What is a Real Estate Appraiser?
According to the Real Estate Service Act of the Philippines (RA 9646), Real Estate
Appraiser is defined as someone who is duly registered and licensed natural person
who, for a professional fee, compensation or other valuable consideration, performs
or renders, or offers to perform services in estimating and arriving at an opinion of
or acts as an expert on real estate values, such services of which shall be finally
rendered by the preparation of the report in acceptable written form.
What is an Appraisal?
Appraisal is the process of estimating or making an opinion on the market value of
an adequately described property as of a specified date.
What are the factors affecting accuracy of appraisal?
Competence of the appraiser
Integrity of the appraiser
Soundness of the procedure used in the appraisal
Availability of the pertinent data
What are the purposes/ functions of appraisal?
For banks/ financing institutions:
loans purposes
insurance purposes
selling purposes
For other purposes:
real estate tax assessment purposes
zonal valuation purposes
merger and consolidation
going concern value
liquidation purposes
joint venture purposes
determination of just compensation for eminent domain purposes
extrajudicial purposes or to distribute the assets of an estate
Why there is a need for an appraisal?
1. In connection with the transfer of ownership
To help prospective buyers decide on offering prices
To help prospective sellers determine acceptable selling price
To establish a fair basis for exchange of real property
To establish a basis for reorganization or merger of business companies
To distribute the assets of an estate
2. In connection with financing and credits
To arrive at the value of the security offered as collateral for a mortgage
loan
To provide an investor with a sound basis for deciding whether to purchase
real estate mortgage or bond
3. To establish just compensation in condemnation proceeding
To estimate value as a whole or before the taking
To estimate value after the taking
To allocate value between the part taken and damage to the residue
4. To establish a basis for taxes
To distribute assets into depreciable items such as building and nondepreciation items such as land and to estimate applicable depreciation rates
To determine gift or inheritance taxes
What is Value?
As per US Society of Residential Appraisers. Value is the present worth of
future benefits to a typical buyer.
As per American Institute of Real Estate Appraisers. Value (actual cash) is
the price property will bring in a fair market, after a fair and reasonable effort
has been made to find a purchaser who will give the highest price.
In general, value refers to what a willing buyer, not forced to buy, will pay,
and what a willing seller, not forced to sell, will accept, after exposing the
subject property in a fee and an open market within a reasonable period of
time.
What are the types of value?
Sale price vs. value
Cost vs. value
Value in exchange. This refers to the worth of an object relative to other
objects with which it can be compared and for which it can be exchange.
Value in use. This refers to the use an object is put to, the service it renders,
and the wants it satisfies.
Market value
Fair value
Investment value
Reversion value
Assessed value
Condemned value; consequential damage and severance damage
Insurable value
Loan value
Liquidation value
Book value
What is Market Value?
It is the highest price in terms of money which a property will bring in a competitive
and open market under all conditions requisite to a fair sale, the buyer and seller
each acting prudently, knowledgeably and assuming the price is not affected by
undue stimulus.
What are other values derived by appraisal?
Insurable value- to serve the need of insured, insurer and adjuster
Going concern value- to serve for corporate mergers the issuance of stock,
revision of book figures and so forth
Liquidation value of price- for forced sale or auction proceedings
Assessed value- to establish a uniform schedule and tax roll for ad valorem
taxation
Condemnation value- for eminent domain case
This list does not include all the function of appraisals but does indicate the
broad scope of the professional appraisers activities.
What is the history of Value Theory?
Ancient Romans and Greeks- value of goods absolute, fixed by state and
owner
Merchantilism- value in exchange affected by law of supply and demand,
gold is the source of all wealth
Physiocrats- productivity of land, not gold as source of wealth; value
created by the utility of an item
Adam Smith- natural price, (i.e.) the cost of production is equals the value
of an item consuming land, labor, capital and coordinations
Austrians- cost of production is unimportant, value is determined by utility
of and demand for the last, marginal item
Todays concept- value is not objective and absolute, but is subjective and
relative to the forces that create and forces that affect it.
What are the forces affecting value?
Utility- usefulness; ability to arouse a desire for possession
Scarcity- a relatively short supply; lack of abundance
Demand- desire to possess plus the ability to buy; effective purchasing
power
Transferability- the ability to change ownership or use
What are the forces affecting/influencing value?
Natural Forces - physical resources
-location
-shape
-topography
-depreciation
-climate condition
-soil depth and fertility
-size
Social Forces - developed resources
Family size and age group distribution
Neighborhood stability and attitudes about property
Population growth, decline, or shifts at the community, regional and
national levels
Lifestyles and living standards, often combined with other forces
Attitudes about law enforcement, the role of government and individual
responsibility
Attitudes about development, growth and ecology
Attitudes toward public education
Economic forces
Income level of neighborhood and community residents
Employment opportunities and trends
Level of wages
Availability of money and credit and interest rate levels
Price levels and property tax burdens
Personal savings and investment returns
General business activity
Supply and demand in housing
Production of goods and services
Political force
Zoning and land use regulations
Building and safety regulations
Environment protection laws
Police, fire and health protection services
Crime prevention, education and recreation services
Public works, power, water, transportation, sewage and flood control
Fiscal policy and taxation
Monetary policy and controls
Government-sponsored urban redevelopment and housing finance
programs
Regulation of industry and business
What are the guiding principles in valuation?
Principles of real estate MARKETABILITY
Principle of substitution. This states that a prudent buyer will pay no more
for a property than the cost of a substitute property that will provide
equivalent usefulness.
Principle of conformity
Principle of progression and regression
Principle of change. This states that the real estate market is dynamic
rather than static; socio-economic forces are constantly changing, causing
constant changes in value. Thus, market value today may not be the same as
market value yesterday or tomorrow.
Principle of supply and demand
Principle of completion
Principles of real estate PRODUCTIVITY
Agents of production: land, labr, capital, coordination
The principle of contribution states that the value of a given feature of a
property is worth only as much as the amount of money it contributes to the
value of the property as whole. For example, improvements to property may
add more, less, or as much value to the property as they cost, depending on
what the market is willing to pay for the features.
The principle of increasing and decreasing/diminishing
returns states that states that with each additional unit of improvement, the
marginal utility of each unit declines until the point at which any additional
units cost more than the additional value they add to the property.
This principle of highest and best use and consistent use states that
the highest and best use of a property is the use that will bring the owner
the highest economic benefit over the long run. Determining highest and best
use is central to estimating market value because the use of a property for
other than the current (or proposed) use may yield higher benefits to both
the investor and the lender regarding greater investment returns and/or less
risk than originally anticipated.
Principle of anticipation. This states that the propertys marker value is
based on the investors expectation about the future benefits the property
will provide and the present value of those benefits.
What is Replacement Cost?
It is the cost of replacing the property being appraised with that of another having
equivalent utility and amenities.
What is Reproduction Cost?
It is the amount of money required for the exact reconstruction of the
improvements being appraised similar to the original.
What is Depreciation?
For valuation purposes, depreciation is defined as a loss in value from any
cause. It represent the difference in value between the building under
appraisal and a new, substitute building.
Depreciation for valuation purposes is not in any way related to
depreciation used in accounting sense or in income tax accounting.
Depreciation here can be in terms of physical depreciation or functional and
economic obsolescence.
What are the different kinds of Depreciation?
Deterioration or the physical wearing out of the property. This is
represented by normal wear and tear, the action of the elements and
catastrophic events such as earthquakes, typhoons and fires.
Curable- if by treating the defects, the expected increase in value of the
property will at least be more than the cost of treatment
Incurable- if the cost of treating the defect will be more than the expected
increase in the property value
Functional obsolescence- or lack of desirability in terms of layout, style,
and design as compared with that of a new property serving the same
function. The loss in value from a decrease in functional utility due to
technological improvements, new materials, and other innovations that make
existing buildings obsolete for their original purpose.
Economic obsolescence- relating to loss of value from causes outside the
property itself. The loss in value from forces external to the property such as
the deterioration of a neighborhood, encroachments of such nuisances as
noise and smell.
What are the basic approaches* to valuation?
Cost approach
The current cost of reproducing a property less depreciation from all source
that is, deterioration, and functional and economic obsolescence
Income approach
The value which the propertys net earning power will support based upon a
capitalization of net income
Market data approach
The value indicate by recent sales of comparable properties in the market
*The appraiser utilizes all three approaches in most of his appraisal work. He may
believe that the value indicated by one approach will be more significant than that
of the other two, yet he will use all three as a check against each other and to test
his own judgment. However, there are appraisal problems in which they cannot be
applied such as in vacant land, the use of the cost approach, or in the case of an
owner-occupied home, the use of income approach. All three approaches are
needed in the solution of most appraisal problems.
What is a Cost Approach in Real Estate Valuation?
In cost approach, the appraiser obtains a preliminary valuation by adding to his
estimate of the lands value, his estimate of the depreciated reproduction cost of
the building and other improvements. This approach is based on the assumption
that the reproduction cost is the upper limit of value. This also assumes that a newly
constructed building would have advantages over the existing building as compared
with the new building. The measure of this deficiency is called depreciation. For
valuation purposes, depreciation is defined as a loss in value from any case. It
represents the difference in value between the building under appraisal and a new,
substitute building. Depreciation for valuation purposes is not in any way related to
depreciation used in accounting sense or in income tax accounting.
What are the steps in Cost Approach?
The estimate of the lands value as if it is vacant
The estimate of the current cost of reproduction of the existing
improvements
The estimate and deduction of depreciation from all causes
The addition of the lands value and the depreciated reproduction of
improvements
What is Income Approach in Real Estate Valuation?
In income approach, the appraiser is concerned with the present worth of the
future net income of a property which will be produced in its remaining economic
life. This future net income is then capitalized by computing its present worth.
Choosing what capitalization rate to apply is one of the most critical steps in the
income approach. A variation of only one half of one percent can make a difference
of many thousands of pesos in the capitalized value of the income.
What are the steps in income approach?
Obtaining the rent schedule and the percentage of occupancy for the
subject property and for comparable properties for the current year and for
several years in the past. This information provides gross rental and the
trends in rental and occupancy. This data is then related and adjusted by the
comparative method to ascertain the estimate of gross income which the
subject property should produce to attract investors in the market.
Obtaining expense data such as taxes, insurance, and operating cost being
paid by the subject property and by comparable properties. The trend in
these expenses is also necessary.
Estimating the remaining useful economic life of the building to establish
the probable duration of its income.
Selecting the appropriate capitalization rate and the applicable technique
and methods for processing the net income.
What is capitalization in perpetuity?
In capitalizing net income earned on land, it is assumed that it will continue
to earn more income indefinitely. The market value by capitalization in
perpetuity formula is MV=I/R where I is the income and the income and R is
the rate of return.
What is Market Data Approach?
The market data approach is essential in almost every appraisal of the
value of the real property. The resulting value by this approach frequently is
defined as the price at which a willing seller would sell and a willing buyer
would buy neither being under abnormal pressure.
This definition assumes that both buyer and seller are fully informed as to
the property and state of the market for that type of property, and that the
property has been exposed in the open market for a reasonable time.
This approach produces an estimate of value of a property by comparing it
with similar properties of the same type and class which have been recently
sold or currently being offered for sale in the same areas. The comparative
process utilized in determining the degree of comparability between two
properties, involves judgment as to their similarity with respect to many
value factors such as location, orientation, plottage, elevation, and size. The
prices of those comparable properties will set the range in which value of the
subject property will be.
What data are needed in Market Data Approach?
Sales or asking prices of comparable properties
Condition influencing each sale
Location of each property
Description of the land and improvements of each property
What is Correlation?
The last stage in the appraisal process is the correlation of the three values
derived by the cost, income and market data approaches. In correlating these
approached into his final estimate of value, the appraiser should take into account
the purpose of the appraisal, the type of property, and the adequacy of the data
available and used in each of the three approaches. These will determine the weight
to be given to each approach. The appraiser should not average the three value
arrived at by means of the cost, market date and income approaches. The appraiser
instead should take the three value estimate and examines the spread between the
minimum and maximum figures. He should then consider the approach which
appears to be the most reliable. Then he should make adjustments in accordance
with his judgment and experience.
What is an Appraisal Report?
A word portrayal of the property, the facts concerning that property, and the
reasoning by which the appraiser has developed his estimate of value. The best
report is the one which, in the fewest number of words, permit the reader to follow
intelligently the appraisers reasoning and to concur in the conclusions reached
thereby. As every report is an answer to a question by a client, it should show the
facts considered and clearly outline the reasoning employed by the appraiser in
arriving at his valuation.
What are the steps in appraisal process?
1. Definition of the problem
Analysis of the TCT
Prepare the plotting based on technical description stated in the title.
Compute the lot area based on the measurement on your plotting against
the area stated in the title.
2. Determination of property rights
-Check the encumbrances annotated at the back of the TCT
-Watch for possible annotations that might affect the value of the land.
-All annotations, adverse or informative, should be included in the report,
such as: lease contracts, claim of levy, right of way and Sec. 4, Rule 74 of the
Rules of Court.
3. Preliminary survey and appraisal
Check the exact location at the cadastral map.
If the property appears to be an interior lot, which is without road frontage,
verify the updated plan with the following offices: Land Registration Authority,
Bureau of Lands, Assessors Office Mapping Section and Department of Public
Works and Highways.
4. Preliminary analysis and data selection and collection (ocular inspection)
Use the compass to check the direction of the property pointed by the
owner against technical plotting.
Check the actual shape and measurements of frontage and depth of the
property against the technical plotting.
Observe the development in the area and the effect of the four forces which
create value: social forces, economic forces, political forces and physical
forces.
5. Analysis of the highest and best use
After observation of the development in the area, the appraiser must
determine the use which at the time of appraisal is most likely to produce the
greatest net return.
6. Application of the three approaches
market data or sales comparison approach
cost approach
income approach
7. Reconciliation of value indicators
8. Determination of Final value and written report
What is the summary of the appraisal process?
1. Reason for appraisal
advising prospective purchasers of real estate
advising prospective sellers of real estate
collateral for mortgages
ad valorem taxation
inheritance (estate) taxation
insurance
eminent
litigation
2. Identify the Problem
real estate to be appraised
property rights to be appraised
purpose of the appraisal
function (use) of the appraisal
type of value
effective date of appraisal
type of value
effective date of appraisal
special limiting conditions
3. Plan the appraisal
prepare the general and specific data
determine the highest and best use
do the basic approaches (coast, market, income approach)
reconcile and value conclusion
4. Prepare the report
certification or letter report
narrative report
forum report
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BONUS
Did you know that there is anomaly when the broker and the appraiser is one and
the same person in a transaction? Read more ...
