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Basic Steps in Appraisal

HANDOUT NO. 57
ICRB CRESAR 2015

14.2 Basic Steps in Appraisal


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STEPS IN THE APPRAISAL PROCESS
Step 1. Definition of the assignment.
This includes seven aspects -- Identify property, property rights; intended use; define type of value; date;
scope; limitations.
1.1 Identify property
The valuer should immediately find out where is the property situated and what type of property it is so that he
can decide if he can visit it. If he is not familiar with the propertys neighborhood, he decline the assignment,
find a fellow valuer who can collaborate, or make acceptable assumptions.
1.2 Identify property rights
In the IVSC, there are four types of property that a valuer can appraise -- Real Property, Personal Property,
Businesses, and Financial Interests. Besides rights, it is also necessary to identify restrictions on the said rights.
Real property includes real estate, land and its improvement and associated rights thereto.
Personal property are certain improvements that are movable machinery, equipment, etc.
Businesses going concerns, factories, shopping centers, etc.
Financial interests capital in a company, investments, potential shares in joint venture, etc. tc.
1.3 Use of valuation
What is intended use for the value estimate? Practical Examples -- To set a selling price; rental price (seller);
To make a counter-offer for above (buyer); To estimate estate tax, shares of heirs (succession); For investment,
speculation; Exchange of property for shares of stock; Market value of a going concern and many others.
1.4 Define value to be determined
The term value has many meanings. To avoid any misunderstanding, the Valuer must immediately ask the
Client what type of value is expected. Most likely, the desired type of value will easily be determined from the
expected use of the report. The most common assignment is to estimate market value.
1.5 Date of value the value as of. Most assignments are to determine current value but in some
situations like valuation of obligations, taxes, etc. the value could be a past value.
1.6 Scope of assignment means ascertaining if the valuer is fully and solely responsible for the entire work
or is part of a bigger team which will help produce other parts of the work, such as the research team, the survey
team, etc.. Also includes defining deadlines, time frames, etc.
1.7 Other limiting conditions - Conditions may be imposed by the client, valuer or local statutes;
By client be careful not to follow clients desired value; conditions should not impair professional
judgment.
By valuer hypothetical assumptions must be reasonable and backed by proper explanation.
By statutes zoning regs, FAR limits, etc.
Step 2. Preliminary Analysis and Data Selection and Collection.
Step 2 has two sub-steps. First, the valuer should analysis the assignment and list down the type of data or
information that needs to be obtained. Then he categorizes the data into 3 categories 1) General economic
data; 2) Property-specific data; and 3) Market data.
General economic data site characteristics, infrastructure, demographics, government policies, etc.
Property-specific data information directly pertaining to the subject property and its comparables.
Market data supply and demand, absorption rate, and other info need for a market study.
Step 3. HABU means Highest and best use. An important consideration of value is to identify what is the
HABU for the property. Assume the land as if vacant, and determine the corresponding improvement with
similar HABU.
Definitions of HABU:
- A property's use allowed by law, which will yield the highest economic benefit and value.
- The use that is physically practicable, legally possible, financially feasible, and maximally productive

SG Academy Real Estate Manual 2015. Rights Reserved.

Basic Steps in Appraisal


STEPS in HABU Analysis:
1 - Inspect the site.
2 - Evaluate if it meets HABU definition: physically OK, legally OK, higher use.. use must be defined.
3 - Analysis of options
Criteria for HABU:
1 Physically practicable? Land fertility? Terrain and geology suitable; proposed improvements can be built,
resources available; existing improvement can be retrofitted. Are there any environmental constraints?
2 Legally permissible? Current zoning. Potential conversion, re-zoning. No contesting ownership claims.
The owner is a legal occupant. No use restrictions. No liens and encumbrances.
3 Financially feasible? What would be a baseline cost estimate to invest for this suggested HABU? Is it still
realistic? Where could such investment funds come from? Are the alternative financial strategies feasible?
4 Maximally productive? What would be a potential projected return for the property if developed to its
HABU? Will this return be attractive, productive?

Step 4. Application of the 3 Approaches in Valuation:


In general, there are three recognized approaches in valuation. They can be applied individually or in
combination with one another. Each approach requires the use of one or more methodologies. The 3
approaches are: 1) Sales Comparison opr Market Data approach; 2) Cost approach; and 3) Income approach.
1. Sales comparison or Market Data approach the value of a Subject property is compared with other
similar properties known as Comparables. In this approach, it is essential that accurate and verifiable market
data is available. Market data includes recent sales or offering prices of the comparables.
2. Cost approach - the propertys value is obtained by making an estimate of its replacement cost and
deducting depreciation. Cost approach is mostly applicable for improvements that are not income-earning.
3. Income approach - the propertys value is estimated by projecting future net operating income and
capitalizing it using an acceptable rate. Two usual methods: Capitalization or Discounted cash flow.

Step 5 - Reconciliation of Value Indications - Results from the three approaches are reconciled using a
rational formula averaging or assigning a probability factor for each approach. The logic for the
reconciliation method used must also be clearly explained.

Step 6 - Report of defined value


The type of report to use depends on the scope of the assignment. It may be any of these Oral report, Letter
report, or Narrative report. In institutions, banks, government agencies, etc. the type of report and format,
outline, are already prescribed thus it is common to find Form Reports. But the truest and most sought-after
appraisal report is a Narrative Report.
Besides the need to write a good and comprehensive narrative report, the Valuer is also obliged to keep in file
for at least 3 to 5 years all the research data and supporting information used in accomplishing his assignment.
TIP: A good outline of the final report should be used as the starting point for the valuers work. Begin
with the end in mind.

SG Academy Real Estate Manual 2015. Rights Reserved.

Basic Steps in Appraisal


SAMPLE QUESTIONS
Q. The definition of the appraisal assignment does not include
A. Identifying the property
B. Determining and specifying the approach to valuation and methodology to be used.
C. Defining the type of value desired
D. Clarifying the purpose for valuation
Q. The Boy Scouts expect a share of the development profits from their property which is being
developed by Alphaland. This is called a
A. Real estate interest
B. Personal property
C. Business asset
D. Financial Interest
Q. Mr. Cruz has a chopstick factory in a warehouse he leased for 25 years. has been very successful.
After 10 years, he wants to retire and hires an appraiser to value the factory as a - A. Real Property
B. Personal Property
C. Business
D. Financial Interests
Q. Nobody wants to buy a chopsticks factory so Mr. Cruz decides to retire anyway and to dismantle the
factory and sell the remaining 10-years leasehold rights to the warehouse as - A. Real Property
B. Personal Property
C. Businesses
D. Financial Interests
Q. Mr. Cruz dismantled his factory. The chopsticks machinery will be sold for value as

A.
B.
C.
D.

Real Property
Personal Property
Businesses
Financial Interests

Q. Which of these assignments should the appraiser refuse to handle


A. An assignment to undertake mass valuation of property for the BIR;
B. An assignment to justify a buyers counter-offer for a property offered.
C. An assignment to determine the value of an estate of a person still alive.
D. An assignment to value a failed business.
Q. Assumptions, limitations and other constraints in an appraisal assignment can be imposed by
The Clients criteria
B. The Valuers sound judgment
C. Government laws and regulations
D. All of the above
Q. Client requires valuation of a farm land for sale at Mamasapano but Mr. Appraiser did not wish to
visit the site because it is restricted by the military so Client agreed that he can make a report based on
an interview with the farm owner. This limitation is based on
A. The Clients criteria
B. The Valuers sound judgment
C. Government laws and regulations
D. All of the above

SG Academy Real Estate Manual 2015. Rights Reserved.

Basic Steps in Appraisal


Q. Property to be valued is a Starbucks outlet for sale by franchisee. Valuer researched the population
of the community and its level of development as part of obtaining - A. Personal data
B. Property-specific data
C. Market data
D. General economic data
Q. Property to be valued is a Starbucks outlet for sale by franchisee. Valuer counted the number of its
current customers and average amount spent. This is part of
A. General economic data
B. Property-specific data
C. Market data
D. Personal data
Q. Property to be valued is a Starbucks outlet for sale by franchisee. Valuer obtained statistics showing
the neighborhood are office buildings with about 500 offices in BPO business. This is part of
A. General economic data
B. Property-specific data
C. Market data
D. Personal data

Q. The Bishop asked Mr. Appraiser to value a 70-year old dilapidated church. The following approach
is practical and more appropriate

A.
B.
C.
D.

Compare the price of this property with other churches in neighboring towns;
Make an estimate of the cost of restoring the church.
Find out the current income generated from churchgoers in the parish.
Undertake a highest and best use analysis.

Q. Previous problem. Under the principle of consistent use the following must be followed during the
HABU analysis - A. The recommended HABU must assume that the use is still a church ;
B. The recommended value for the land and for the building is based on same use;
C. The HABU can simply be for the land assuming it is vacant;
D. The HABU recommendation must be what the Bishop wants.
Q. A lot at downtown in the city was leased 25 years for use as a parking lot and it earns P500K monthly.
Value shall be based on
A. Comparable sales of other properties used as parking lot;
B. Using income approach, capitalize the earnings for next 25 years;
C. Make a HABU analysis assuming the leasehold can be terminated.
D. It is not adviseable to estimate a value.
Q. In the basic steps in appraisal, Reconciliation means
A. Completing an appraisal assignment on time;
B. Reconciling the Clients value expectation with the appraisers estimate;
C. Selecting the final value from various results obtained during analysis;
D. All of the above.

SG Academy Real Estate Manual 2015. Rights Reserved.