Appraisal Formula
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Transcript of Appraisal Formula
SUMMARY OF APPRAISAL FORMULAA) COMPOUNDED INTEREST
1. Future Value of Single Investment
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
FV = P 50,000 x (1 + .15)5
FV = P 100,567.90 say P 100,568
2. Future Value of Annuity
FVA = A [(1+ r)n - 1 ] r
FVA - Future Value of Annuity
A - Annual Uniform Payment
r - interest rate
n - no. of years
Example:
How much will a yearly investment of P 150,000 be after 10 years if the investor is satisfied
with a return of 12%?
Solution
FVA = A [(1+ r)n - 1 ] r
FVA = 150,000 [(1+ .12)10 - 1 ]
FVA = P 2,632,310
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
0.12
ACEBUREAU Appraisal; ACEBU Center for Real Estate (ACRE)
Example:
What is the reversion value of a property in 2 years with an estimated market value of P12, 540,000
an interest rate of 10% per year?
Solution
PV = P (1+ r)-n
PV = P12,540,000 * (1+ .10)-2
PV = P 10,363,636.00
4. Present Value of Annuity
PVA = A [1 - (1+ r)-n ]
r
PVA - Present Value of Annuity
A - Annual Uniform Payment
r - interest rate
n - no. of years
Example:
If a property is expected to produce a yearly income of P 3,600,000 for 8 years. What is the
present value of the yearly income today if discounted at a rate of 8%.
Solution
PVA = A [1 - (1+ r)-n ]
r
PVA = 3,600,000 [1 - (1+ .08)-8
]
PVA = P 20,687,900.20
5. Amortization Formula
MA - Monthly Amortization
P - Principal Amount (Loan Amount)
r - interest rate
n - no. of months
Example:
Mr. A purchases a house and lot thru installment basis. The contract price is P 3,500,000 with a
required downpayment of 20%. Compute the monthly amortization if the loan interest rate
per year is 8% for 5 years.
M.A. = P x ( r )
1 - (1 + r)-n
0.08
M.A. = P xr
[1 - (1+ r)-n ]
ACEBUREAU Appraisal; ACEBU Center for Real Estate (ACRE)
Where:
P = 3,500,000 - (3,500,000 x 20%)
P = 2,800,000
n = 5yrs x 12 = 60 months
r = .08/12 = 0.006667
M.A. = P 2,800,000 x ( .006667 )
M.A. = P 56,774.44
6. Income Approach (Direct Capitalization)
Income I
Rate 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% is
I
R
330,000
0.125
V = P 2,640,000
7. Gross Rent Multiplier or Gross Income Multiplier (GRM or GIM)
Example 1:
Compute the Gross Rent Multiplier (GRM) of the property that rented for P 250,000 per year
and was sold a month ago at P 8,500,000.
Sales Price
Gross Rent
P 8,500,000
P 250,000
GRM = 34
1 - (1.006667)-60
Value = V =
V =
V =
GRM =
GRM =
GRM =
Sales Price or Value
Gross Rent
ACEBUREAU Appraisal; ACEBU Center for Real Estate (ACRE)
Example 2:
Compute the indicated value of the property that rented for P 750 per month, using a month
monthly Gross Rent Multiplier (GRM) of 100, if the expenses attribute to the property were
115 per month.
Value = GRM x Gross Rent
Value = 100 x P 750
Value = P 75,000
7. Land Residual Technique
Step 1 Compute Net Operating Income (NOI) or Net Income Before Recapture (NIBR)
if Not Given
Potential Gross Income
Less: Allowance for Vacancy & Bad debts
Equals: Effective Gross Income
Add: Other Income or Miscellaneous Income
Less: Operating Expense (Admin. Expense, 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 Building = Building Value x Over-all rate
Where: Over-all rate = Interest rate (Land) + Recapture Rate
Recapture rate = 1/Remaining Economic Life
b) Income due to Land = NOI - Income due to Building
Step 3 Compute Land Value
Value of Land= Income due to Land x Interest Rate (Land only)
Step 4 Compute Total Property Value (TPV)
TPV = Land Value + Building Value
Example
Assume the following data:
Gross Income: P 2,350,000/year
Allowance for Vacancy & Bad debts: 5% of Gross Income/year
Operating Expense: P 220,000/year
Building Value: P 15.0M
Interest rate on Land: 8%
Economic Life of building: 40 years
Using Land Residual Technique, compute the Value of the Property:
GRM = Value or Sales Price
Gross Rent
- If Building Value is given; Land Value is Unknown
ACEBUREAU Appraisal; ACEBU Center for Real Estate (ACRE)
a) Compute NOI
Less: Allowance of Vac. (5% of P 2,350,000)
Less: Operating Exp.
NOI
b) Analyze Income
Income due to Bldg. = Building Value x Over-all Rate
= P 15,000,000 x (Interest Rate on Land + Recapture Rate)
Recapture Rate = 1/40 = 2.5%
= P 15,000,000 x (8% + 2.5%)
Income (Bldg) = P 1,575,000
Income due to Land = NOI - Income due to Bldg.
Income (Land) = P 2,012,500 - P 1,575,000
= P 437,500
c) Compute Value of Land
Value of Land= Income due to Land / Rate (Interest on Land only)
= 5,468,750.00
d) Compute Total Property Value
TPV = Value of Land + Value of Building
= P 5,468,750 + 15,000,000
TPV = 20,468,750.00
8. Building Residual Technique
Step 1 Compute Net Operating Income (NOI) or Net Income Before Recapture (NIBR)
if Not Given
Gross Income
Less: Allowance for Vacancy & Bad debts
Equals: Effective Gross Income
Add: Other Income or Miscellaneous 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)
Where: Over-all rate = Interest rate (Land) + Recapture Rate
Recapture rate = 1/Remaining Economic Life
b) Income due to Building = NOI - Income due to Land
- If Land Value is given; Building Value is Unknown
2,350,000.00
(117,500.00)
2,232,500.00
(220,000.00)
2,012,500.00
ACEBUREAU Appraisal; ACEBU Center for Real Estate (ACRE)
Step 3 Compute Building Value
Value of Building= Income due to Bldg. x Over-all Rate
Where: Over-all rate = Interest rate (Land) + Recapture Rate
Recapture rate = 1/Remaining Economic Life
Step 4 Compute Total Property Value (TPV)
TPV = Land Value + Building Value
Example
Assume the following data:
Net Operating Income: P 2,350,000/year
Land Value: P 5.0M
Interest rate on Land: 8%
Economic Life of building: 40 years
Using Building Residual Technique, compute the Property Value:
a) Analyze Income
Income due to Land = Land Value x Interest rate (Land only)
= P 5,000,000 x 8%
Income (Land) = P 400,000
Income due to Bldg.= NOI - Income due to Land
Income (Bldg.) = P 2,350,000 - P 400,000
= P 1,950,000
c) Compute Value of Building
Value of Bldg.= Income due to Bldg./ Over-all Rate (Interest on land + Recapture rate)
= P 1,950,000 / (8% + 2.5%) Recapture rate = 1/Rem. Economic Life
= 18,571,428.57 = 1/40
d) Compute Total Property Value = 2.5%
TPV = Value of Land + Value of Building
= P 5,000,000 + 18,571,428.57
TPV = 23,571,428.57
9. Basic Appraisal Mathematics s
a) Area of Square = s x s s
b) Area of Rectangle= L x W
L
c) Area of Circle= π r2
r
W
ACEBUREAU Appraisal; ACEBU Center for Real Estate (ACRE)
b1
d) Area of Trapezoid = (b1 + b2) x h h
2
b2
e) Area of Triangle = 1/2 (b x h)
h
b
f) Volume of cube = S x S x S
S
S
g) Volume of parellelepiped = L x W x H
H
W
L
h) Volume of Cylinder = π R2 x H
i) Volume of Pyramid = B2 x H
ACEBUREAU Appraisal; ACEBU Center for Real Estate (ACRE)
10. Basic Statistics
Statistics - is the study of how to collect, organize, analyze and interpret numerical information.
Variable - is a quantity that may assume any set of value. (ex. Monthly income, volume, price,etc.)
Constant – is a quantity that does not change its value (ex. 12 inches = 1 foot, 1 year = 12 months)
Ungrouped data –Raw data that are not organized in any specific way
(subject to analysis & interpretation)
Grouped data – are 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. grades of all students who took an entrance examination)
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 Standard
Deviation.
Measures of Central Tendency
- Statistical tools designed to give information concerning the average, or typical score of a large
number of scores.
Three Methods of measuring central tendency:
a)The Mean – arithmetic average of all scores (M=SX/n)
M – Mean
S - Summation of X
X – raw score
n – number of observations
Three Methods of measuring central tendency:
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 occurs number of times.
Frequently appearing score in the distribution.
Example:
X
120
118
115 Median = (115 + 114)/2 = 114.5
114 Mode = 114
114
112
SX 693; n = 6
Mean (simple) = SX/n
= 693/6
= 115.50
ACEBUREAU Appraisal; ACEBU Center for Real Estate (ACRE)
Weighted Mean – incorporates into the formula the weight of each term.
Example:
An exam was given for 3 subjects with corresponding weights-
Grade (X) Weight (W)
Exam No. 1 85 20%
Exam No. 2 90 30%
Exam No. 3 50%80 50%
100%
Weighted Mean (Mw) = 85(.20) + 90(.30) + 80(.50)
= 84
Three Methods of measuring variability (Measure of Dispersion):
a) The Range – the difference between the highest & lowest scores.
Example: If the highest score is 140; lowest is 60, range is (140 – 60) = 80
b) The Standard Deviation (SD) – 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)
2 Methods in Computing Standard Deviation:
1. Deviation Method
2. Computational Method (Long process)
Deviation Method
Formula; SD = √Sx2/n MAD = SX/n
SD- Standard deviation
X - Raw score
M - Mean
x - deviation score
n - number of scores
SX - summation of x = (X-M)
Raw Score (X) Deviation Score x=(X-M) Absolute Dev. x2
10 10 - 6 = 4 4 16
8 8 - 6 = 2 2 4
6 6 - 6 = 0 0 0
4 4 - 6 = -2 2 4
2 2 - 6 = -4 4 16
SX 30 12 40
Mean = SX/n
M= 30/5 = 6 SD = 40 MAD = S Abs. x
5 n
SD = 2.828427 MAD = 12/5
Range = Highest - Lowest Score MAD = 2.4
= 10 - 2
Range = 8
ACEBUREAU Appraisal; ACEBU Center for Real Estate (ACRE)
11. Rawland Valuation (Subdivision Development Approach)
Step 1 Analyze Gross Income
Gross Income = Total Cash Price
Total Cash Price = Selling Price of Developed Lot/Sq.M. x Saleable Area
Where:
Saleable area = 70% x Gross Land Area
Step 2 Analyze Expenses
a) Development Cost
b) Administrative Expenses
c) Sales Expenses (Brokers 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.
Rawland Value/Sq.M. = URV x Annuity Factor
No. of Years x Gross Area
Compute Annuity Factor (if not given):
Annuity Factor = 1 - (1+r)-n
r = interest rate
n = no. of years
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 = Php171,500,000.00
b) Analyze Expenses
Total Expense = Development Cost + Other Expenses
Total Expense = Php101,000,000.00
c) Ultimate Rawland Value = Gross Income - Total Expenses
= Php70,500,000.00
d) Compute Rawland Value/Sq.M.
Rawland Value/Sq.M. = URV x Annuity Factor
No. of Years x Gross Area
RV/Sq.M. = Php171,500,000.00 x 3.60477
5 x 100,000
RV/Sq.M. =
r
508.27 or P 510/Sq.M.
ACEBUREAU Appraisal; ACEBU Center for Real Estate (ACRE)
12. Appraisal of Machinery/Equipment
Estimating Reproduction Cost New (RCN) by trending of indexing (based on original acquisition cost.x Trending Factor
a)For Imported Machinery
RCN = Original Cost x Current Exchange Rate x Trend Factor
Exchange Rate at Acquisition date
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 x PI x REL
FC1 EL
where:
RCNLD – Reproduction Cost New less Depreciation (DRC)
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.
Dollar Exchange Rate at the time of acquisition: Php 39.0890 to $1.00
Dollar Exchange Rate at the time of appraisal: Php 54.2033 to $1.00
Estimated Economic Life: 30 years
To compute:
RCNLD = OC x FC2 x PI x REL
FC1 EL
RCNLD = $10,000,000 x P54.2033 x 1.0 x 26/30
P39.0890
RCNLD = Php 12,018,065.00
ASSESSED VALUE: RCNLD x Assessment Level
= Php 12,018,065.00 x 80%
= Php 9,614,452.00
ACEBUREAU Appraisal; ACEBU Center for Real Estate (ACRE)
13. 4-3-2-1 Rule
Lot D Value of Lot D = 10% x Total Value of Property
Lot C Value of Lot C = 20% x Total Value of Property
Lot B Value of Lot B = 30% x Total Value of Property
Lot A Value of Lot A = 40% x Total Value of Property
14. Market Data Approach
SUBJECT COMPARABLE 1
VALUE ? P xxxx.xx
Adjustment(s)
Time (if applicable) +
Location (+/-)
Size (+/-)
Shape (+/-)
Topography (+/-)
Terrain (+/-)
Corner Influence (+/-)
Adjusted Value
Weight X%
Indicated Value = (Price of Comparable - Adjustments) x Weight
If Comparable is SUPERIOR
COMPARABLE (Subtract Adjustment Factor)
If Comparable is INFERIOR
COMPARABLE (Add Adjustment Factor)
14. Cost Approach
Step 1 Value Land by Market Data Approach
Step 2 Compute Replacement Cost, New (RCN)
RCN = Cost of Replacement/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)
TPV = Land Value + Depreciated Replacement Cost (Building)
ROAD
COMPARABLE 2
P yyyy.yy
SUBJECT
( - )
( + )
+
(+/-)
(+/-)
(+/-)
(+/-)
(+/-)
(+/-)
(+/-)
Y%
(+/-)
(+/-)
(+/-)
100% - X% -Y%
COMPARABLE 2
P zzzz.zz
+
(+/-)
(+/-)
ACEBUREAU Appraisal; ACEBU Center for Real Estate (ACRE)
Example
Subject Property House and Lot
Location Pine Street, P.N. Roa Valley Subd., Cagayan de Oro City
Land Area (Sq.M.) 182
Building Single-storey residential house; High cost; Year built - 2004, well-maintained
Floor Area (Sq.M.) 146
VALUATION BY COST APPROACH per Sq.M.
LAND: 182 Sq.M. @ Php1,500
per Sq.M.
IMPROVEMENT: (Residential Building)
Reproduction Cost, New 146 Sq.M. @ Php15,000
a) Physical Deterioration - Straight Line Method (SLM) - 6/40 x 100%
b) Functional Obsolesence - -5%
c) Economic Obsolesence - 0%
Depreciated Replacement Cost (DRC)
TOTAL PROPERTY VALUE
2,027,775.00
2,300,775.00
MARKET VALUE
273,000.00
2,190,000
328,500.00
2,134,500.00
106,725.00
0.00
2,027,775.00
ACEBUREAU Appraisal; ACEBU Center for Real Estate (ACRE)