BASIC APPRAISAL

TABLE OF CONTENTS

I. Introduction to Real Estate Valuation /Appraisal Process pp. 1 – 5A

II. Nature of Property/General Real Estate Information 6– 9
III. Introduction to Human Geography 11 – 18
IV. Data Research & Appraisal Methodology 19 – 21
V. Basic Principles of Property Value 22 – 24
VI. Market Data Approach 25 – 29
VII. Income Approach
- Appraisal of Lease Interest 30 – 39
- Appraisal of Leaseholds (w/ Tables) 40 – 45
VIII. Cost Approach 55 – 60
IX. Investment Mathematics & Statistics 61 – 78
X. Inspection, Identification, Site Analysis and Map Reading 79 – 84A
XI. Appraisal of Rawland for Subdivision Purposes 85 – 86A
XII. Appraisal of Machinery & Equipment 87 – 93
XIII. Appraisal Reporting Writing 94 – 104B
XIV. Laws Affecting Property Value 105 – 111
XV. National Code of Ethics for the Realty Service Practice 112 – 117
Department Administrative Order No. 6 118 – 122
D A O No. 3 123 – 129
XVI. Appraisal of Real Property for Taxation Purposes 130 – 139
 INTRODUCTION TO REAL ESTATE VALUATION

I. Definition of “Appraisal”, “Valuation”, “Cost estimation” and “Barnings Forecast”

In ordinary usage and according to the dictionary “appraisal’ and “valuation” are synonymous but the
dictionary definitions are not broad enough; in others they are not sufficiently specific.

Valuation – determination of the monetary value at the specified date of the property rights encompassed
in an ownership.

Appraisal – stated result of valuing a property, making a cost estimate, forecasting earnings, or any
combination of two or more of these stated results. An appraisal is also the act of valuing, estimating
cost, or forecasting earnings.

Cost estimation – an estimate of the amount of money that would be required at some specified date, to
construct, produce, replace, or reproduce, some tangible and/or intangible thing, without regard to its
ownership.

Earnings forecast – an estimate or forecast of the future net monetary returns, derivable from something
owned or considered as being owned.

Simply defined, appraisal is an estimate or opinion of value, where an estimate is NOT a:

a. State of value
b. Determination of value
c. Fixing of Value
An appraisal is only one person’s opinion of value. Different appraisers may arrive of different
estimates. The accuracy and usefulness of the value estimate depends on the appraiser’s skill, experience
and judgement.

II. Definition of Value

Value – means the worth, usefulness or utility of an object to someone for some purpose.

Market value – defined as the (1) highest price in terms of money (2) that real property is acquired (3)
by a buyer who is willing to buy and a seller who is willing to sell but not obliged or anxious to sell (4)
both of whom have adequate knowledge of the actual and potential use/s of the property (5) which has
been offered for a reasonable time in the open and competitive market.

III. Value in use and Value in Exchange

Value in Use – refers to the value of a thing or property to the holder which includes the Amenities,
benefits and income derived from its ownership, all of which are estimated in terms of money. This is
subjective.

Value in Exchange – indicates value of the property traded in the market. This is synonymous to
objective value or market value.
IV. Value, Price and Cost

1. Value and Price

Value is the distinct attribute of a thing or commodity to attract and complement another thing or
commodity in the market while price is the amount paid or offered for a thing or property. To the
seller, the price is subjective value. It is value in exchange.

The objective value of a property may be higher or lower than its current price.

2. Value and cost

Cost is not price. Neither is it value. It represents the capital expense in the formation and
construction of a finished product. It includes the original cost of land and construction materials as
well as profit and professional services.

Land, in its natural state, has minimal value. But, when it is developed into its highest and best use,
the becomes an attractive investment. Highest and best use is the most profitable use of the land that
will produce its highest present land value. The land, therefore, acquires a higher value. This is
objective value.

Normally, cost is less than price. The difference is profit. But if a seller is in dire need of money, he
would go away with profit or even less than that. This is value in use.

V. Other Meanings of Value

1. Land has PLOTTAGE VALUE when one or more parcels are consolidated so that its increment in
value as a whole is much more than the total sum of the value of each parcel of land separately
owned.

2. RENTAL VALUE refers to the price fixed for the right to use a certain property for a specific period
of time.

3. CASH VALUE is the value of the property in an all-out sale. It is synonymous to market value.

4. INVESTMENT VALUE on the other hand, is the present worth of future benefit or income of the
property that the owner, or investor has acquired. Economics consider this the ECONOMIC
CONCEPT of value.

5. GOING CONCERN VALUE is the value of the business in operation, or property that will continue
to be utilized. It includes tangible property such as real estate, equipment and machinery, fixtures and
inventories plus tangible assets such as franchises, patents and goodwill.

6. BOOK VALUE is the original cost of an asset or property less accrued depreciation.
 7. Corporations under receivership may sell its assets at LIQUIDATION VALUE OR VALUE. This
value could be lower than its market value because the owners are forced to sell, or due to their
ignorance of the real value of their assets.

8. In estimating the depreciation in account of the corporate asset, the estimated SALVAGE VALUE is
one of the factors are: (1) cost of the assets, and (2) their estimated useful life. Salvage value is the
amount that may be recovered minus cost of disposal when the assets will be retired of disposed of at
a future time.

9. LOAN VALUE is the maximum level of value, or appraised value, against which a property may be
mortgaged to secure payment of the loan. A Loan-to-value rate is usually fixed by the lending
institution or bank.

10. The INSURANCE VALUE is the cost of insurance coverage of the building or improvement to cover
its loss due to earthquake, fire or other calamity. This is done by estimating the cost of replacing the
entire building, or the portion thereof that has been damaged. The value of the land is included in the
estimate.

11. SCRAP VALUE is the value of a depreciated building, or the materials recovered from it.

12. CONDEMNATION VALUE is the estimated value of a property that is the object of expropriation
for public use. Just compensation is the fair and full equivalent, in money, for the loss sustained.

13. ASSESSED VALUE is the value of land/or improvements for advalorem tax purposes. The assessed
value is multiplied by the tax rate to produce the amount of tax due to payment. It is synonymous to
TAXABLE VALUE.

14. ZONAL VALUE is the fair market of land in a specific zone or area established by the Bureau of
Internal Revenue.

VI. CHARACTERISTICS OF VALUE

The value of real property is created by the presence of any or all four (4) characteristics, three (3) of
which are inherent in, and last is extraneous to, the property.

1. UTILITY is the ability of the property to satisfy human need.

2. SCARCITY. Land is not scarce. It is the use for which it is intended, or actually established that is
becoming scarce. The scarcity, however, is not absolute.

3. EFFECTIVE DEMAND The desire, coupled with the financial capacity, of the buyer/s to acquire a
piece of real property.

4. TRANSFERABILITY refers to the quality of the property to be transferred or covered. It seems the
right ownership of the transferee is absolute in fee, and that his title is not tainted with any-third party
claims whatsoever that would render it uncertain and dubious.
VII. FACTORS THAT INFLUENCED VALUE

The Real Estate value fluctuates, and remains stable at times on property. The appraiser and valuer, in his
search for value, analyses and evaluates these forces to arrive at the right figure on a specific date, these
forces are designated as:

1. SOCIAL forces relate to population growth, birth control measures and migration.

2. POLITICAL forces are government-based. The degree of efficiency in the maintenance of peace and
order and the effort of providing primary services such as electric light, water, fuel, and food, exn
Zoning and land use ordinances, anti-squatting law, rent control.

3. ECONOMIC forces include the nature of basic industry and business activity in the neighborhood:
trend of employment, salaries and wages of employees and workers: and expansion of the housing
program.

4. PHYSICAL forces refer to the location and age of the neighborhood: size, area, shape and
topography of land: type of improvements and architectural trends; and street pattern, sidewalks and
underground drainage.

VIII. BUNDLE OF RIGHTS

Real estate is defined as land and improvements that are permanently attached, or intended to be affixed
to land, including the rights and interest therein. It compromises two (2) inseparable components, and the
latter to the right of ownership of, and other interests in the land and/or improvements.
VIII.1 BUNDLE OF RIGHTS

Ownership of real estate is the juridical component of real estate. It is the legal right to own the
land and/or improvements. This right of ownership comprises several real rights, and is
collectively known as the ‘bundle of rights”. These are:

1. The right to possess and enjoy the use of the property.

2. The right to dispose.

3. The right to exclude any person from the enjoyment and disposal of the property.

4. The right to recover.

5. The right to convey ownership by inheritance.

IX. TYPES OF APPRAISALS

1. Informal Appraisals. Made by almost everyone. They are usually based on a combination of
knowledge, experience and intuition, i.e. pricing merchandise for sale, making a market analysis – as
by real estate salesperson, taking a listing.
2. Formal Appraisals. These are usually made by people especially trained for this work.

2.1 Appraisal in business and finance.

2.1.1 Use of appraisals in the sale of property
2.1.2 Use of appraisals in the purchase of property
2.1.3 Use of appraisals in mergers and exchanges
2.1.4 Appraisals in connection with mortgage, debenture and stock financing
2.1.5 Appraisals in connection with sale-leaseback transactions under certain circumstances,
lending institutions will purchase a corporation’s real estate facilities and then lease the
premises back to the corporation. The institution may make improvements on the property
before leasing it back.

2.2 Appraisals in the litigation

2.2.1 Appraisals in the condemnation proceedings. Under the law of eminent domain. All
branches of government have the right to take privately owned real estate for public use
(for expropriation purposes).
2.2.2 Appraisals in fraud cases. In the fraud case, the amount of the inventory damages is not
appraised directly as such, instead as appraisal is made of the value of the property as is
actual existed at the time of the sale and the difference between the amount paid and this
actual value is the amount of the monetary damage.
2.2.3 Appraisals in damages cases. Situation occur in which an owner of real or personal
property claims that he has suffered property damages by the willful or inadvertent act of
another party.in damages cases, appraisals are required to determine the monetary amount
of the damage.
2.2.4 Appraisals in division of estate cases. The distribution of the property under the terms of a
will, in divisive proceedings, or between rival claimants frequently requires that the value
of the property involved be determined by appraisal.

2.3 Appraisals of taxation

2.3.1 Appraisal for property tax purposes
2.3.2 Appraisal for inheritance and gift tax purposes

2.4
2.4.1 Appraisals for fire insurance
2.4.2 Appraisals for theft and loss insurance
NATURE OF PROPERTY/ GENERAL REAL ESTATE INFORMATION

Nature of Property
Appraisals deals with property. Whether an appraisal is a cost estimation, an earning forecast or a
valuation. It is concerned with specifically designated and described property. The starting point of an
appraisal is an investigation to determine precisely what property is to be appraised. A clear
understanding of the meaning of property is of fundamentals importance, both to the appraiser and his
client, especially in the field of evaluation.

Definition of Property
1. Sometimes it is used to mean a physical tangible or corporeal objects (such as a car or a parcel of
land) or an intangible object (such as patent, a contract, a franchise, or shares of stack of a
corporation).
2. Sometime it is used to mean the rights encompassed in ownership. They are the rights that are defined
and protected by law. (Such as the bundle of Rights).
3. Sometimes it is used to mean the thing that is owned. The expression entity owned is to be mean
either an integral or integrated entity, owned or capable of being owned, by a sole owner, co-owners
or diverse owners. The essential part of this definition is the functional integrality of the entity. The
following legal definitions are pertinent to the subject.

RES ALICUJUS – Thing owned by a particular person or group of persons

RES ALIENAE- Things belonging to others
RES COMMUNES- Things owned by no one and subject to use of all those things incapable of
entire exclusive appropriation for example light, air, the sea, running water.

An individual person, a corporation, a partnership, an association, a trustee, a city, a state, a county,

maybe the owner of an entity. Also, if the entity is real, it may be owned by one person, two or
more persons either as joint tenants or tenants-in-common. In addition, there are number of forms of
diverse ownership of an owned entity; such as lesson-lessee, mortgagor-mortgagee, bond holders-
stockholders, etc.

A sole owner, each of the co-owner, each of the diverse owners of an entity, as the case maybe,
enjoys certain advantages, satisfactions, and privileges and is burdened with certain disadvantages,
dissatisfaction, obligations, and liabilities. The net effect of these non-concomitant of ownership
maybe advantageous and desirable or disadvantageous and undesirable, but in either event, they are
called benefits that the owner derives from his interest in the entity. These benefits are owned or
possessed to the exclusion of other persons.

This forecasting of the kind, amount and incidence of the owner’s benefits that will appear in
associating with something that is, will be or could be owned, is the essential core of valuation
 procedure. It is the consensus of such forecast that creates a “market” for a commodity or other
salable thing.

Owner benefits consist of one or more of the following:

a. Monetary return or returns
b. Use and/or consumption of the owned entity

NATURE OF PROPERTY/ GENERAL REAL ESTATE INFORMATION

a. Police Power
b. Zoning
c. Power of Taxation
d. Building Code
e. Eminent Domain
f. Subdivision Regulations
g. escheat

2.Those Imposed by Contracts

a. Lease
b. Usufruct
c. Right of Easement
d. Restriction in usage in Contract to Sell

3.Those imposed by the Grantor

a. By will or testament
b. By donation

Kinds of ownership
a. Sole owner of an undivided property interest
b. Co-owners of an undivided property interest
c. Diverse owners of divided property interest

In general practice, the word “property” has been variously used, for example, to mean any of the following,
depending upon the context:
1. Property rights (property interest)
2. Benefits concomitant to something that is owned
3. Something that is owned, or
4. A tangible thing or aggregate of tangible thing, with or without regard to the ownership thereof.
It is that multiple meaning that gives rise to understanding. The common ambiguities can be avoided by
keeping clearly in mind that it is always. The property interest that is to be valued regardless of what the
property is called. In this connection, the expression “the Property” is frequently used to describe an integral
entity (such as land and building) which is held in the diverse ownership of lessor and lessee. Here there is one
tangible “something that is owned” but there are two ownerships, each of which encompasses a different kind
of property interest. For evaluations purposes, there are two property interest, not one. To call the land and
building a property is not misleading, it can actually lead to a misstatement of what is that is being valued.
The term “WHOLE PROPERTY INTEREST” is used throughout the valuation because it is the whole property
interest that are bought, sold, merged, mortgaged or bequeathed. The adjective” WHOLE” has been adopted
because a conveys the idea of unity or unity or integrity of ownership benefits or interest and this is an essential
part of the concept.

The property interest is an integral or integrated entity (called here the primary property interests) may be held
in:
1. Sole Ownership
a. The benefits are undivided
b. The property interest is undivided, and
c. The undivided property interest is a whole property interest

2. Co-ownership
a. The benefits are represented in the proportion to the co-owners
b. The primary property interest in undivided
c. The undivided primary property interest is a whole interest
d. Each co-owners interest is an undivided interest in the primary property interest.
e. Any of the co-owners’ interest can be held in sole ownership or co-ownership

3. Diverse ownership, or if the entity is real state

a. The benefits are assorted into different kinds
b. The primary property interest is divided and the aggregate of property rights in the entity does not
constitute a whole property interest
c. The property interest of each of the respective diverse owners is divided portion of the aggregate of
property rights in the entity and each is a whole property interest.
d. Any of these whole property interest can be held in sole ownership or co-ownership

4. A combination of sole ownership and co-ownership- condominium

a. The benefits are assorted into two kinds: each of the owners has the sole benefits of the ownership of
his own apartment and, jointly with the other owners, the benefits that is held in co-ownership.
b. The property interest of each of the owners is a combination consisting of a divided portion of the
aggregate of property rights in the real estate and undivided interest in those that remain after the
assignment of all the divided portions to their respective owners; each of the combinations is a whole
property interest but their aggregate is not.
Definition of Personal Property
There refer to movable items/objects not permanently affixed to real estate. Generally, truth exception, items
remain personal property if they can be removed without serious injury to real estate or to the items themselves.

INTRODUCTION TO HUMAN GEOGRAPHY

BASIC CONCEPTS
Geography’s most fundamental principle is that location is important: the location of people, activities, and
environments can help to explain human behavior and can help to solve human problems.
Geography is the scientific study of location of people and activities across the earth’s surface and the reasons
for their distribution.
Historical Development of Geography
1. Eratosthenes-used the word geography calculated the circumference of the earth (within 0.5 percent
accuracy); divided the earth into 5 climates regions- a torrid zone at the extreme north and south and 2
bands of temperature climate between the torrid zone and each of the frigid zone.
2. Hipparchus- drew imaginary lines on the surface of the earth in order to describe the location of places.
3. Aristotle- The earth is sphere
4. Ptolemy- wrote an eight volume Guide to Geography; forerunner of the present geography.
5. Humboldt and Ritter- Geographers should study human environment relationships by concentrating on
how the physical environment causes social development.
Geographers identify the location of something in four ways-name site, situation and mathematics.

1. Toponym –nominal location or a place name given to a portion of the earth’s surface
2. Site- physical characteristic of the location, important site characteristics include climate, water sources,
topography, soil and vegetation.
3. Situation- relative location of a place compared with other’s place; i.e. identify important buildings,
streets, and other landmarks to direct people to a desired location
4. Mathematical Location- absolute location on the earth’s surface, describe according to unique set of
numbers known as latitudes and longitudes. Two imaginary lines or arcs, known as parallels and
meridians.” Prime Meridians’-0-degree longitude at Greenwich, England. Numbers between 0-180
degrees either East or West of the prime meridian.

Definitions:
 1. Township- a square, 6 miles long and 6 miles wide. A township is divided into 36 sections, each of
which is 1 mile by 1 mile.
2. Map- a two dimensional (flat) representation of the earth’s surface or a portion of it.
3. Cartography- the science of making map.
4. Scale- relationship between the length of an object on a map and the length of the same feature on the
earth’s surface.
5. Projection- the system used to transfer locations on the earth’s surface to locations on a map.
6. Special Distribution- the arrangement of the phenomenon across the earth’s surface. Important
properties of spatial distribution: density concentration and pattern.
6.1. Density- frequency that something occurs within the given unit of area. i.e. arithmetic density is
the total number of objects, such as people in the area.
6.2. Concentration- extend of the spread of something over a given study area. If the objects in a
given area are close together, they are considered clustered. If they are relatively apart, they are
considered dispersed.
6.3. Pattern- the geometric arrangement of objects. Geographers observe that many objects from a
liner distributor such as the arrangement of houses along a street or stations along a subway.

II. POPULATION
1. Demography- scientific study of population characteristic
2. Ecumene- the portions of the earth’s occupied by permanent human settlement.
3. Density- helps geographers measure the relationship between population and available sources and can
be computed in number of ways:
3.1 Aritinmetic density (Population Density)- Total number of people divided by a total land area.
3.2 Physiological Density- number of people per unit area of arable land which is land suitable for
agriculture. The higher the physiological density, the higher the potential pressure people may place
on the land to produce enough food.
3.3 Agricultural Density- the ratio of the number of farmers to the total amount of land suitable for
agriculture helps to account for these economic differences.
4. Census- the most important source of knowledge about the growth and composition of a country’s
population.
5. Components of Population Change
5.1 Fertility
Natural Increase- the percentage by which a population grows in a year and is computed by
subtracting the crude death rate from the crude death rate from the crude death rate (excludes
migration)
5.2 Mortality
Crude death rate-annual number of death per 1,000 population
5.3 Migration

III. MIGRATION
1. Definition- a permanent move to new location
2. Emigration- migration from a location
3. Immigration- migration to a location
4. Net migration- difference between the number of immigrants and the number of emigrants
 5. Factors affecting migration
5.1 Push Factors- Induce people to move away from old residence
5.1.1 Political push factors- people forced to migrate from a particular country for political reasons
known as refugees.
5.1.2 Economic push factors
5.1.3 Environmental push factors
5.2 Pull factors – attractive features of a new location may lure migrants there
5.2.1 Political pull factors – lure of freedom
5.2.2 Economic pull factors
5.2.3 Environmental pull factors – for health reasons

IV. ECONOMIC DEVELOPMENT

1. Measures of economic development thru indicators
1.1 Per capita income
1.2 Economic structure by sector
1.2.1 Primary sector – concern with the direct extraction of materials from the earth’s surface,
generally through agriculture, though sometimes by mining, fishing, and forestry.
1.2.2 Secondary sector – includes manufacturers that process, transform, and assemble raw
materials into useful products.
1.2.3 Tertiary sector