PRICEVERSUSVALUE –
WAS OSCARWILDE RIGHT?
2015 SME Annual Meeting & Exhibit
Valuation Session
Denver, Colorado
February 17,...
PRICEVERSUSVALUE
“Nowadays, people know the price of everything and
the value of nothing.” (OscarWilde)
The Picture of Dor...
PRICEVERSUSVALUE
 Price – A fixed amount of money.
What you pay for something.
 Value – A perception.
Like beauty, it is...
PRICEVERSUSVALUE (CONT’D)
 A frequent cause of substantial misunderstanding
in many appraisal assignments.
PRIORTO ACCEPTING AN ASSIGNMENT
 Determine the client’s expectations –
 Client may not have a firm value in mind, but
ge...
PRIORTO ACCEPTING AN ASSIGNMENT (CONT’D)
 Determine the basis for client’s expectations –
 Requires a dial0gue.
 Often ...
PRIORTO ACCEPTING AN ASSIGNMENT (CONT’D)
 Important to make clear not attempting to
determine value client wants so you c...
PRIORTO ACCEPTING AN ASSIGNMENT (CONT’D)
 If price is the client’s basis, address the issue –
 In some instances, can’t ...
ADDRESSINGTHE ISSUE
 Step 1 – Discuss methodology
 Explain approaches to value and basis for your
selection(s).
 This r...
ADDRESSINGTHE ISSUE (CONT’D)
 Step 2 – Establish likely order-of-magnitude value.
 This is the moment of truth.
 Apprai...
REPRESENTATIVE ILLUSTRATIONS
 Example 1 – Pipeline ROW Across Property
Underlain by Limestone.
 Quarried previously but ...
REPRESENTATIVE ILLUSTRATIONS (CONT’D)
 Example 2 – Landowner has property with known
deposits of sand and gravel.
 Extra...
REPRESENTATIVE ILLUSTRATIONS (CONT’D)
 Example 3 – Pipeline ROW across property underlain
by limestone.
 Extraction on p...
REPRESENTATIVE ILLUSTRATIONS (CONT’D)
 Example 4 – Underground coal mine crosses
property line onto unleased property and...
TWO BASIC MISAPPLICATIONS OF PRICE
 Examples illustrate the two basic forms of
misapplication of price in determining val...
RESPONSE – EXAMPLE 1 – PIPELINE ROW
 Matter was involved in litigation.
 Representing pipeline company so issue would be...
RESPONSE – EXAMPLE 2 – CONSERVATION EASEMENT
 Discussed appraisal methodology with landowner.
 First, no expectation of ...
RESPONSE - EXAMPLE 2 (CONT’D)
 Even if used IncomeApproach, would be modest
value.
 To be supportable, would need to fac...
RESPONSE – EXAMPLE 3 – PIPELINE ROW
 Matter was involved in litigation.
 Representing landowner.
 Initial model runs -
...
RESPONSE – EXAMPLE 4 – COAL MINETRESPASS
 Matter was involved in litigation.
 Damages for trespass vary by venue.
 Inad...
WRAPPING UP
 Misuse of price can occur in two forms.
 Explicit or direct application.
 Implicit or indirect application.
WRAPPING UP (CONT’D)
 How best to address.
 Establish client’s expectations.
 To the extent possible, develop an order-...
CLOSINGTHOUGHT
Wall Street and much of the investment community live
by the Greater FoolTheory.
Don’t be a part of it.
Alan K. Stagg,PG, CMA
President & CEO
Stagg Resource Consultants, Inc.
5457 BigTyler Road
Cross Lanes,WV 25313
(304) 776-6...
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Price Versus Value

Published on: Mar 4, 2016
Source: www.slideshare.net


Transcripts - Price Versus Value

  • 1. PRICEVERSUSVALUE – WAS OSCARWILDE RIGHT? 2015 SME Annual Meeting & Exhibit Valuation Session Denver, Colorado February 17, 2015
  • 2. PRICEVERSUSVALUE “Nowadays, people know the price of everything and the value of nothing.” (OscarWilde) The Picture of Dorian Gray,Ward, Lock and Company (1891)
  • 3. PRICEVERSUSVALUE  Price – A fixed amount of money. What you pay for something.  Value – A perception. Like beauty, it is in the eye of the beholder.
  • 4. PRICEVERSUSVALUE (CONT’D)  A frequent cause of substantial misunderstanding in many appraisal assignments.
  • 5. PRIORTO ACCEPTING AN ASSIGNMENT  Determine the client’s expectations –  Client may not have a firm value in mind, but generally has an order of magnitude value.
  • 6. PRIORTO ACCEPTING AN ASSIGNMENT (CONT’D)  Determine the basis for client’s expectations –  Requires a dial0gue.  Often requires some finesse.
  • 7. PRIORTO ACCEPTING AN ASSIGNMENT (CONT’D)  Important to make clear not attempting to determine value client wants so you can meet it.
  • 8. PRIORTO ACCEPTING AN ASSIGNMENT (CONT’D)  If price is the client’s basis, address the issue –  In some instances, can’t be dealt with and assignment must be turned down.
  • 9. ADDRESSINGTHE ISSUE  Step 1 – Discuss methodology  Explain approaches to value and basis for your selection(s).  This requires that you have thought through the process before discussing with client.
  • 10. ADDRESSINGTHE ISSUE (CONT’D)  Step 2 – Establish likely order-of-magnitude value.  This is the moment of truth.  Appraisal assignment may have to be turned down if a satisfactory understanding can’t be reached.  Difference is usually so profound that decision is evident.
  • 11. REPRESENTATIVE ILLUSTRATIONS  Example 1 – Pipeline ROW Across Property Underlain by Limestone.  Quarried previously but not within proximity to ROW.  Long-term mine plan contained in mining permit.  Insignificant corner of one pit affected by ROW.  Initial response by landowner cites the value of the stone calculated to lie within the ROW using price as the multiplier.
  • 12. REPRESENTATIVE ILLUSTRATIONS (CONT’D)  Example 2 – Landowner has property with known deposits of sand and gravel.  Extraction in area but none has been considered on subject property.  Landowner interested in placing a conservation easement on property (instant red flag).  Recites price of sand and gravel products in area and informally derives an order-of-magnitude value.
  • 13. REPRESENTATIVE ILLUSTRATIONS (CONT’D)  Example 3 – Pipeline ROW across property underlain by limestone.  Extraction on property by owner in past.  Potential for extraction to resume in foreseeable future.  Prepared order-of-magnitude estimate of value which obviously well under landowner’s expectation.  Landowner response “but that stone sells for $x a ton.”
  • 14. REPRESENTATIVE ILLUSTRATIONS (CONT’D)  Example 4 – Underground coal mine crosses property line onto unleased property and mines.  Landowner brings suit.  Attorneys ask you to establish damages based on several methods, one of which includes using the selling price of the coal as the multiplier.
  • 15. TWO BASIC MISAPPLICATIONS OF PRICE  Examples illustrate the two basic forms of misapplication of price in determining value.  Direct application – used as the multiplier against the units of the commodity in question.  Indirect application – not used as the multiplier but influences client’s intuitive sense of value.
  • 16. RESPONSE – EXAMPLE 1 – PIPELINE ROW  Matter was involved in litigation.  Representing pipeline company so issue would be determined as a matter of law.  Required thorough explanation of appropriate valuation techniques with particular emphasis on:  Probability of occurrence of mining (uncertainty).  Time value of money.  Accepted assignment because issue was not with client.
  • 17. RESPONSE – EXAMPLE 2 – CONSERVATION EASEMENT  Discussed appraisal methodology with landowner.  First, no expectation of mining in foreseeable future, thus income approach not appropriate.  Discussed order-of-magnitude values to be derived using Sales Comparison Approach.  Based on sales data gathered in the broad region over the years in prior appraisals.  Not represented to be a value that would be reached, but gives perspective.
  • 18. RESPONSE - EXAMPLE 2 (CONT’D)  Even if used IncomeApproach, would be modest value.  To be supportable, would need to factor uncertainty into process (probabilistic approach).  Many variables.  Did not accept assignment.
  • 19. RESPONSE – EXAMPLE 3 – PIPELINE ROW  Matter was involved in litigation.  Representing landowner.  Initial model runs -  Probability of occurrence of mining (uncertainty).  Time value of money.  Did not provide a value but functioned in an advisory capacity with entity selected to provide valuation.
  • 20. RESPONSE – EXAMPLE 4 – COAL MINETRESPASS  Matter was involved in litigation.  Damages for trespass vary by venue.  Inadvertent trespass.  Willful trespass.  In this instance providing two values was appropriate.  First, using expected royalty income.  Second, using expected selling price.
  • 21. WRAPPING UP  Misuse of price can occur in two forms.  Explicit or direct application.  Implicit or indirect application.
  • 22. WRAPPING UP (CONT’D)  How best to address.  Establish client’s expectations.  To the extent possible, develop an order-of-magnitude estimate of range of value likely to be obtained.
  • 23. CLOSINGTHOUGHT Wall Street and much of the investment community live by the Greater FoolTheory. Don’t be a part of it.
  • 24. Alan K. Stagg,PG, CMA President & CEO Stagg Resource Consultants, Inc. 5457 BigTyler Road Cross Lanes,WV 25313 (304) 776-6660 astagg@staggconsultants.com

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