BASIC APPRAISAL

DR. RODRIGO B. MALLONGA, CE, ENP, MBA, LLB, DPA

RE BROKER / APPRAISER / CONSULTANT
What is a real estate

- Refers to the land and all the permanent (immovable) improvements thereon.

Mathematics:

- The shortest distance between 2 points is a straight line.

In Brokerage:

- The shortest distance between a seller and a buyer is thru a real estate broker.

PRICE – determine by the seller

COST – determine by engineer/appraiser thru

Cost Estimation = an estimate of the amount that would be required to construct, produce, replace or
reproduce some tangible and/or intangible things regardless of its ownership at a particular time.

VALUE – determine by appraiser thru Valuation = a determination of the monetary value of the property
rights encompassed in an ownership at some specific time or period. (1995, 1998, 1999 BE).

Real Estate Broker = provides/facilitate the determination of the value of the property as basis of
acquisition or as selling price

What Value are we looking for:

FAIR MARKET VALUE (1998, 1999)

The highest peso amount which the property should bring in a competitive market.

MARKET VALUE (1998, 1999, 2000)

1. The highest price estimate in terms of money

2. That a real property is acquired
3. By a buyer who is willing to buy and a seller who is willing to sell but is not obliged or anxious to
sell
4. Both of whom have adequate knowledge of the actual and potential use of the property
5. Which has been offered for a reasonable time in the open and competitive market

Market value is usually equals to acquisition price.

Characteristics/Determinants of Value
(1998, 1999, 2000, 2001, 2002)

1. Utility (physical attributes)

2. SCARCITY (classification, shape, area)
3. TRANSFERABILITY (Bundle of Rights)
(to dispose, to possess, to use, to its fruits, to recover)
4. DEMAND (Factors/Forces influencing Values)
(social, political, economic, physical)

1. The need to determine the market value of a property

2. The need to be aware of the characteristics or determinants of value
3. The bundle of rights of ownership
4. The factors/forces influencing value
5. Appraisal to determine the market value of a property

What is Appraisal
(1995, 1998, 1999, 2001, 2002)

Analytical procedure in expressing opinion of sound estimate of value

- Analysis (engineering, economics, etc)

- Procedure (engineering, economics, etc.)
- Expression (oral or formal report)
- Opinion (personal/signed)
- Sound Estimate (skills, experience, judgment)
- Value (in peso amount)

Basic tools in conducting appraisal:

1. Copy of Title
2. Copy of Tax Declaration
3. Copy of Survey Map and Vicinity Map
4. Copy of Building Plan
5. Compass
6. Measuring Tape
7. Camera
8. Ballpen and paper

Agencies to be visited:

1. DENR (survey map)

2. Assessor (tax mapping)
3. Building Official (building plan)
4. Register of Deeds (annotations)
5. HLURB (license to sell)
6. EMB (environmental clearance)
7. City Treasurer (unpaid taxes)

Conduct of Appraisal of a Property

1. Site Visitation
2. Measure boundaries
3. Measure building size
4. Notes the description of the land and improvements
5. Notes neighboring properties
6. Conduct market data
APPROACH OF PROPERTY VALUATION

1. MARKET DATA APPROACH (Sales Comparison Approach)

2. COST APPROACH
3. INCOME APPROACH

*MARKET DATA APPROACH

- A method of estimating a property value using the principle of substitution (1 of 12 principles in
appraisal valuation) based on comparison of the subject property with similar properties within
the vicinity.
- The basis of comparison are size/area, shape, location, utility and time element.
- The comparison will be between the prices paid in actual transactions and the current prices of
the property.

PRINCIPLE OF SUBSTITUTION
(1992, 1996, 1998, 2002)

-The maximum value of a property tends to be set by the cost of purchasing an equally desirable and
valuable replacement property.

*COST APPROACH

- A method of estimating the reproduction and replacement cost thru the principle of
substitution.
- It determines the cost of reproducing or replacing a property loss after deducting its value from
deterioration and functional or economic obsolescense.
- It estimates the value of the property by adding the cost of replacement and cost of
improvements to the land value less accrued depreciation.

Reproduction Cost

- The present cost of reproducing the improvement with one of an exact or highly similar
material or the cost of exact duplication/replica with the same or closely related materials, in
the present market.

Replacement Cost

- The present cost of replacing or constructing a new improvement which will represent an exact
replica of the existing one.

THREE METHODS OF ESTIMATING REPRODUCTION COST OR BUILDING COST

1. Quantity Survey Method (Bill of Materials)

2. Unit Cost in Place Method (Unit Cost/sq.m.)
3. Comparative/Area-Volume Method (per sq.m.)
(the most commonly used method)

Depreciation

- The loss in value of any property or improvement up to the date of the appraisal due to:
1. Physical obsolescence (wear and tear)
2. Functional obsolescence (inadequate area)
3. Economic obsolescence (change in land use or other external causes)
METHODS OF ESTIMATING DEPRECIATION

1. Straight Line-Effective Age Method

(based on the premise that a property : has certain useful life expectancy, has capacity to
produce certain income, has losses in value in accordance with its age proportional to the
estimated life)

2. Observed Condition-Cost-to-Cure Method

(actual inspection rather than by any theoritical provisions)

3. Capitalization of Rent Loss Method

(used for estimating incurable functional and economic obsolescence such as foundation walls,
oversized rooms)

4. Abstraction Method
(depends on market data by observing the market prices paid by the buyers where the three
kinds of depreciation are represented in the properties)

*INCOME APPROACH

- A method of estimating the market value of the property based on its income, based on the principles of:

1. Anticipation - the value of the property is equal to the present value of the expected future cash
flow

2. Substitution – needed as the rental rates for the property must be with those of competitive
substitute space.

METHODS OF CAPITALIZATION

1. Direct capitalization Method

(a. Land Residual Technique – with income but land cannot be accurately estimated)

b. Building Residual Technique – with income and land value by market data)

c. Property Residual Technique – properties with long term lease and building economic life is short)

2. Straight-Line Capitalization

- A method which makes no provisions for reinvestment of net income and is useful when future
income is not fixed nor certain.
- It assumes a steady decline in income to satisfy the steady return of capital plus interest which is
also declining, over the expected remaining economic life of the investment.

3. ANNUITY CAPITALIZATION

- A method which assumes a certain and regular level of net income trend over a stretch of years
with reinvestment at the current risk rate.
- It assumes that real estate has a finite life and is a wasting asset which the total capital
investment is recaptured.

4. SINKING FUND CAPITALIZATION

- A method which assumes the same amount of net income every period, being the safe rate for
low-risk long term government bonds or the savings account rate at the banks and reinvestment
of net income.
- Believe of little value in valuation as it assumes a real property with a finite life as is a wasting
asset.