Appraisal of

Urban Lands
MRRPAO
Chapter IV- Section 2.
Rules in the Appraisal of Urban
Lands
Appraisal of Urban Lands
A. Rectangular Lots
1. Rectangular lots within the standard depth
2. Stripping method and standard depth
3. Adjustment for Frontage
B. Triangular Lots
1. Triangular lot with its base on the street
2. Triangular lot with its apex on the street
C. Trapezoidal Lots
D. Irregular Lot
A. Rectangular Lots
The value of rectangular lots shall be computed as
follows:
1. Rectangular lots within the standard depth
- To find the value of a rectangular lot within the standard
depth, multiply the base unit value by its area.
Example:
Size of lot 20m x 30m.
Price of lot per sq.m.- P1,500
Value of lot = 20m x 30m x P1500/sq.m.
= P900,000.00
 A. Rectangular Lots

2. Stripping method and standard depth

a. The nearest portion or strip to the street has the
highest value and the value of each successive
parallel strip across a given lot decreases as the
distance to the street increases.
b. The standard depth may be established after a careful
study of various lot depths in the locality.
For instance if, the dominant or prevailing lot depth among
the residential lots in the city or municipality is 20 meters,
this depth may be fixed as the standard depth for
residential lands within that locality.
 A. Rectangular Lots

2. Stripping method and standard depth

c. Appraisal by Stripping Method shall be adopted

where the length of the land exceeds the
established depth for residential area, as
determined by the local assessor and indicated
in the Schedule of Fair Market Value.
d. The Stripping Method shall not be applied on
commercial and industrial properties.
 A. Rectangular Lots

2. Stripping method and standard depth

e. Stripping method shall not apply to corner lots.

f. For lands bounded by 2 streets that are not
considered corner lots, the higher street value
shall be applied, provided that the value per
square meter for the last strip shall not be lower
than the value per square meter of lots in the
other street.
g. Subdivision lots are not subject to stripping
 A. Rectangular Lots

2. Stripping method and standard depth

h. Corner lots shall be valued with percentage
increment as determined by the local assessor
and incorporated in the duly enacted SFMV,
provided that only the lot along the street with
the highest value will be considered for the
application of corner influence referred hereto.
Provided further, that an alley or callejon shall
not be considered as a factor for the value
adjustment hereof.
 A. Rectangular Lots

b. Stripping method and standard depth

i. Roads or streets in urban subdivisions, unless

already donated or turned over to the barrio
(barangay), municipality or city, shall be listed in
the name of the subdivision owner and shall be
valued on the basis of the cost of cementing,
asphalting or paving them with gravel and sand
per square meter.
c. Adjustment for Frontage

1. The adjustment value for frontage shall be

added to the valuation of all commercial lots
fronting streets or roads. The same is applied
by multiplying the length of frontage of the
subject property in linear meters by 50% of the
unit base value applicable thereof.
c. Adjustment for Frontage
2. Value Adjustments based on factors not
specified in the SFMV, such as but not limited
to the shape, topography, and blighted status
of lands that adversely affect the value of the
property being assessed, shall be applied.
c. Adjustment for Frontage
Rectangular lots whose depth exceeds the standard
depth- The following computation illustrates how a
rectangular lot whose depth exceeds the standard depth
shall be valued.
Example:
Suppose a residential lot 20 by 50 meters is located
along a street with an assigned base unit value of
P200.00 per sq.m. and the standard depth for residential
land in the locality is 20.00 meters
 Example

Suppose a residential lot 20 by 50 meters is located

along a street with an assigned base unit value of
P200.00 per sq.m. and the standard depth for residential
land in the locality is 20.00 meters
 Alley

1st Strip 2nd Strip 3rd strip Other lot

Road
frontage

Lot 20 x 50m
20m

200/sqm 160/sqm 120/sqm

180/sqm
20m 20m 10m

Depth 50m
c. Adjustment for Frontage
Rear (Interior) Rectangular Lot - To find the
value of an interior rectangular lot, extend first
its two (2) opposite sides forming a
combination of the subject lot and the
hypothetical rectangular lot supposedly formed,
and compute its value. This value less the
value of the hypothetical rectangular lot
computed also as in A-1 is the value of the
subject rectangular lot.
 Example

Suppose a interior residential lot 45 by 15 meters (as shown) is located

30meters from the street with an assigned base unit value of P200.00
per sq.m. and the standard depth for residential land in the locality is
20.00 meters.
Find the Market Value of the interior lot assuming that right –of-way
will be provided.
 c. Adjustment for Frontage
Rear (Interior) Rectangular Lot

30m 15m

20m 20m 5m

ROAD Hypothetical
Interior
rectangular lot 45m
lot

45m
Hypothetical lot and Interior Lot (HL + IL)

Adjusted Unit
Width/Depth Area (sq.m. Unit Value
Strip % Adj. Value (Php/sq. Market Value (Php)

c. Adjustment for Frontage

(m) ) (Php/sq.m.)
m.)

1st 45 x 20 840 200.00 100% 200.00 168,000.00

2nd 45 x 20 840 200.00 80% 160.00 134,400.00
3rd 45 x 5 225 200.00 60% 120.00 27,000.00
TOTAL 2355   329,400.00

Hypothetical Lot (HL)

Width/Depth Area (sq.m. Adjusted Unit

Strip Unit Value % Adj. Market Value (Php)
(m) ) Value (Php)

1st 45 x 20 840 200.00 100% 200.00 168,000.00

2nd 45 x 10 420 200.00 80% 160.00 67,200.00
TOTAL 1260   235,200.00

Interior Lot = MV (HL +IL) minus MV (HL)

MARKET VALUE = 329,400.00 - 45m =

235,200.00 P94,200.00
d. Triangular Lots

1. Triangular lot with its base on the street - To

find the value of a triangular lot with its base on
the street, first compute as a rectangular lot (as
in A-1) then take two-thirds (2/3) of the
resulting value.
d. Triangular Lots

2. Triangular lot with its apex on the street - To

find the value of a triangular lot with apex on
street, first compute as rectangular lot (as in
A-1), then take one-third (1/3) of the resulting
value.
d. Triangular Lots

3. Trapezoidal Lots - To find the value of a

trapezoidal lot, compute the values of the
rectangular and triangular portions separately,
according to the rules hereof and take the sum
of the computed values for the total value.
d. Triangular Lots

4. Irregular Lot - Reduce the irregular lot to the

nearest equivalent rectangular, triangular and
trapezoidal sectors and apply the foregoing
rules in computing the lot values.
 Appraisal of Agricultural
and Other Lands

MRRPAO
Chapter IV- Section 3.
Rules in the Appraisal of Agricultural and Other Lands

Lecture III - 2
 A. Agricultural Lands
1. The unit base value per hectare prescribed in the (Schedule of
Fair Market Value) SFMV is multiplied by the area of the
agricultural land to arrive at the market value for the different
kinds and sub-classes of agricultural lands.
R.A. No. 7160 has no specific provisions on the valuation
and assessment of plants and trees. Apparently, the kind of
plants and trees determine the classification and value of
agricultural land.
The aggregate value arrived at is subject to the applicable
adjustments expressed in percentage for:
 (a) Type of road along/nearest the property and
 (b) location of property, such as, distance from the public road
from the poblacion or trading center.
 A. Agricultural Lands
2. The computation of values begins with the determination of the
area, productivity and subclass or sub-classes of an agricultural
land.
In the case of a parcel of land utilized or planted to various
agricultural crops, such as, rice, corn, coconut, etc. (if practicable,
the boundaries between each sub-class shall be plotted or
sketched on the map) and the corresponding area thereof be
determined.
Each area so determined shall be multiplied by the applicable unit
base value. The resulting values for each sub-class so computed
are summed up to obtain the total base market value of the parcel.
To arrive at a final value, the total base market value is multiplied
by the adjustment percentage value as discussed in the
succeeding paragraphs.
A. Agricultural Lands
Adjustment Factors
a. The following are the percentages of adjustments for the
valuation of agricultural lands:
A. Agricultural Lands
• The distance of a property from all-weather roads,
railroad stations, landing places along sea coasts and from
a trading center or poblacion shall be measured from
corner of the lot or parcel nearest to such roads or centers.
• All-weather roads include national, provincial, municipal
and all other public roads traversable by trucks, cars and
other forms of vehicles under any kind of weather.
A. Agricultural Lands
ILLUSTRATIONS:
• Assume that a five (5) hectare irrigated riceland, capable
of producing 204 cavans of palay per hectare annually,
has a unit base value of P150,000.00 per hectare Assume
further that the riceland is over 3 kms. from an all
weather road and trading center or poblacion
A. Agricultural Lands
 A. Agricultural Lands
• Values of improvement such as plants and trees shall be
considered in the preparation of the Schedule of Values for
agricultural lands.
• This is supported by the decided case entitled “Manila Railroad
company vs. Aguilar” (35 Phil. 118), where the Supreme Court
ruled that: “when the land preferably intended for the raising of a
given crop or for the planting of t rees of a certain kind, although
these or the crop be deemed improvements to the land they shall
not be appraised apart from the land as they are an integral part
thereof and their value is inherent or forms a part of that of the
land.”
• However if it shall be proven that the ownership of the land is
different from that of the improvement, a separate valuation and
assessment shall be made in the names of their respective
owners.
 A. Agricultural Lands
• Agricultural land convertible into residential subdivisions or
industrial land shall be classified and valued as agricultural
until such time that they shall have been actually converted and
developed into such. This rule shall also apply to lands already
approved by proper authorities as subdivision but have not yet
been actually developed for the purpose.
• As soon as a portion of the subdivision is finally divided,
converted and developed into residential lots, the same shall be
valued like similar lots in the locality. Portions of the
subdivisions not yet developed and converted into residential,
commercial or industrial lot shall remain to be classified and
valued as agricultural
 B. Timber and Forest Lands
• Timber and forest lands belonging to the Republic of the
Philippines or any of its political subdivisions, the beneficial
use of which have been granted to a taxable person, shall be
subject to the real property tax.
• For this purpose, said lands shall be appraised and assessed
yearly against the beneficial user at the market value of the
marketable timber on the basis of the annual volume of
timber “actually cut” from the operational area, during the
preceding year, regardless of the annual total “allowable
cut” indicated in the lease agreement.
 C. Mineral Lands
1. Mineral lands are those lands in which minerals exist in
sufficient quantity or grade to justify the necessary
expenditures to be incurred in extracting and utilizing such
minerals.
2. Mineral Lands are further classified as follows:
a. Metallic mineral lands - these are lands which contain
any of the metallic elements or minerals, or their combination
such as gold, silver, platinum, tin, chromium, iron, manganese,
copper, nickel, lead, zinc, tungsten and the like.
b. Non-Metallic mineral lands - are lands which contain
all other deposits not covered by the above-defined metallic
elements or minerals.
C. Mineral Lands

3. Mineral Lands shall be appraised yearly against the

beneficial user or concessionaire on the basis of the value of
extracted mineral.
 Lecture III-3

Market Data Approach

VALUATION METHODOLOGY/APPROACH

Reference:
Manual on Real Property Appraisal and Assessment Operations (MRPAOO)
Uniform Standards of Professional Appraisal Practice (USPAP)
MARKET DATA APPROACH
The Market Data approach is based on the economic principle
of “SUBSTITUTION”
 If a thing can be substituted for another, then their values
will be comparable. Hence, the value of a property will be
comparable to that of similar properties with similar
qualities.
 The principle of Substitution recognizes that a typical buyer
will compare asking prices and seek to purchase the
property that meets his or her wants and needs for the
lowest cost.
 In the Market Data Approach, the appraiser attempts to
interpret and measure the actions of parties involved in the
marketplace, including buyers, sellers, and investors.
 MARKET DATA APPROACH VS
COMPETITIVE MARKET ANALYSIS
 Before, the quick approach done by real estate agents for
valuing real estate is the competitive market analysis
(CMA). 0
 In a CMA the value of a property is estimated by comparing
it to the sale price of similar properties in the same area.
 But a CMA is just a “snapshot” because not all similar
properties are “exactly similar.”
 It could also have a bias since a CMA aims to persuade an
owner to sell the property at a target pricing level deem by
the agent marketable.
 Thus a CMA can be a guide but should never be presented
as an appraisal.
MARKET DATA APPROACH VS
COMPETITIVE MARKET ANALYSIS

 The appraisal prepared by a professional appraiser which

emulates the CMA method is formally called the “Market
Data Approach.” It is also popularly known as the “Sales
Comparison Approach.”
 The Market Data Approach (MDA) is more sophisticated
and reliable than CMA
 The Subject property is compared to recently sold
comparable properties. However, because no two
properties are exactly alike, the sales prices of the
comparable properties are carefully analyzed and
appropriately adjusted up or down for each of the
differences between the subject property and the
comparable properties.
 MARKET DATA APPROACH

 When comparing different properties, not just the

physical differences in the properties, such as the
actual structures, their ages and conditions,
compared, but also what property rights are being
transferred or were transferred in the comparable
properties, and also any differences in
encumbrances between them.
 For instance, is a fee simple title being transferred,
or are there any easements or deed restrictions on
the subject property or on the comparable
properties?
MARKET DATA APPROACH

Data collection methods and valuation process

 Sources of market data.
 BIR or LGU
 All real estate sales transactions can be found either with
the BIR or the LGU’s tax assessment office (confidential
and can not be divulged to the public).
 Appraisers have learned how to cultivate special
connections in order to obtain information.
 The reliability of these data is highly questionable because
it is still common practice for transactions to be under-
valued.
MARKET DATA APPROACH

Data collection methods and valuation process

 Sources of market data.
 Private Sector
A better source for information would be the private sector
- real estate brokers, banks, insurance companies, or
private credit investigation firms.
 ads posted online or in newspapers.
 Inthe absence of market data about recent sales, the
alternative would be to obtain offer prices. This is readily
available from ads posted online or in newspapers.
 MARKET DATA APPROACH
Data collection methods and valuation process
 The main idea is to simulate the price that would have
been paid if each comparable sale were identical to the
subject property.
 If the comparable is superior to the subject in a factor or
aspect, then a downward adjustment is needed for that
factor.
 if the comparable is inferior to the subject in an aspect, then
an upward adjustment for that aspect is needed.
 The adjustment is somewhat subjective and relies on the
appraiser's training and experience.
 It is possible for various appraisers to yield different
indicators and these have to be reconciled.
DEFINITION OF TERMS
 Subject - refers to the property to be valued.
 Comparable - refers to other properties (the more the
better) which can be compared “apple-to-apple” with the
Subject because they have closely similar features.
 Elements of comparison - are the various characteristics
that are commonly comparable between the various
properties being considered such as price, property
rights, financing terms, conditions of sale, market
conditions, location, physical and economic conditions,
etc..
 Units of comparison - factors commonly found in the
comparables, price per square meter; net income
multiplier; etc..
DEFINITION OF TERMS
 Market price - is the price that the comparable
property was sold for; it may be more or less than the
market value, particularly if either buyer or seller
needed to complete the transaction quickly, or if the
transaction was not at arm’s length, such as a sale
between relatives or friends.
 Market cost - is what it would actually cost to buy the
land and build the structures. Market value and
market cost may not be the same; it is rarely the
same for improvements to the property.
 For example, paying Php 200,000 to add a new addition
probably will not increase the market value by Php
200,000. Market cost estimates are partially needed to
make adjustment values upon comparables.
STEPS IN THE MARKET DATA APPROACH

1. Research the market to obtain information

pertaining to sales, and pending sales that are
similar to the subject property
2. Investigate the market data to determine whether
they are factually correct and accurate
3. Determine relevant units of comparison (e.g.,
sales price per square foot), and develop a
comparative analysis for each of the
comparables.
STEPS IN THE MARKET DATA APPROACH

4. Compare the subject and comparable sales

according to the elements of comparison and
adjust as appropriate
5. Reconcile the multiple value indications that
result from the adjustment (upward or
downward) of the comparable sales into a
single value indication
UNITS OF COMPARISON

Units of comparison - are the components or

units that allow quantification of the elements of
comparison, such as price per sq. meter, rent
multiplier, income ratio; density measures;
EXAMPLE OF ELEMENTS OF COMPARISON & UNITS:
Unit
1. Location:
Distance from amenity km.
2. Site specific data :
a) High vantage point, nice view, etc. %
b) Agri land - existence of irrigation %
3. Physical characteristics
Number of bedrooms, garage, etc. PhP value
4. Allowed Use
Level of commercial allowed C-i, C-2, etc. % or Php
Height limit % or Php
5. Economic characteristics
Land with coconut vs. fruit trees % or PhP
6. Neighborhood data
Surroundings clean, well-lighted, safe etc. %
7. Conditions of sale
Terms of payment, option, escrow, etc. PhP value
METHODS OF COMPARISON

There are two basic ways to compare market data

between a Subject and a Comparable:
1. Review and intuition or “observation” method;
and
2. Adjustment grid data analysis
METHODS OF COMPARISON

1. The Review and Intuition method is a

simple approach. It does not require any
deep analysis, just a simple comparison
between the two properties. From
experience, the Appraiser makes a value
judgment and a declaration of value based
on his observations of past and present. It
is intuitive, not testable. No serious
computations are needed.
METHODS OF COMPARISON

1. The Adjustment grid method is a more

sophisticated technique. It is systematic
and minimizes risk. It is also more logical
and allows the appraiser to back up his
indicated value by presenting the logic he
used in arriving at the estimate. The
adjustment grid is a worksheet where the
elements of comparison are arrayed and
adjustments are made.
ADJUSTMENT GRID METHOD

The steps in the Adjustment Grid method are

as follows:
1. Comparables are arrayed in a table
horizontally
2. Common elements of comparison arrayed
horizontally; usually price is given.
3. Adjustment on value in terms of percentage
or absolute amounts developed
4. Adjustments are applied to make
comparables similar to the subject property
ADJUSTMENT GRID METHOD
Adjustment rules:
The adjustment rules can be confusing. But the
simple rational is this: The comparable’s value is
adjusted to make it “equivalent” to that of the
Subject property.
 If a feature or element in the comparable property
is inferior, then an adjusting value must be added
to it to level up with the Subject.
 If the feature or element is superior, then an
adjusting value must be deducted from it to level
down with the Subject.
EXAMPLE: THE APPRAISAL ASSIGNMENT:
Appraiser was asked to value a 2BR house in a
subdivision made by Camella. After doing research,
he saw 3 other 2BR homes of the same model, and
lot sizes, with offering prices and features as follows;
 Comp house# 1 - P2.5M; is one km from the park,
has one-car garage and is 5 years old.
 Comp house#2 - P2.7M; is 1.5 km. from the park,
has one-car garage, and is 2 years old.
 Comp house#3 - P2.6M; is 2 km from the park,
has 2-car garage, and is brand new.
SOLUTION USING THE ADJUSTMENT GRID METHOD

 From research, he found the homes have all

the same lot size and the current value of the
lot is P 1.2M. Proximity to the park which has a
beautiful clubhouse is considered a premium
and a half-km differential results in a 5% price
differential. The current cost of building an
extra one- car garage is P200,000. Assume a
useful life of 50 years.
 Element Comp Comp House Comp House
SUBJECT
of ComparisonUSING
SOLUTION House#
THE1 ADJUSTMENT
#2 #3
GRID
METHOD
1. Offer price (Asking) P 2,500,000. P 2,600,000. P 2,700,000. To derive

2. Location from park 1.0 km 1.5 km 2.0 km 1.0 km

3. Garage One-car One-car Two-cars Two-cars
4. Age of the house 5 years old 3 years old Brand new 2 years old
ADJUSTMENTS
0% (same as
1. For distance to park Inferior +5% Inferior +10%
subject)
Inferior + Inferior
2. For garage Same, no adj.
P200K +P200K
Inferior Inferior Superior
3. Forage
+3x30k +Ix30K -2x30k
(2,700,000-
1,200,000)/50
Adjusted Values P 2,790,000. P 2,960,000. P2,910,000. Ave=
P2,886,666.
SOLUTION USING THE ADJUSTMENT GRID
METHOD
Notes:
 The lots of these houses currently sell for P 1.2M. From
CHouse#3, a brand new home costs (P2.886-P1.2) =
P1.686M
 A depreciation period of 50 years is assumed. Thus
average annual depreciation is P1.686M/50 or
P33,720/year.
 Take note that : since the prices given are offering prices
(ceilings), a 5% reduction for negotiation may be
considered.
 Thus the indicative market value for the Subject House is
95% x P2.886M or about P 2,741,700. say P2,740,000
 Lecture III - 4

VALUATION
METHODOLOGY/
APPROACH
Cost Approach
Concept of the Cost approach
• The value of the Subject property can be estimated by
developing a cost estimate of the property as if new and
adjusting the said cost estimate for depreciation that
reflects the current condition of the subject property.
Concept of the Cost approach
• “The cost approach was once called the summation
approach. The theory is that the value of a property can
be estimated by summing the land value and the
depreciated value of any improvements.
• The value of the improvements is often referred to by the
abbreviation RCNLD (for "reproduction/replacement cost
new less depreciation").
Concept of the Cost approach
• Reproduction refers to reproducing an exact replica;
• Replacement cost refers to the cost of building a house or
other improvement which has the same utility, but using
modern design, workmanship and materials.
• In practice, appraisers almost always use replacement
cost and then deduct a factor for any functional dis-utility
associated with the age of the subject property.
• An exception to the general rule of using the replacement
cost, is for some insurance value appraisals. In those
cases, reproduction of the exact asset after a destructive
event like a fire is the goal.
Concept of the Cost approach
• The cost approach is therefore obviously suitable for
valuing improvements, not land. However, in some
instances, land can also be valued using the cost
approach.
• Example, if the assignment is to value a developed residential
subdivision project as a whole, then the cost approach will be
applicable. The Appraiser can arrive at a value indication by
obtaining the current value of raw land using market data and then
making a current cost estimate for site development and deduct
depreciation.
Concept of the Cost approach
• For many assignments which will use the Cost approach, the
overall methodology is a mix of the cost and market data
approaches.
• For example, the replacement cost to construct a building can be
determined by adding the labor, material, and other costs. On the other
hand, land values must be derived from an analysis of comparable
market data.
Concept of the Cost approach
• The cost approach is considered most reliable when used
on newer structures, but the method tends to become less
reliable for older properties.
• The cost approach often the only reliable approach when
dealing with special use properties.
• The principle of Substitution is applicable in the Cost
Approach
STEPS in the Cost Approach:
STEPS in the Cost Approach:
1. Estimate land value (using market data or sales
comparison)
2. Estimate cost to replace or reproduce improvements as
if new
3. Deduct accrued depreciation.
4. Add the depreciated cost of improvements to the land
value.
Abbreviations and meanings
• RCN (Reproduction cost new) – virtual replica, same
design, same materials
• RCN (Replacement cost new )- comparable function and
utility, equally satisfactory substitute
• D - Depreciation (accrued depreciation)
• RCNLD - Replacement cost new less depreciation
Components of Costs
1. Market costs
2. Direct costs
3. Indirect costs
4. Builder’s margin
5. Taxes
Components of Costs
Market costs are the total of current prices of the factors of
production - Labor, Materials, Management and Capital.
Total costs can be broken down to direct costs, indirect
costs, margin, and taxes.
1. Direct costs — those which are directly related to the
construction of the improvement; costs of the
components and elements that have been installed into
the completed structure, including the costs incurred to
install them (labor, equipment, supplies, and
supervision).
Components of Costs
2. Indirect costs - those which are associated with direct
costs, such as design fees, permit fees, mobilization, office
and administrative expenses, insurance premiums, etc.
Indirect costs are also called overhead costs.
Industry factors of between 5 to 10% of direct costs are
acceptable rates.
Components of Costs
3. Builder’s margin - in addition to direct and indirect
costs, allowance must be made for the builder’s profit
margin which can range from 10% to 20%.
4. Taxes - also comprise part of costs. In the Philippines, all
construction revenue are subject to value added tax of
12%. The output tax can however be reduced by
corresponding input tax, thus the net effect of VAT will be in
the range of 5 to 7%. Local taxes, nominally about 1 to 2%
also come into play.
Methods of Cost Estimating
There are four generally acceptable methods for cost
estimating:
1. Comparative area method
2. Unit cost method
3. Index method
4. Quantity survey method
Methods of Cost Estimating
1. Comparative Area Method - In this method, the cost is
estimated from known construction cost of similar property
expressed in terms of overall size or capacity (e.g. per
square meter of floor area).
2. Unit cost method - unit costs for major cost groups are
developed, using units such as the square meter, linear
meter, etc. and applied to estimated group quantities.
Methods of Cost Estimating
3. Index method - if either overall costs or unit costs are
historical values (old), indexing is applied to update them.
Current cost is estimated by applying an adjustment factor,
determined from a pertinent index, to original cost; also
referred to as trending method. An index tracks relative
changes in the price or cost of specific items or groups of
items over a period of time.
Methods of Cost Estimating
4. Quantity survey method - measurement of the quantity
and quality of all materials, labor, equipment, etc., unit cost
figures are applied to arrive at a total cost estimate. Add
design fees, license, overhead, profits, tax.

The process of cost estimating is a relatively technical and

complex effort. The appraiser should consult and
collaborate with an architect, engineer or quantity surveyor.
Another viable and practical approach is to actually engage
a builder to prepare a hypothetical quotation for the subject
property as if it were to be completely rebuilt.
Applying Depreciation to RCN
• Physical Deterioration is due to wear and tear in
operation and exposure to the elements. Depreciation in
value due to physical deterioration is estimated by figuring
out the cost of restoring worn-out components to brand
new.
Applying Depreciation to RCN
• Functional Obsolescence is depreciation resulting from
new technology, changes in design, materials or process
and as a result the older parts of a building are found no
longer functional, inadequate, expensive to maintain or
operate.
• Examples: Old light fixtures are now supplanted by energy-saving
LED, elevators are more power-efficient, expensive centralized air-
conditioning can be replaced by split-type units, rust-prone iron
window frames are now aluminum, etc..
Applying Depreciation to RCN
• Economic (or Environmental) Obsolescence is
depreciation resulting from influences external to the
property itself such as - changes in the local economy,
shifting property use pattern, legal changes, legislation
ordinances, zoning and administrative orders, and the
encroachment of objectionable influences such flooding,
informal settlers, etc..
Applying Depreciation to RCN
Physical deterioration and functional obsolescence are
either “curable or incurable.”
• Curable obsolescence will require renovation costs.
• Incurable conditions can not be remedied and therefore
will significantly cause a negative impact upon the
estimate of replacement cost. (lowers the market value).
Economic obsolescence which is incurable can only be
measured by the market and income approaches.
Steps/Methods of Estimating
Depreciation
1) Market extraction method
2) Age-life method
3) Breakdown method
1) Market extraction method
Market extraction method - depreciation is estimated
from comparables;
Method:
• From a comparable sale, deduct land value, obtain
depreciated value of building;
• estimate RCN and compare to obtain depreciation;
• then compute current value of building.
Example:
Market extraction method
The Subject is a 5-year old 2BR model on 100 sq.m. lot.
Two comparables found.
a. A vacant lot also 100 sq.m., same block was recently
sold for P1.0M
b. A similar 2BR house in the same block was recently
sold for P 10M. House is 10 years old.
What is the value of the Subject, using market extraction
method to compute depreciation?
Example:
Market extraction method
Solution:
Given: Market value of Comparable 2BR = P10M, Value of
Land = P2M
• Value of house = P10M - P2M = P 8M (depreciated value,
house is 10 years old).
• Assume 50-year life, the building being 10 years old has
depreciated about 10/50 or 20%.
• Estimate the RCN of the comparable:
• RCN = P 8M / 0.80 = P 10M. (assumes zero inflation)
• If the comparable is replaced today, it will cost P10M.
Example:
Market extraction method
Solution:
The Subject is a 5-year old 2BR model on 100 sq.m. lot.
Since the comparable is equivalent in all respects, this
is now the RCN of the Subject Property.
But the Subject is 5 years old.
• Assuming a 50-year life, the Subject has depreciated
10%.
• Thus, the RCNLD = 90% x P10M or P 9.0M
• Final value will be RCNLD + Value of Land = P9M + P2M
= P11.0 M
2) Age-life method
2) Age-life method
• In the Age-Life method, depreciation is estimated from
economic life and effective age relationships. This method
is very simple. Obtain the ratio of the Effective age versus
the estimated economic life and multiply it by the
replacement cost new.
Terminologies reflecting Age and Life
relationships
• AGE: refers to a cumulative period that has transpired
• Actual age - chronological or physical age of the building
• Effective age - a relative “age”; the building may be 20 years old
but because well- maintained, appears only 10 years old.
Terminologies reflecting Age and Life
relationships
• LIFE: refers to a total period estimated for the subject
property
• Economic life - an estimated or specified period where the
improvement is economically useful;
• Useful life - the estimated physical life of the improvement. Usually
greater than the economic life.
Terminologies reflecting Age and Life
relationships
• REMAINING LIVES: refers to the remaining period.
• Remaining economic life = Economic life minus effective age.
• Remaining useful life = Useful life minus actual age.
Example: Age-life method
Computing value using depreciation from Age-Life
relationships :
An office building is now 40 years old but has an estimated
economic life of 50 years. Periodic repairs and
maintenance warrants that the said economic life can still
be attained. A quantity survey estimate was made and
shows that the replacement cost new for the subject
building will be P100M. What is the current market value?
Example: Age-life method
Solution:
• Building RCN = P100 M
• Economic life = 50 years
• Effective age = 40 years
• Depreciation = 40/50 = 80%
• Current value = P 100M - .80(100) = P20M
3) Breakdown method
3) Breakdown method
• The Breakdown method is a little bit sophisticated. It may
require substantial computation and estimating effort. But
it is more reliable and definitive. First, the RCN is
estimated using any of the usual methods for cost
estimating. Then, the values of deductions for
depreciation are separately estimated.
 3) Breakdown method
Method: From the estimate of RCN, deduct an itemized value
for each type of depreciation.
Current Reproduction Cost New (RCN) of Replaceable
Property
Less: Physical Deterioration: Curable and Incurable
Less: Functional Obsolescence: Curable and Incurable
Less: Economic Obsolescence; Generally Incurable
3) Breakdown method
The key to this method is to identify separately the factors
causing depreciation

• Physical deterioration: If existing toilets are no longer

functioning, the RCN (which will contain functional toilets)
must be adjusted by deducting the cost of toilets.
3) Breakdown method
The key to this method is to identify separately the factors
causing depreciation

• Functional obsolescence: If the existing lifts have

become inefficient and can carry only half of the original
passenger capacity, the RCN (which will include full-
capacity lifts) must be adjusted by deducting the cost of
repairing or replacing the lifts with modern units.
3) Breakdown method
The key to this method is to identify separately the factors
causing depreciation

• Economic obsolescence: If the building is now less

accessible because it has become a one-way street, then
the land component of the RCN should be adjusted by a
percentage that reflects the erosion of land values because
of the one-way street. This amount can not easily be
estimated but secured from market data.
RCNLD Example using Breakdown
Method for Depreciation
Value of the Land = P 20M
RCN of the building = P 100 M
Less: Depreciation estimate by breakdown method
• Physical deterioration - 20% P 20 M
• Functional obsolescence P 25 M
• Economic obsolescence P 15 M
• Total Depreciation P 60 M
RCNLD of the building = P100M - P60M = P 40M
Indicated Value of the Property = P20M +P40M
= P 60M
 Lecture III - 5

Income Approach
• The current value is dependent on the expected future income
that can be derived from owning the property.
• The principles of Substitution and Anticipation are considered in
this approach.
• The income approach is particularly suitable for income-earning
property.
• The estimate of future income should not be speculative. It must be based
on actual or historical values, either as experienced by the Subject
property itself or from comparables.
• Income-earning properties consist of buildings and
improvements used in a business.
• Certain kinds of land, such as farms with high-value crops, can
also be considered as income-earning properties.
1. Make a thorough study of the property’s potential gross
income;
2. Allow for reasonable deductions - vacancy rates, collection
losses, etc. and compute the Effective Gross Income or EGI.
3. Subtract the operating expenses to derive the “Net
Operating Income” or NOI;
4. Assuming the NOI to be a constant future stream, apply a
capitalization rate to determine current value;
5. Alternatively, assuming the NOI to be variable and its will
end after a determinable period, then compute the current
value by using a discounted cash flow method (DCF).
• Method 1 - Direct capitalization
• Value = NOI / cap rate

• Method 2 - Discounted Cash Flow

• Value = NPV of annual flows + Reversion Value
1. From annual gross income, deduct vacancy % to reach
Effective Gross Income (EGI)
2. Estimate operating expenses and deduct from EGI to arrive at
NOI
Note: : NOI does not consider depreciation, interest of loans and
taxes.
• Discounting is a financial concept which converts a future value
into a present value using a specified or selected interest rate.
• Discounting is merely the reverse of “compounding.” It answers
the question:
• “What is the equivalent present value of a future amount given an interest
rate and duration?”
• The interest rate used in the computation is called the “Discount
rate”. It is also called the “Overall Capitalization Rate” or “Cap
Rate” for short.
• The cap rate itself may have multiple components
• a risk-free interest rate and a recapture rate.
A) Single value discount factor:

𝑭𝑽 𝑭𝑽
𝑷𝑽 = =
𝒇𝟏 (𝟏 + 𝒓)𝒏
f1 = (1+r)n
SDF = 1/f1 (single sum discount factor)
Where:
PV = present value
FV = future value
r = the interest rate
n = number of periods
Example: Single value discount factor:
What’s the present value of P 10M to be received 10 years
from now if interest rate is 10%?
Solution:
r = 10%,
n = 10 years,
f1 = (1+0.1)10 = 2.59
SDF = 1/f1= 0.3855
PV = 10M x 0.3855 = P 3.855 M
B) Multiple income stream discount factor if term is fixed or limited
−
𝒏 𝟏
𝒇𝟐 (𝒇𝟏−𝟏) 𝟏+𝒓
𝑷𝑽 = 𝑹𝑽 where 𝒇𝟐 = =
𝒇𝟏 𝒓 𝒓
or
(𝟏+𝒓)𝒏−𝟏
𝑷𝑽 = 𝑹𝑽
𝒓(𝟏+𝒓)𝒏

𝒇𝟐 (𝟏+𝒓)𝒏−𝟏
= is the Multiple Discount Factor (MDF)
𝒇𝟏 𝒓(𝟏+𝒓)𝒏

Where:
PV = present value
RV = a constant recurring value in the future (the income stream)
r = the interest rate (also the cap rate)
Example: Multiple income stream discount factor
What is the present value of P1M received annually for next 10
years if the interest rate is 10%?
Solution:
(𝟏+𝒓)𝒏−𝟏 (𝟏+𝟎.𝟏)𝟏𝟎−𝟏
𝑴𝑫𝑭 = = = 𝟔. 𝟏𝟒𝟒
𝒓(𝟏+𝒓)𝒏 𝟎.𝟏 (𝟏+𝟎.𝟏)𝟏𝟎

𝑷𝑽 = 𝑹𝑽 𝒙 𝑴𝑫𝑭
𝑷𝑽 = 𝟏, 𝟎𝟎𝟎, 𝟎𝟎𝟎 𝒙 𝟔. 𝟏𝟒𝟒 = 𝟔, 𝟏𝟒𝟒, 𝟎𝟎𝟎
• The first method in the Income Approach is just to use the
assumption of a non-ending constant future income stream. This
is the estimated “NOI”.

• Thus, PV (Present Value) = NOI / cap rate

An office building which is 5 years old has been rented out with a
total gross rental of P20M annually. Assuming that the average
vacancy rate is 10% and the total annual operating costs has
been P5M, what is the value of the building if the cap rate is
10%?
Solution:
Gross Income = P 20M
Less Vacancy 10% ( 2M)
EGI = P 18M
Less operating cost ( 5M)
NOI = P 13M
Current Value = P13M / 0.10 = P 130M
• (Note debt burden and taxes are not considered in the NOI.)
• Discounted cash flow is more sophisticated. It assumes that the
annual income stream will end after a determinable period.
Then the building will have a reversionary value or an
estimated value that it can be sold for at the future time.
An office building which is 5 years old has been rented out with a
total gross rental of P20M annually. Assuming that the average
vacancy rate is 10% and the total annual operating costs has
been P5M, what is the value of the building if the cap rate is
10%. Assume that the current leases will end in 10 years and the
Owner intends to sell the building on the 10th year at an
estimated future value of P150M. The 10-year single sum discount
rate SDF is 0.3855 and the multi-sum discount rate MDF is 6.144.
Solution
• Present value of future single sum
• PV1 = RV x SDF = P150M x 0.3855 = P 58M
• Present value of future multiple sums
• PV2 = NOI x MDF = P13M x 6.144 = P80M
• Discounted cash flows
• Value = PV1 +PV2 = P58M +P80M = P138M
• A cap rate can often be a judgment call of the investor. It is the
desired rate which satisfies the investor’s goals. As a bare
minimum, the cap rate must include the prevailing “cost of
money” or the opportunity rate (what a depositor can get from
a safe investment) plus a recapture rate for the portion of the
property which depreciates (such as the building).
• Land alone will have a cap rate equivalent to market interest
rate. It needs no recapture. At the end of the investment period,
land still maintains its original value plus a potential
appreciation.
• Buildings are wasting assets. At the end of the investment
period, its value is expected to be lower due to obsolescence.
For example, an Investor may look at it like this -
• Risk-free rate of long term bonds - 4%
• Desired recapture rate of capital - 6%
• Risk premium - 4%
• Other factors (debt service) - 2%
• Overall cap rate = 16 %
• Residual Methods - computational methods of extracting the
values of either land or improvements from future income and
expenses.
• Categories: Land Residual and Building Residual.
1. In this technique, the value of the building is readily given.
2. Compute the NOI.
3. Subtract a portion to be allocated to the building by adopting an overall rate
and multiplying the said rate to the given value of the building.
4. The balance is the income to be allocated to the land.
5. Capitalize this by multiplying it with the interest rate only.
6. Add back the building value to yield value of the property.
1. This is the reverse. Here, the value of the land is known or given.
2. Compute the NOI.
3. Allocate a portion of it attributable to land by multiplying land
value by the interest rate only.
4. Subtract from NOI to yield portion attributable to the building.
5. Capitalize portion attributable to building by dividing it by the
Overall Rate
 Lecture III - 6

Reconciliation of
Value Indications
and Final Value
Estimate
 Reconciliation of Value
Indications and Final Value
Estimate
O After applying the three approaches to valuation,
the total value of a property is obtained as the
sum of the respective value estimates for land
and improvements.
O If two or more approaches are used to make the
estimates, they have to be “reconciled.”
O The reconciliation procedure can be as simple
as taking an average value or it can be done by
applying a probability weight factor on the
separate values.
O Reconciliation will yield the final value estimate.
 Example of Reconciliation
of Values
(by Averaging)
SUMMARY OF VALUE CONCLUSIONS

Approach Computed Value (Php)

Cost Approach 8,100,000 8,100,000

Market Data Approach 8,070,000 8,070,000

Income Approach:
Overall Capitalization Rate 7,860,000 Average of
Overall Cap Rate
Gross Income Multiplier 7,920,000 7,890,000 and Gross
Income Multiplier
Final Concluded Value, Php 8,000,000
Value is rounded off 8,020,000 Average of the 3
Approaches
 Example of Reconciliation of Values
(by Weight Factor)
SUMMARY OF VALUE CONCLUSIONS

Computed Weighted
Approach Wt
Value (Php) Value (Php)
-8,100,000 x 20%
Cost Approach 20%
8,100,000 1,620,000
Market Data Approach 30% -8,070,000 x 30 %
8,070,000 2,421,000
Income Approach: 50%
Overall Capitalization
60% -7,860,000 x 60% x 50%
Rate 7,860,000 2,358,000
Gross Income
40%
Multiplier 7,920,000 1,584,000 -7,920,000 x 60% x 50%

Final Concluded Value, 7,983,000 (rounded off to

Php 7,980,000 the nearest ten
thousands)
References:
• Uniform Standards of Professional
Appraisal Practice (2014-2015)
• International Valuations Standards
2009
Types of Appraisal Reports
A. Oral
B. Written.
Types of written reports
1) Letter
2) Form
3) Narrative
Oral reports:
 Used only in circumstances where written
report not permissible.
 Include: description, facts, assumptions,
reasoning and valuation conclusion.
 Keep on file all notes and data.
Letter report:
 Sets forth only the conclusion, omits supporting
data and discussion of methods;
 should contain all the essential elements.
Form report:
 Combination checklist + fill-in the blanks format;
 Allows standardization;
 Can attach some exhibits.
 Contents:
1. Property description - basic info, neighborhood,
improvements, comments..
2. Valuation section - approaches and analyses (cost,
market, income), reconciliation.
Narrative report:
 a full appraisal report.
General Outline of a Narrative Report
(recommended)
I. Introduction -
1. Titlepage
2. Letter of transmittal to Client
3. Table of contents
4. Certification of value
5. Executive summary of important conclusion with
signature of appraiser
II. Premises of the appraisal
1. Qualifying/limiting conditions
2. Assumptions
3. Purpose or objectives
4. Intended use
5. Definition of value, date of value estimate,
6. Property rights appraised.
III. Presentation of Data
1. Description of the property
2. General data - location, neighborhood, zoning,
3. Site-specific data - terrain, history,
improvements, etc.
IV. Analysis and Conclusions
1. HABU of land assuming vacant, HABU as
improved,
2. Value estimate for the land value - various
approaches
3. Value estimate for the improvements - various
approaches
4. Reconciliation to a final value estimate
Addenda or Supporting Materials
 Maps, lot plan, survey plan Photos
 Floor plan or diagram of improvements,
 Statistical data, sales data sheets, sales location
maps. Other supporting documents as available