REAL ESTATE APPRAISAL

APPRAISAL
- Is an estimate of value as of a given time and for a specific purpose.

- It is the process of valuation, in a more technical usage, a systematic,

analytical, determination and recording of property facts, based primarily on a
personal inspection and inventory of the property.

- Being an estimate, it may or may not be accurate, its accuracy depends on:
1) the Integrity; and
2) the Competence of the Appraiser.

- Definition under R.A. 9646 (RESA): is the process of developing an estimate

of the value of an adequately identified and described property as of a
specific date, supported by logical presentation of factual and relevant data
primarily based on a personal inspection of the property.

- Note: Appraisal does not create value but observes and interprets forces
which create value.

- It includes:

a) Research
b) Data
c) Reasoning
d) Analysis
e) Conclusions necessary to arrive at a value estimate.

REAL ESTATE APPRAISER VS. REAL ESTATE ASSESSOR

Real Estate Appraiser Real Estate Assessor

- a 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.
- a duly registered and licensed natural
person who works in a local government
unit and performs appraisal and
assessment of real properties,
including plants, equipment, and
machineries, essentially for taxation
purposes.
REAL ESTATE VS. REAL PROPERTY VS. PERSONAL PROPERTY

Real Estate Real Property Personal Property

Is the physical land and all Refers to the rights, Tangible, movable items or
improvements which are interests and benefits objects not
attached to the land. It is related to the ownership of permanently attached to
the physical, tangible entity real estate (Bundle of real estate.
which can be seen and Rights)
touched together with all
the additions or
improvements thereon.

PROPERTY RIGHTS
1) Surface Rights- refer to those ownership rights in a parcel of real estate
that are limited to the surface. It does not include air rights or subsurface rights
2) Subsurface Rights- Landowner's rights to the water and other substances
below the surface of land.

3) Air Rights- are the property interest in the "space" above the earth's
surface. Generally speaking, owning, or renting, land or a building includes the
right to use and develop the space above the land without interference by others.

4) Subject to rights reserved by the State

a) Taxation

b) Eminent Domain
c) Police Power

d) Escheat

Characteristics of Value
1) Demand

- the need or desire coupled with the purchasing power to fill it

2) Utility

- the ability of a good or service to fill that need

3) Scarcity
- refers to shortage of supply relative to the demand

4)Transferability
- the good or service must be transferable to have value to anyone
other than the person possessing it
Forces that Affect Real Estate Values
1) Social

2) Political

3) Economic

4) Physical

Social Political Economic Physical

Forces relating to Forces that are Forces relating to Forces that refer to
population growth, related to the the nature of the location and
birth control efficiency of basic industry and age of the
measures and government in the business activity in neighbourhood:
migration. maintenance of the neighbourhood, size, area, shape,
peace and order i.e. employment, topography,
providing primary income, housing, improvements,
services and etc. trends, etc.
legislation.

COST VS. PRICE VS. VALUE

Cost Price Value

- Is the actual amount - Is the actual amount - Is the relationship
spent to build or put a paid in a particular between a thing
property into being transaction desired and a
potential purchaser
(or a person who
desired)

What is Market Value”

- It is the estimated amount for which a property should exchange on the date of
valuation between a willing buyer and a willing seller in an arm’s length
transaction after proper marketing wherein the parties had each acted
knowledgeably, prudently and without compulsion

- Elements:
a) Estimated amount as of a given date
b) Willingness of both parties
c) Substantive knowledge and sound judgment by both parties
d) Known in the open market
e) Under no pressure

Economic Principles of Value

1) Principle of Anticipation

- Value is created by the expectation that certain events will occur

2) Principle of Balance

- Value is achieved and maintained when all elements are in proper

proportion

3) Principle of Change

-Real property uses are always in a state of change since no physical or

economic condition ever remains constant
4) Principle of Competition

- Is the interaction of supply and demand. Excess profits tend to

attract competition. Real property will generally be higher in value if it is
similar in design, construction, age and use to other properties in the
neighbourhood
5) Principle of Conformity

- Real property will generally be higher in value if it is similar in

design, construction, age and use to other properties in the
neighbourhood
6) Principle of Contribution

- Any improvement to property is worth only what it adds to the value

of the property regardless of the cost of the improvement
7) Principle of Highest and Best Use

- The use of the property that will give the most profit, the greatest
net income. The use should be physically possible, legally permissible,
financially feasible, which results in the highest value of the property being
valued
8) Principle of Increasing and Diminishing Return
- Relates to the principle of balance as well as to the principle of
contribution. This principle holds that as capital units are added, a certain
point is reached where the added units do not contribute value commensurate
with their costs

9) Principle of Substitution

- The worth of a property is influenced by the cost of acquiring a

substitute or comparable property

- The most extensibly used principle

10) Principle of Surplus Productivity

- The surplus productivity principle recognizes the four agents of

production to wit (in the order as to priority of payment):
a) Labor

b) Capital
c) Entreneurship
 d) Land
11) Principle of Supply and Demand
- The value of the property depends on the number of properties
available in the market place- the supply of the product

-Other factors include the prices of other properties; the number of prospective
purchasers; and the price buyers will pay

Multiple Meanings of Value

1) Assessed Value
- The value of property established for property tax purposes typically
done by the assessor

2) Insurable value

- The cost of total replacement of a property’s destructible

improvements

3) Loan or Mortgage Value

- The value set on a property for the purpose of making a loan.

Normally, this is the same as market value

4) Going-Concern Value

- The value of business based in operation, or property that will

continue to be utilized
5) Plottage Value

- The increased value of the large combined parcel, called an

assemblage, over and above the sum of the smaller parcels
6) Investment Value
- The estimated value of property investment

7) Book Value
- The original cost of an asset or property less accrued depreciation

8) Rental Value
- Refers to the price fixed for the right to use a certain property for a
specific period of time
9) Liquidation Value

- When a corporation under receivership may sell its assets lower

than the market value because the owners are forced to sell
10) Other Values
● Salvage Value
● Scrap Value
● Zonal Value
● Condemnation Value
 THE APPRAISAL PROCESS

Definition of the Assignment

Identify Identify Use of Define Date Scope of Identify

of
Real Propert the Value Value the Real
Estate y valuatio Assignme Estate
Rights n nt

Preliminary Analysis and Data Selection and Collection

Highest and Best Use

Land as though vacant
Property as improved
Specified in terms of Use, Time and Market Participants

Land Value Estimate

Application of the Three Approaches

Reconciliation of Value Indications and Final Value Estimate

Report of Defined Value

Purposes of Real Estate Appraisal
a) Transfer, Valuation & Allocation of Assets
● To help a buyer or lessee determine the fairness of the asking price
or to decide on offering prices
● To help a seller or lessor set an acceptable price
● To set a fair basis for the exchange of real property
● To set the value of a property in mergers, acquisitions, liquidations
& bankruptcies
● To set the value of a property that is part of an estate
● To distribute the assets of an estate

b) Financing, Development and Insurance

● To determine the value of the security offered for a mortgage loan
● To determine property insurance value
● To determine the value of property losses due to fire, earthquake,
flood damage and other disasters
● To determine viability and development costs
● To determine remodelling cost
● To ascertain a vacant property’s most profitable use
● To ascertain whether the present use of the property is its most
profitable use
c) Taxes and Legal
● To assess property for property taxes
● To determine gift or inheritance taxes
● To value property as part of a marital dissolution
● To value property in an arbitration of a dispute
● To value property in condemnation proceeding
● To determine the effect on value of construction defects as part of a
legal proceeding
● To determine depreciation and allowable depreciation
expense

Three Common Types of Written Appraisal Reports

1) Letter Report

- This is the least formal written report. This is used when the
supporting data is not required by the client. This consists of one to five
page business letter. This may include certain exhibits such as lot plan,
pictures, or supporting document.
2) Form Report
- This is preferred by lenders and others handling large volumes of
appraisals. This offers standardization of data and analysis for easy
review. Forms are available for various types of property. Some allow for
extensive narrative supplement as desired.
 3) Narrative Appraisal Report

-Most formal and detailed type of report. It is preferred when user needs to
follow the appraiser’s step-by-step logic. It is often required as a test of
competence for appraiser’s applying for profession recognition and
designation.

What are the Basic Appraisal Documents?

1) For Real Estate
a) Photocopy of the title

b) Lot plan with vicinity map signed by a licensed Geodetic Engineer

c) Photocopy of the current tax declaration

d) Latest real estate tax receipts payment

e) Building Plans and approved building permit

2) For Chattel Mortgage (Transportation Equipment)

a) Photocopy of Registration Certificate

b) Photocopy of Official Receipts

What are the Government/Non-Government Agencies Involved for the

Verification/Inquiry in Real Estate Appraisal?
● Assessor’s Office
● Registry of Deeds
● Local Residents
● Real Estate Brokers/License Appraisers
● Subdivision Developers/Owners
● Bank Credit Officers/ Appraisers
● Newspaper clipping/classified ads
● Buy and Sell

THE THREE (3) APPROACHES TO VALUE

1) Sales Comparison Approach

2) Cost Approach
3) Income Approach

I. Sales Comparison Approach

 Also known as Market Data Approach

 Is the process of carefully comparing and relating the similar comparable

 properties to the subject property being appraised and employing the weighted
adjustment to compensate for differences.
 The bases of comparison are:

a) Location

b) Time Element
c) Physical

Characteristics d)Condition
of Sale

e) Others

 If comparable property is superior to the subject property, DEDUCT

 If comparable property is inferior to the subject property, ADD

 The principle used mainly is the principle of substitution

Example:
The property is located at 74A Emora Grand Building Bonifacio Street, Davao
City, fronting the Espino Medical and Maternity Clinic. It is also adjacent with
various commercial establishments and moderate to heavy residential density on
rear side.
The 452 square meter commercial property is developed with a sixteen year old
4-storey commercial building. The improvement is well maintained and currently
st
used for business operation. On the 1 floor, there are 5 commercial spaces for
rent, 4 are already occupied by a Salon, a Coffee Shop, a Souvenir Shop, and a
nd
Spa. On the 2 floor is occupied by Dormitoryo Francesca which is an exclusive
rd
Ladies Dormitory. On the 3 floor is the Marketing Office of Paintline which is a
th
printing press company. On the 4 floor is the production area of Paintline. The
frontage of the property is 5 meters from the road. The subject property has an
elevation level with its fronting roads grade line and has an irregular rectangular
shape.

Comparable 1:
A 780 square meter corner lot with 3 fully depreciated bungalow houses is
offered for sale at an asking price of Twenty Million Pesos (P20,000,000) or P
26,000/sq.m offered for sale since December 2015. This is located along Artiaga
corner Aurora Quezon Streets and is 100 meter away from the subject property.
Comparable 2:

A 185 square meter vacant lot is offered for sale since January 2016 with an
asking price of Five Million Pesos (P5,000,000) or P27,000/sq.m. The same is
located along Quezon Boulevard, Davao City across Bonifacio Barangay Hall.
 Comparable 3:
A 371 square meter lot with a year old 2 storey house (Fully Depreciated) is also
offered for sale at an asking price of Sixteen Million Pesos (P16,000,000) or P
43,000/sq.m. This is located along Artiaga Street, Davao City, fronting Polyclinic
Medical Center.

Comparable 4:
A 300 square meter improved lot with a 4 storey commercial dormitory building
(floor area undisclosed) has been sold 2 months ago and the asking price is
Thirty-Five Million Pesos Million Pesos (P35,000,000) or P116,000/sq.m. The
said property is located along Artiaga Corner Quezon Bouelvard Street and is
110 meters from the subject property.

Realtors, Brokers, Bank Appraisers and Assessors’ opinion of the valuation of

land along Bonifacio Street are ranging from P 25,000 to P 55,000 per square
meter.

BIR Zonal Value for commercial lots within this area is P 19,000 per square
meter.

II. COST APPROACH

 Is an estimate of the investment required to duplicate the property in its present
condition

 Is reached by estimating values of the land and adding the cost of replacement, new
 of the improvements, less accrued depreciation
 Reproduction Cost, New

- The present cost of reproducing the improvement with one of an exact or

highly similar materials, the cost of exact duplication in today’s market, with the
same or closely related materials
 Replacement Cost, New

- The present cost of replacing the improvement with one having the same
utility
 Depreciation - Loss in value from any cause

Causes: Deterioration
Functional Obsolescence

Economic Obsolescence

DETERIORATION

- The loss in value brought about by wear and tear, disintegration, use in
service and the action of elements

FUNCTIONAL OBSOLESCENCE
-Loss in value due to functional inadequacy or over-adequacy due to size, style
or age brought about by changes in art, poor planning

ECONOMIC OBSOLESCENCE

- Reflecting loss in value brought about by external economic forces, such

as changes in optimum land use, legislative enactment, infiltration of
inharmonious people or property uses

2 Phases of Depreciation
1) Accrued Depreciation (Past Depreciation)

- Loss in value that has already taken place up to the date of the appraisal or
capital already recovered.
2) Future Depreciation (Remainder Depreciation)

- Loss in value which will occur in the future.

- To be estimated on the basis of provision for the return of the capital, which
would be charged against annual net income in order to return invested capital in
the depreciating item over its remaining useful life

Three (3) Methods of Determining Depreciation

1) Straightline Method
 The property losses in value in accordance with its age.

 Formula:
Date of
Appra
 Example: isal –
Date
Const
ructe
d
Estim
ated
Econ
omic
Life

Date constructed -
2002
Date of appraisal -
2014

Estimated Economic Life -

40 years
Depreciation Rate

2
4

s
 Age-Life Relationships

ACTUAL AGE- historical age or chronological age

EFFECTIVE AGE- age indicated by condition and utility of a structure

ECONOMIC LIFE- begins when built and ends when the improvement no longer
contributes any value to the property
REMAINING ECONOMIC LIFE- the economic period over which existing
improvements are expected to continue to contribute to property value
Remaining Economic Life= 100%-Depreciation x Total Economic Life

= .30 or 30%

2) Effective Age Method

 In using this method, one should be guided by effective age rather than the actual
Chronological Age.
 Effective Age- is the age that appears to be compared to a new item or structure
 Formula:

Effective Age
x Est RCN

Est. Economic Life

 Example:

Estimated RCN of Structure - Php 1,500,000.00

Effective Age (est) - 5 years
Est. Economic Life - 20 years

Depreciation - Php1,500,000.0 x 5/20

= Php 375,000.00
Depreciated cost of structure= Php1,500,000.00 – Php 375,000.00
= Php 1,125,000.00
 3) Observe Condition Method
- A method of determining depreciation by ACTUAL INSPECTION rather

than by any theoretical provisions.

Three (3) Methods of Estimating Building Cost

1) Quantity Survey Method;

2) Unit Cost-In Place Method; and

3) Cost Per Square Meter Method
 1) Quantity Survey Method
 This is the detailed inventory of all the materials and labor that go into the finished
building.

 This method is commonly used by constructors, engineers and architects and is

the most accurate method.

2) Unit-Cost in Place Method

 A.ka. Modified Quantity Survey Method

 This method requires an analysis of building by breaking it down into major
components such as foundation, columns, floorings, etc. using workable units as
lineal meter, sq.m., cu.m. or other appropriate basic units

3) Cost Per Square Meter Method

 A.ka. Comparative Unit Method
 The simplest and easiest of the three (3) methods.

 The floor area of the building is simply multiplied to the corresponding estimated unit
cost of Reproduction, New of the building.
 Formula:

RCN, New= Floor Area x Estimated Unit Cost

Example:
Sixteen-year Old Four-Storey Commercial Building. A concrete framed commercial
structure with roof deck covered by corrugated metal roofing, painted smooth finish CHB
walls and partitions, painted hardiflex ceiling, painted panel and flush doors, glass on
steel framed window and granite tile floorings. Ground floor is partitioned into 5
commercial spaces. Second floor is partitioned into bedrooms which served as
dormitory. Third floor is partitioned into three rooms and the last floor is open area for
printing production. The building has stairways. Total Floor Area is computed at 452
square meters. Useful Economic Life of the structure is estimated at 40 years with an
actual age of 16 years.
III. INCOME APPROACH

 It is a process of estimating the present value of anticipated net income benefits that
the property will produce during its remaining economic life.
 The method of estimating the present value of income expectancies through
discounting process is called CAPITALIZATION.
 Applies PRINCIPLE OF ANTICIPATION

COMPUTATION APPLYING THE DIRECT CAPITALIZATION TECHNIQUE

Rental Income
 Net Operating Income

Determination of Capitalization Rate

Capitalization Rate = Interest Rate + Recapture Rate

= 8% + (100% / 24 Years)

= 8% + 4.17%
= 12.17%
 Determination of Net Operating Income Attributable to Land

 Determination of Value of Land using Capitalization Method

 VALUE OF LAND = Net Income / Interest Rate

= P1,874,522 / 8%

= P 23,431,525 or say P23,430,000

PROPERTY MANAGEMENT

Property management is the operation, control, and oversight of real estate

management indicates a need to be cared for, monitored and accountability given for its
useful life and condition. This is much akin to the role of management in any business.
Property management is also the management of personal property, equipment, tooling,
and physical capital assets that are acquired and used to build, repair, and maintain end
item deliverables. Property management involves the processes, systems, and
manpower required to manage the life cycle of all acquired property as defined above
including acquisition, control, accountability, responsibility, maintenance, utilization, and
disposition.

A property manager is a third party who is hired by a landlord or property investor to

manage the day-to-day operations at rental property.

Here are seven of the most common tasks a property manager is responsible for.
1. Rent Responsibilities

Dealing with rent issues is one of the most common responsibilities of a property manager.
This includes:

● Setting Rent: The property manager is responsible for setting the right rent
levelto attract tenants to your property. They understand the market where the
property is located and have looked at comparable properties in the area.
● Collecting Rent: They ensure optimal cash flow by setting a date to collect rent
each month and strictly enforcing late fees.
● Adjusting Rent: The property manager can increase the rent by a fixed
percentage each year, according to individual state and/or municipal law. They
can also decrease the rent if they feel it is necessary.

2. Tenant Responsibilities

Managing tenants is another core responsibility of a property manager. They are involved in
all areas, including:

● Finding Tenants: Property managers are responsible for filling vacancies. They
know where to advertise the rental and what to include in their ads. They also
understand what attracts tenants, so they can offer tips to help makeover the
property.
● Screening Tenants: Property managers should have a consistent screening
process, including running credit checks and criminal background checks, which
can decrease your chances of being accused of discrimination. Experienced
property managers have seen hundreds, even thousands, of tenants, so they
have a better idea of how to select the right tenants; those who will pay their rent on
time, have a longer tenancy and create fewer problems.

● Handling Leases: This can include setting the lease term and making sure it has
all the necessary clauses to protect the owner. This includes determining the
amount of security deposit required.
● Handling Complaints/Emergencies: They are paid to deal with
maintenance requests, noise complaints and they have the necessary contacts
to handle emergency situations.
● Handling Move Outs: When a tenant moves out, the manager is responsible for
inspecting the unit, checking for damages and determining what portion of the
security deposit will be returned to the tenant. After move out, they are
responsible for cleaning the unit, repairing any damages and finding a new
tenant.

● Dealing With Evictions: When a tenant does not pay rent or otherwise
breaches the terms of a lease, the property manager understands the proper way
to file and move forward with an eviction.

3. Maintenance and Repairs

The property manager must keep the property in safe and habitable condition. Property
managers are responsible for the physical management of the property, including
regular maintenance and emergency repairs.
 ● Property Maintenance: This includes performing preventative property
maintenance to keep the property functioning in top condition. For example, they
are personally in charge of, or must hire someone to, exterminate, check for
leaks, landscape, shovel snow and remove trash. This maintenance aims to keep
current tenants happy and attract new tenants.
● Repairs: When there is an issue, the property manager must fix the problem or
hire someone else to do it. They often have a large network of reliable plumbers,
electricians, carpenters and other contractors.

4. Knowledge of Landlord-Tenant Law

Good property managers have an in-depth knowledge of statewide and national laws
regarding the proper ways to:

● Screen a Tenant
● Handle Security Deposits
● Terminate a Lease
● Evict a Tenant
● Comply With Property Safety Standards

5. Supervising Responsibilities

● Other Employees: If there are other employees in the property, such as a

concierge or security personnel, the property manager is responsible for making
sure they are doing their job. The property manager can set their salaries and
even fire them.
● Vacant Properties: Property managers are often hired to look after vacant
properties to make sure there has been no vandalism and to perform routine
maintenance. They also make sure contractors and other repairmen are
completing their work in a timely manner.

6. Responsible for Managing the Budget/Maintaining Records

Property managers can be responsible for managing the budget for the building and for
maintaining all important records.

● Managing Budget: The manager must operate within the set budget for the
building. In certain emergency situations when the occupants (tenants) or
physical structure (investment property) are in danger, they may use their
judgment to order repairs or likewise without concern for the budget.
● Maintaining Records: The property manager should keep thorough records
regarding the property. This should include all income and expenses; list of all
inspections, signed leases, maintenance requests, any complaints, records of
repairs, costs of repairs, maintenance costs, record of rent collection and
insurance costs.

7. Responsible for Taxes

● The property manager can assist the property owner with understanding how to
file taxes for the investment property.
● The property manager can also file taxes for the property.