Professional Documents
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3.6 Basic REA For REB
3.6 Basic REA For REB
OTHER PURPOSES:
1) Sale & Disposition
2) Taxation
3) Condemnation Proceedings
4) Basis for Insurance
5) Accounting & Property records
PRICE, COST and VALUE
PRICE
- Actual amount paid in a particular transaction
- Term used for the amount asked, offered, or paid for a good or service
- Generally an indication of a relative value placed upon goods or services.
COST
- Actual amount spent to build or put a property into being.
- The total cost of the property includes all direct & indirect costs of its production
- The amount of money required to create or produce the good or service.
VALUE
- A relationship between a thing desired and a potential purchaser.
- An economic concept referring to price most likely to be concluded by the buyers &
sellers
- Is a hypothetical price, and the hypothesis on which the value is estimated determined
by the valuation basis adopted.
Price and Cost are factual figures and considered as indicators of value.
1) DESIRABILITY
- Property must arouse the desire of potential buyer.
- Desirability to be effective must be supported by purchasing
power.
2) UTILITY
- A thing must be useful to have value.
3) SCARCITY
- An object must have limited supply in order to arouse desire in an
individual.
4) TRANSFERABILITY
- Ownership of an object must be transferrable.
FORCES THAT AFFECT VALUE (SEPP)
1) SOCIAL - Factors emerging from man’s social instincts and
yearnings. Such as:
> Population growth & decline
> Changes in family size
Example:
When an office building has a net income expectancy of P 100,000 per annum. Rate of
return is @ 12%. Its value today or its present worth based on future benefits or future
income is derived from the formula for capitalization
V = I/R
Thus, V= P 100,000
12%
= P 833,333.00 – This amount represents what a buyer
is justified to pay for the investment of
the property TODAY.
6) HIGHEST and BEST USE (HABU) – The priciple states that the most
profitable use of the property will yield the highest land value. Land has no
value unless man can use it, but the amount of the value of land depends
on how it is used. Because real estate owner wishes to reap the greatest
possible net returns from his property.
Example:
Velez St. in Cagayan de Oro City is a commercial strip forming part of the
city’s business district. If a
3-storey commercial building is constructed on a lot along this span, the
improvement represents the HABU as it gives the most profitable use of
land, hence, maximizes its value.
7) SUBSTITUTION – The principle states that no prudent buyer will pay more
than what it will cost him to buy or build an equally desirable substitute
property. When several properties or services with substantially the same
utility are available, the one with the lowest price attracts the greater
demand and the widest distribution.
Example:
Mr. Roxas decided to put up a boutique selling local and imported clothes;
shoes and other accessories along the southeast side of Nicanor Reyes St.
within the University Belt. He has to choose between the following spaces
for rent:
Store Space 1
Floor Area – 80 sq.m.
Rental Rate – P 6,000/month
Characteristics: good condition; newly renovated
Store Space 2
Floor Area – 83 sq.m.
Rental Rate – P 8,500/month
Characteristics: good condition; newly renovated
Since the two (2) spaces offer almost the same features, utility and
desirability, Mr. Roxas decided to occupy/rent Store Space 1.
8) SUPPLY AND DEMAND – The principle involves the interplay of economic
forces affecting market value. Changes in the proportionate relationship
between supply and demand tend to affect the price obtainble in the
market. It also states that scarcity influences supply and desire influences
demand. Demand of for a commodity is created by its usefulness ad the
scarcity of supply.
Example:
There is an oversupply of office buildings in Makati, like in Salcedo and
Legaspi Villages. Some of this buildings do not get maximum occupancy
because the demand is less.
To compete in the market, owners have no option but to offer their
buildings/condominiums for rent or for sale at the lower side of the price
gamut/range prevailing in the area.
MODULE 2
LEGAL CONSIDERATIONS
IN APPRAISAL
LEGAL CONSIDERATION IN APPRAISAL
INTRODUCTION
Ownership of real estate is a direct function of constitutional guarantees.
Res nullius are those physical things which "have not or have
never had" an owner. Res nullius is a category of "things."(1)
Those things have not been reduced to "property" because
they are not, or more accurately cannot, be appropriated by
individuals. Light, for example, is res nullius.
Res Alicujus - Things owned by someone - a particular
person or group of persons
Res Alienae - Things belonging to others
▪ REAL PROPERTY
▪ Real property relates to the interests, benefits, and rights
inherent in the ownership of real estate.
▪ Based on this distinction between real estate and real property,
those involved in the valuation of real estate are technically
real property appraisers as opposed to real estate appraisers.
▪ Consistent with the concept of real property is the bundle of
rights concept, a view of real property ownership suggesting
that the rights inherent in the ownership of a parcel of real
estate can be compared to a bundle of sticks whereby each
stick represents a separate and distinct right in the ownership
of that real estate.
FUNDAMENTAL DEFINITIONS OF LEGAL INTERESTS
Bundle of Rights
Rights generally inherent in the ownership of real estate include but
are not limited to the following:
1. The right to use (Jus Utendi)
2. The right to its fruits (Jus Fruendi)
3. The right to dispose (Jus Disponendi)
4. The right to recover (Jus Vindicandi)
5. The right to abuse (Jus Abutendi)
The bundle of rights can be divided through various instruments
including leases, easements, and mortgages.
Through these instruments, one party owns or controls certain rights
whereby another party owns or controls other rights.
FUNDAMENTAL DEFINITIONS OF LEGAL INTERESTS
PERSONAL PROPERTY
• Personal property is an item that is not real property.
• It usually falls outside the subject of an appraisal.
• Three examples of personal property that may appear to be
related to the real estate are the following:
• A portable microwave oven
• A window air-conditioning unit
• Furniture
FUNDAMENTAL DEFINITIONS OF LEGAL INTERESTS
FIXTURE
• The purest and most complete form of real estate ownership is fee
simple. Yet, even though an individual may own a parcel of real
estate in fee simple with no mortgage encumbrance, he or she does
not have exclusive use of that property.
• There can be private restrictions placed on the property by the
previous owner or the developer. Such restrictions may require a
minimum floor area, architectural controls, and placement of
improvements.
• There can also be governmental controls. When purchasing real
estate, one should recognize that the purchase is being made
subject to these restrictions which are inherent in the ownership of
the property.
LIMITATIONS ON OWNERSHIP OF REAL ESTATE
Police Power
• Police power is the right of government to regulate land use for the
public good. There are numerous examples of police power, but the
most obvious ones are zoning and building codes.
• Zoning is intended to promote orderly development of land. Zoning
may allow commercial development along a major highway but may
restrict adjoining land to residential usage. By promoting orderly
development, zoning generally tends to maximize and maintain an
individual parcel’s value.
LIMITATIONS ON OWNERSHIP OF REAL ESTATE
Police Power
Eminent Domain
Taxation
• Governments are granted the right of taxation, that is, they are
allowed to levy taxes on properties.
• In many communities, property taxes are the primary funding basis
for local operations including schools.
• If property taxes are not paid, governments have the right to
acquire the properties, although proper legal procedures must be
followed.
LIMITATIONS ON OWNERSHIP OF REAL ESTATE
Deed Restrictions
Deed Restrictions
Easements
• An easement conveys the right to use part of the land for a specific
purpose. Easements thus divide the bundle of rights.
• Utility companies have to acquire easements to extend utility lines
through property.
• In order to widen an existing highway, a governmental authority may
have to acquire a temporary easement alongside the highway for
construction purposes.
LIMITATIONS ON OWNERSHIP OF REAL ESTATE
PRIVATE RESTRICTIONS ON REAL ESTATE OWNERSHIP
Easements
Leases
Mortgages
Liens
Encroachments
Adverse Possession
Leasehold Estate
Air Rights
Surface/Subsurface Rights
INDIVIDUAL (SEVERALTY)
TENANCIES
UNDIVIDED INTERESTS
Condominium
Cooperative
• Which of the following is NOT one of the three tests of when personal
property becomes a fixture and thus part of the real estate?
a. Cost of the item b. Manner of attachment
c. Intent of the parties d. Character of the item
• Which type of title transfer offers a guarantee of the title from the
seller to the buyer?
a. Quitclaim b. Title insurance
c. General warranty d. Adverse possession
• Real property is
a. the same as real estate. b. different than unreal property.
c. an intangible interest in real estate d. the bricks and mortar.
REVIEW QUESTIONS
• Real estate is
a. the tangible bricks and mortar and land.
b. different than unreal estate.
c. an intangible interest.
d. a microwave sitting on top of a kitchen counter.
• A condominium is known as
a. tenancy in common. b. partial ownership.
c. joint tenancy. d. a type of special ownership.
INSPECTION OF PROPERTIES
SITE ANALYSIS IMPROVEMENT ANALYSIS NEIGHBORHOOD ANALYSIS
-Physical Characteristics of Land - Building Type; Framework; - Type; Population Density
- Highest & Best Use (HABU) Physical /functional defects - Income Level/Economic Base
WRITE REPORT
LETTER CERTIFICATION SHORT/FORM REPORT NARRATIVE TYPE
MODULE 4
APPROACHES TO VALUE
APPROACHES TO VALUE
1) MARKET DATA APPROACH
- Principle Underlying the Approach is the Principle of
Substitution
- Consist of gathering information concerning sales of
properties that are comparable to the property appraised.
CORRELATION OF VALUES
DIRECT COMPARISON P 6,200/sqm x 60% = P 3,720/sqm
OPINION SURVEY P 6,700/sqm x 40% = P 2,680/sqm
Appraised Value, P 6,400/sqm
RAWLAND VALUATION
Example:
Mr. A offers his 10.0 hectare rawland in Lumbia, Cagayan de Oro City. Prices of developed lots in
Lumbia is at P 3,500/sq.m. Subdivision developers disclose a development cost of P 800/sq.m.
of the Gross Area; Admin., Sales & other expenses is estimated at P 21,000,000. At how much
should you buy the property given a 5 year development & sales period of 5 years?
Annuity based on a 12% interest rate is 3.60477.
a) Analyze Gross Income
Total Cash Price = Selling Price of Developed Lot/Sq.M. x Saleable Area
TCP = P 3,500/Sq.M. x 10 has x 10,000Sq.M./hectare x 70%
TCP = Php245,000,000.00
b) Analyze Expenses
Total Expense = Development Cost + Other Expenses = Php800/sq.m. x 100,000 sq.m. + Php21,000,000
Total Expense = Php101,000,000.00
c) Ultimate Rawland Value = Gross Income - Total Expenses =Php245,000,000 - Php101,000,000
= Php144,000,000.00
d) Compute Rawland Value/Sq.M.
Rawland Value/Sq.M. = URV x Annuity Factor
No. of Years x Gross Area
RV/Sq.M. = Php144,000,000.00 x 3.60477
5 x 100,000 Php519,043,680.00000
RV/Sq.M. = Php 1,038.09/Sq.M. Php1,038.09
APPROACHES TO VALUE
2) COST APPROACH
- Principle Underlying the Approach is the Principle of
Substitution
- Value of Improvement is estimated as follows:
> Estimate Replacement cost New (RCN)
> Arrive at the depreciated value of improvement using
straight-line method of depreciation and cost-to-cure
technique.
> Depreciated value of improvement is added to the Value of
Land.
Different Methods in estimating Cost:
a. Quantity Survey Method – includes a detailed inventory of all
materials, labor including indirect costs. Used by Engineers
& Architects.
b. Unit-Cost-in-Place – It is the mathematical compression of
Quantity Survey Technique. Use of installed prices of various
building materials.
c. Cost per Sq. Meter – is a product of Quantity Survey & Unit
Cost in Place methods. Established cost per area is
multiplied to the total floor area.
COST APPROACH – Sample Problem
Less: a) Physical Deterioration - Straight Line Method (SLM) - 6/40 x 100% ( 328,500.00 )
b) Functional Obsolesence - -5% ( 109,500.00 )
c) Economic Obsolesence - 0% ( 0.00 )
P 1,752,000.00 P 1,752,000.00
TOTAL PROPERTY VALUE P 2,025,000.00
Rounded to P 2,020,000.00
APPROACHES TO VALUE
3) INCOME CAPITALIZATION APPROACH
- Principle Underlying the Approach is the Principle of
Anticipation
- Value is arrived by capitalizing Income.
- Used in the valuation of income generating properties, such
as: Retail store properties, apartments, shopping centers,
office buildings, hotels, leased commercial & industrial
buildings
a) DIRECT CAPITALIZATION
b) YIELD CAPITALIZATION (DISCOUNTED CASH-FLOW)
DIRECT CAPITALIZATION
Example 1:
Income per year is P 3,000,000.00; Capitalization rate is 6%
Value = P 3,000,000.00/6% = P 50,000,000.00
DIRECT CAPITALIZATION
FORMULA:
VALUE = INCOME
RATE
V = I/R
Direct Capitalization Method
Subject Property Commercial Building
Building 2-storey commercial building; Average cost grade; Remaining Econ. Life – 40 years
Less: Allowance for vacancy & bad debts, say -10% (127,000.00)
Capitalization Rate = Rate of Return + Recapture Rate where: Recapture rate = 1 / Remaining Econ. Life
= .025 or 2.5%
Say, P 16,630,000.00
INCOME CAPITALIZATION APPROACH
YIELD CAPITALIZATION
+
pwf x I5
NPV5 I5
+ pwf x In
In
NPVn
pwf x RV
+
RV Reversion Value
Present Worth Factor = 1/(1 + r)n
(End of Period)
=
Where: r = rate n = period (year)
MV
INCOME CAPITALIZATION APPROACH
Discounted Cash Flow (DCF) Analysis
A 2-storey commercial building has a Net Operating Income per year of P 12,000,000 with an
increment of 10% per year. Compute the value of the property today assuming a 10 year cashflow.
Lot area is 3,000 sq.m. at P 12,000 per sq.m.
Building Value at 10th year is estimated at P 57,600,000. PV Rate = 12%
ADD:
VALUE OF LAND (Today) = 3,000 m2 x P 12,000/m2 x 0.32197 Php11,590,920.00
SELLER ‘S CURVE
TIME
VALUE PARAMETERS
OVER APPRAISAL
HIGHEST POSSIBLE
MARKET VALUE
MARKET
PRICE
FAIR MARKET
VALUE
INTERSECTED LOT
(70% FMV)
VALUATION EMPIRICAL FORMULAS
DELTA LOT
(60% FMV)
NABLA LOT
(40% FMV)
VALUATION EMPIRICAL FORMULAS
IL KL CL CTL KTL TL
(+10%) (+20%) (+20%) (+10%)
LEGEND
CL – Corner lot
KL – Key lot
IL – Inner lot
CTL – Corner Thru lot
KTL – Key Thru lot
VALUATION EMPIRICAL FORMULAS
3m <3m
100% 100%
FMV FMV
70% 50%
FMV FMV
VALUATION EMPIRICAL FORMULAS
SUBDIVISION ROAD
cul-de-sac
(100% FMV)
MODULE 6
REAL ESTATE FINANCE &
ECONOMICS
❖ REAL ESTATE FINANCE AND ECONOMICS
▪ One of the factors that has impact on real estate value is the
availability of credit.
▪ The availability of debt money also influences real estate
development and consequently the value of real estate.
▪ When credit is plentiful, loans are easy to obtain, and the
availability of money results in an active market.
▪ When credit is scarce, illiquidity occurs, and prices often decline
because only a few people can pay cash or qualify to borrow or
find a bank to loan them money.
▪ Decrease or increase in interest rates; decline in interest rates
tends to expand the borrowing power of many people.
❖ REAL ESTATE FINANCE AND ECONOMICS
• the basic impact of monetary and fiscal policy that impact the price
and supply of money;
• understand the basics of real estate finance including the basic terms,
types of loans, and various forms of mortgages
Interest
• Interest represents the money earned for the right to use
capital. Mortgages are generally paid on a compound interest
method in which interest is paid each month on the
outstanding balance at the contractual interest rate.
Payment
• Payment is also known as debt service.
• A payment on an amortizing mortgage is comprised of both
interest and principal. Dividing the annual debt service by the
original loan amount equates to the mortgage constant. For
instance, if a mortgage payment is P13,000 per month, or
P156,000 per year, and if the original loan amount was
P2,000,000, the annual constant is .078 (P156,000 ÷
P2,000,000).
MORTGAGE FINANCING TERMS
Loan-to-Value
• The loan-to-value (LTV) ratio is a percentage of the original or
proposed loan to the value of a property (loan amount ÷
property value).
• Mortgages are usually based on a loan-to-value concept that
protects the lender from loaning too much on a property.
• If a lender has a program that loans 70 percent LTV, and the
property value is P1,000,000, the maximum loan will be
P700,000. The remaining P300,000 is derived from a down
payment (equity) or some form of other financing.
• BSP regulation allows an LTV ratio up to a maximum of 80%.
MONETARY AND FISCAL POLICY
• Conversely, the lower the debt amount for the nation, the
lower the inflation rate and the lower the interest rate.
MONEY MARKETS