In an attempt to explain the difference between the two, let’s look at a simple example:

A dwelling-house at No. 1 Main Street is constructed at a price of $1.0M.  Subsequent to this the owner spent $600,000. to renovate and significantly improve the property.  The owner thinks that the price of the property should be $1.0M plus $0.6M plus a mark-up of $0.4M (or $2.0M).  Having advertised the property for sale the best offer received was $1.5M.  Even though this is a hypothetical example, it is representative of what sometimes happens in the property market.

What this suggests is that value is not directly proportional to money/resources spent.  The major factors to consider in determining value are the purchase price, comparables and market trend (explained in the above article: Price & Market Value) and not cost e.g. ‘brick and mortar’ costs.

One may have noticed this phenomenon in our Valuation Reports when the inferred value of a building is different than the reported insurance recommendation/replacement cost.  This is because the replacement cost is determined by other factors unrelated to determinants of market value, and generally involves an analysis of cost estimates from various sources.  This assessment considers ‘brick and mortar’ costs, amongst other elements.