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SUMMARY OF APPRAISAL FORMULA

COMPOUND INTEREST

1. Future Value of Single Investment (Compounding)

FV = P(1 + r)n where: FV - Future Value, P - Principal, r - interest rate, n - no. of compounding
periods

Example: Land purchased for P50,000 cash appreciates at the rate of 15% compounded
annually. How much is the land worth after 5 years? Disregard taxes, insurance and
selling expenses.

Solution: FV = P(1 + r)n = 50,000(1.15)5 = 100,567.90 say, P100,568.00

2. Future Value of Annuity

(1 + r)n - 1 where: FVA – Future Value of Annuity, A – Annual Uniform Payment, r –

FVA = A [ ]
r interest rate, n – no. of years

Example: How much will a yearly investment of P150,000 be after 10 years if the investor is
satisfied with a return of 12%?

Solution: (1.12)10 - 1
FVA = 150,000 [ ] = P 2,632,310
0.12
3. Present Value of Single Investment (Discounting or Reversion Formula)

PV = FV(1 + r)-n where: PV – Present Value, FV – Future Value, r – interest rate, n – no. of
compounding periods

Example: What is the reversion value of the property with an estimated market value of
P12,540,000 and interest rate of 10% per year in 2 years time?

Solution: PV = 12,540,000(1.10)-2 = 10,363,636.00

4. Present Value of Annuity

1 - (1 + r)-n where: PVA – Present Value of Annuity, A – Annual Uniform Payment, r

PVA = A [ ]
r – interest rate, n – no. of years

Example: If a property is expected to produce a yearly income of P3,600,000 for 8 years. What
is the present value of the yearly income today if discounted at a rate of 8%.

Solution: 1 - (1.08)-8
PVA = 3,600,000 [ ] = 20,687,900.20
0.08

5. Amortization Formula

r where: MA – Monthly Amortization, P – Principal Amount, r – interest

MA = P [ ]
1 - (1 + r)-n rate, n – no. of months

Example: Mr. A purchases a house and lot thru installment basis. The contract price is
P3,500,000 with a required downpayment of 20%. Compute the monthly amortization
if the loan interest rate per year is 8% for 5 years.

Solution: P = 3,500,000 (0.8) = 2,800,000

n = 5 x 12 = 60

r = 0.08/12 = 0.006667

MA = 2,800,000 [ 0.00667 ] = 56,774.44

1 - (1.00667)-8
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INCOME APPROACH

1. Direct Capitalization

Value = Income/Rate, V = I/R

Example: What is the value of a property consisting of land and building with an annual net
operating income of P330,000 and with an over-all capitalization rate of 12.50%?

Solution: V = 330,000/0.125 = 2,640,000

2. Gross Rent Multiplier or Gross Income Multiplier (GRM or GIM)

GRM = Sales Price or Value/Gross Rent

Example1: Compute the GRM of the property that rented for P250,000 per year and was sold a
month ago at P8,500,000.

Solution1: GRM = 8,500,000/200,000 = 34

Example2: Compute the indicated value of the property that rented for P750 per month, using
GRM of 100, if the expenses attribute to the property were 115 per month.

Solution2: Value = GRM x Gross Rent = 100 x 750 = 75,000

3. LAND RESIDUAL TECHNIQUE

- If Building Value is given; Land Value is unknown

Step 1 Compute Net Operating Income (NOI) or Net Income Before Recapture (NIBR)
if not given

Potential Gross Income (PGI)

Less: Allowance for Vacancy & Bad Debts
Add: Other Income or Miscellaneous Income
Equals: Effective Gross Income
Less: Operating Expense (Admin, RPT, Depreciation)
Equals: Net Operating Income (NOI)
Less: Mortgage Payment (Debt Servicing)
Equals: Net Income Before Tax

Step 2 Analyze Income

a) Income due to the Building = Building Value x Cap rate, BI = BV x CR

Capitalization rate = interest rate (land) + recapture rate, CR = IR + RR
Recapture rate = 1/(remaining economic life), RR = 1/N

b) Income due to the Land = NOI – Income due to the Building, LI = NOI – BI

Step 3 Compute Land Value

Value of Land = Income due to the Land x interest rate (land only), LV = LI x IR

Step 4 Compute Total Property Value (TPV)

TPV = Land Value + Building Value, TPV = LV + BV

Example: Assume the following data,

Gross income: P2,350,000/year

Allowance for Vacancy & Bad Debts: 5% of Gross Income/year
Operating Expense: P220,000/year
Building Value: P15.0 M
Interest rate on Land: 8%
Economic Life of Building: 40 years

Using Land Residual Technique, compute the Value of the Property

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a) Compute NOI
2,350,000.00
Less: Allow for Vac. 117,500.00 (5% of 2,350,000)
2,232,500.00
Less: Operating Exp. 220,000.00
NOI 2,012,500.00

b) Analyze Income (BI & LI)

BI = BV x CR = BV x (IR + RR) = 15,000,000 x (0.08 + 1/40) = 1,575,000

LI = NOI – BI = 2,012,500 – 1,575,000 = 437,500

c) Compute Value of Land (LV)

LV = LI/IR = 437,500/0.08 = 5,468,750

d) Compute TPV
TPV = LV + BV = 5,468,750 + 15,000,000 = 20,468,750

4. BUILDING RESIDUAL TECHNIQUE

- If Land Value is given; Building Value is Unknown

Step 1 Compute Net Operating Income (NOI) or Net Income Before Recapture (NIBR)
if not given

Gross Income
Less: Allowance for Vacancy & Bad Debts
Add: Other Income or Miscellaneous Income
Equals: Effective Gross Income
Less: Operating Expense
Equals: Net Operating Income (NOI)

Step 2 Analyze Income

a) Income due to Land = Land Value x interest rate (land only), LI = LV x IR

b) Income due to Building = NOI – Income due to Land, BI = NOI – LI

Step 3 Compute Building Value

Value of Building = Income due to the Bldg. x Cap Rate, BV = BI x CR

Capitalization rate = interest rate (land) + recapture rate, CR = IR + RR
Recapture rate = 1/remaining economic life, RR = 1/N

Step 4 Compute Total Property Value (TPV)

TPV = Land Value + Building Value, TPV = LV + BV

Example: Assume the following data,

Net Operating Income: P2,350,000/year

Land Value: P5.0 M
Interest rate on Land: 8%
Economic Life of Building: 40 years

Using Building Residual Technique, compute the Value of the Property

a) Analyze Income (BI & LI)

LI = LV x IR = 5,000,000 x (0.08) = 400,000

BI = NOI – LI = 2,350,000 – 400,000 = 1,950,000

b) Compute Value of Building (BV)

BV = LV/CR = LV/(IR + RR) = 5,000,000/(0.08 + 1/40) = 18,571,428.57

c) Compute TPV
TPV = LV + BV = 5,000,000 + 18,571,428.57 = 23,571,428.57
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BASIC APPRAISAL MATHEMATICS

1. Area of Square, A = s2 s

2. Area of Rectangle, A = LW W

3. Area of Circle, A = π r 2 r

b1
4. Area of Trapezoid, A = [(b1 + b2) x h]/2 h
b2

h
5. Area of Triangle, A = bh/2
b
s s
6. Volume of Cube, V = s3 s

W L

7. Volume of Parallelepiped, V = LWH

H

r
8. Volume of Cylinder, V = π r 2h h

9. Volume of Pyramid, V =b2h h

b
b

BASIC STATISTICS

Statistics - is the study of how to collect, organize, analyze and interpret information
Variable - is a quantity that may assume any set of value (ex. Monthly income,
volume, etc.)
Constant - is a quantity that does not change its value (ex. 12 inches = 1foot, 1 year =
12 months)
Ungrouped - raw data that are not organized in any specific way (subject to analysis &
Data interpretation)
Grouped Data - raw data organized into groups or categories with corresponding
frequencies (distribution)
Population - the entire collection of all possible observations of a particular
characteristic of interest (ex. sold residential units in a subdivision)
Sample - is a representative set of observations that reflects the characteristics of
the whole, that is, the population from which it is taken
Parameter - is any statistical characteristic of a population, for example, the Mean and
the Standard Deviation

Measures of Central Tendency – statistical tools designed to give information concerning the
average, or typical score of a large number of scores

3 methods of measuring central tendency

a. The Mean (M) – arithmetic average of all scores, M = (∑X)/n

M – mean, ∑ - summation, X – raw score, n – number of observation.
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b. The Median (Mdn) – the exact midpoint of any distribution, or the point that separates the upper
half from the lower half of the distribution

c. The Mode (Mo) – is the measure that determines which score occur number of times. Frequently
appearing score in the distribution.

Example: X n
120
118 Median = (115 + 114)/2 = 114.5
115
114 Mode = 114
114
112 Mean (simple) = 693/6 = 115.50
∑X = 693 6

Weighted Mean (Mw) = incorporates into the formula the weight of each term
Example: An exam was given for 3 subjects with corresponding weights

Grade (X) Weight

Exam 1 85 20%
Exam 2 90 30%
Exam 3 80 50%

Mw = 85(0.2) + 90(0.3) + 80(0.5) = 84

3 methods of measuring variability (measure of dispersion)

a. The Range – the difference between the highest & lowest scores
Example: If the highest score is 140; the lowest score is 60, range is (140 – 60) = 80

b. The Standard Deviation (SD = √ ∑(x2)/n) – is the absolute heart & soul of variability concept;
takes into account all scores in a distribution. It measures how much all scores deviate or vary
from the mean (average)

Two methods in computing SD – deviation method & computational method (long process)

d. Mean Absolute Deviation (MAD = (∑x)/n), deviation score (x) = X – M

Raw Score Deviation Score Absolute

n x2
(X) (x = X – M) Deviation /x/
1 10 4 4 16
2 8 2 2 4
3 6 0 0 0
4 4 -2 2 4
5 2 -4 4 16
∑ 30 12 40
M = 30/5 = 6 Range = 10 -2 = 8 SD = √40/5 = 2.828 MAD = 12/5 = 2.4

RAWLAND VALUATION (Subdivision Development Approach)

Step 1 Analyze Gross Income

Gross Income = Total Cash Price
Total Cash Price = Selling Price of Developed Lot per Sq.M. x Saleable Area
Saleable Area = 70% of Gross Land Area

Step 2 Analyze Expenses

a. Development Cost
b. Administrative Expenses
c. Sales Expenses (Broker’s Commission, Advertising, etc.)
d. Interest on Working Capital
e. Miscellaneous Expenses
f. Contractor’s Profit

Step 3 Compute Ultimate Rawland Value (URV)

URV = Gross Income – Expenses

Step 4 Compute Rawland Value/Sq. M.

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RV/Sq.M. = [(URV/No. of years x Gross Area) x Annuity Factor]

Step 5 Compute Annuity Factor, if not given

AF = [1 – (1 + r)-n]/r, where r – interest rate, n – no. of years

Example: Mr. Green offers his 10 hectares rawland in Bit-os, Butuan City. Prices of developed
lots in Bit-os is at P3,500 per square meter. Subdivision developers disclose a
development cost of P800/sq. m. of the gross area; Admin., sales and other
expenses is estimated at P21,000,000. At how much should you buy the property
given a 5 year development and sales period of 5 years? Annuity based on 12%
interest rate is 3.60477.

Solution: Step 1 Analyze Gross Income

Gross Income = Total Cash Price
Total Cash Price = Selling Price of Developed Lot per Sq.M. x Saleable Area
TCP = (P3,500/Sq.M.) x (10 has. x 10,000 Sq.M./ha.) x 0.70
TCP = P171,500,000.00

Step 2 Analyze Expenses

Total Expense = Dev’t Cost + Other Expenses
TE = (P800/Sq.M. x 10 has. x 10,000 Sq.M./ha.) + P21,000,000
TE = P101,000,000

Step 3 Compute Ultimate Rawland Value (URV)

URV = Gross Income – Expenses = TCP – TE
URV = P171,500,000 – P101,000,000 = P70,500,000

Step 4 Compute Rawland Value/Sq. M.

RV/Sq.M. = [(URV/No. of years x Gross Area) x Annuity Factor]
= [(70,500,000/5 x 100,000) x 3.60477]
= 508.27 or P510/Sq.M.

APPRAISAL OF MACHINERY/EQUIPMENT

Estimating Reproduction Cost New (RCN) by trending of indexing (based on orig x trending factor)
a. For Imported Machinery

Original Cost x Current Exchange x Trend Factor

RCN =
Exchange Rate at Acquisition Cost

Trend Factor – Kemper International Replacement Value Cost Trend

b. For Locally Manufactured Machinery

RCN = Original Cost x Local Index (from NEDA)

c. Appraisal of Machinery for Tax Purposes

RCNLD = OC x (FC2/FC1) x PI x (REL/EL)

RCNLD – Reproduction Cost New Less Depreciation

OC – Original/Acquisition Cost
FC1 – Exchange Rate (Acquisition)
FC2 – Exchange rate (Assessment Date)
EL – Economic Life
REL – Remaining Economic Life
PI – Price Index (if available only)

Example: A commercial machinery from USA was acquired, installed and in operation in
February 1999 at total original cost of $10,000,000. Re-appraisal was made in
December 2003.
FC1 – Php39.0890 to $1.00 FC2 – Php54.2033 to $1.00
Estimated Economic Life – 30 years

RCNLD = 10,000,000 x (54.2033/39.0890) x (26/30) = P12,018,065

Assessed Value = RCNLD x Assessment Level = 12,018,065 x 0.80
= P9,614,452.00
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4-3-2-1 RULE

Value of Lot D = 10% of Total Property Value

Lot D
Value of Lot C = 20% of Total Property Value
Lot C
Value of Lot B = 30% of Total Property Value
Lot B
Value of Lot A = 40% of Total Property Value
Lot A

road

MARKET DATA APPROACH

SUBJECT Comparable 1 Comparable 2 Comparable 3

VALUE ? Px,xxx.xx Py,yyy.yy Pz,zzz.z
Adjustment(s):
Time (if applicable) + + +
Location (+/-) (+/-) (+/-)
Size (+/-) (+/-) (+/-)
Shape (+/-) (+/-) (+/-)
Topography (+/-) (+/-) (+/-)
Terrain (+/-) (+/-) (+/-)
Corner Influence (+/-) (+/-) (+/-)
Adjusted Value
Weight
X% Y% Z% = 100 – X - Y
Indicative
Value = ∑ (Price of Comparable + Adjustments) x Weight

If Comparable is SUPERIOR
Comparable
(Subtract Adjustment Factor)
(-)
Subject
(+)
If Comparable is INFERIOR
Comparable
(Add Adjustment Factor)

COST APPROACH

Step 1 Value Land (LV) by Market Data Approach

Step 2 Compute Replacement Cost, New (RCN)

RCN = Cost of Replacement per Sq.M. x Floor Area (in Sq.M)
Less: a). Physical Deterioration, SLM = Actual Age/Economic Life
b). Functional Obsolescence (if any)
c). Economic Obsolescence (if any)
Equals: Depreciated Replacement Cost (DRC)

Step 3 Compute Total Property Value

TPV = LV + DRC (Building)

Example:
Subject Property House and Lot
Location Mana Pepang Village, Surigao City
Land Area (in Sq.M.) 182
Building Single-storey residential house; High Cost; built in 2010, well-maintained
Floor Area (in Sq.M.) 146

Valuation by Cost Approach MARKET VALUE

Land: 182 Sq.M. @ Php1,500/Sq.M. 273,000.00

Improvement:
RCN 146 Sq.M. @ Php15,000/Sq.M. 2,190,000.00
Less: Physical Deterioration – (6/40) x RCN 328,500.00
Functional Obsolescence – 5% 109,500.00
Economic Obsolescence – 0 0.00

DRC 1,752,000.00

Total Property Value 2,025,000.00