What is a Real Estate Appraiser?According to the Real Estate Service Act of the Philippines (RA 9646), Real Estate Appraiser is defined as someone who is duly registered and licensed natural person who, for a professional fee, compensation or other valuable consideration, performs or renders, or offers to perform services in estimating and arriving at an opinion of or acts as an expert on real estate values, such services of which shall be finally rendered by the preparation of the report in acceptable written form.

What is an Appraisal?

Appraisal is the process of estimating or making an opinion on the market value of an adequately described property as of a specified date.

What are the factors affecting accuracy of appraisal?

Competence of the appraiser Integrity of the appraiser Soundness of the procedure used in the appraisal Availability of the pertinent data

What are the purposes/ functions of appraisal?

For banks/ financing institutions:

loans purposes insurance purposes selling purposes

For other purposes:

real estate tax assessment purposes zonal valuation purposes merger and consolidation going concern value liquidation purposes joint venture purposes determination of just compensation for eminent domain purposes extrajudicial purposes or to distribute the assets of an estate

Why there is a need for an appraisal?

1. In connection with the transfer of ownership

To help prospective buyers decide on offering prices To help prospective sellers determine acceptable selling price To establish a fair basis for exchange of real property To establish a basis for reorganization or merger of business companies To distribute the assets of an estate

2. In connection with financing and credits

To arrive at the value of the security offered as collateral for a mortgage loan To provide an investor with a sound basis for deciding whether to purchase real estate mortgage or bond

3. To establish just compensation in condemnation proceeding

To estimate value as a whole or before the taking To estimate value after the taking To allocate value between the part taken and damage to the residue

4. To establish a basis for taxes

To distribute assets into depreciable items such as building and non-depreciation items such as land and to estimate applicable depreciation rates To determine gift or inheritance taxes

What is Value?

As per US Society of Residential Appraisers. Value is the present worth of future benefits to a typical buyer. As per American Institute of Real Estate Appraisers. Value (actual cash) is the price property will bring in a fair market, after a fair and reasonable effort has been made to find a purchaser who will give the highest price. In general, value refers to what a willing buyer, not forced to buy, will pay, and what a willing seller, not forced to sell, will accept, after exposing the subject property in a fee and an open market within a reasonable period of time.

What are the types of value?

Sale price vs. value Cost vs. value Value in exchange. This refers to the worth of an object relative to other objects with which it can be compared and for which it can be exchange. Value in use. This refers to the use an object is put to, the service it renders, and the wants it satisfies. Market value Fair value Investment value Reversion value Assessed value Condemned value; consequential damage and severance damage Insurable value Loan value Liquidation value Book value

What is Market Value?

It is the highest price in terms of money which a property will bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus.

What are other values derived by appraisal?

Insurable value- to serve the need of insured, insurer and adjuster Going concern value- to serve for corporate mergers the issuance of stock, revision of book figures and so forth Liquidation value of price- for forced sale or auction proceedings Assessed value- to establish a uniform schedule and tax roll for ad valorem taxation Condemnation value- for eminent domain case This list does not include all the function of appraisals but does indicate the broad scope of the professional appraisers activities.

What is the history of Value Theory?

Ancient Romans and Greeks- value of goods absolute, fixed by state and owner Merchantilism- value in exchange affected by law of supply and demand, gold is the source of all wealth Physiocrats- productivity of land, not gold as source of wealth; value created by the utility of an item Adam Smith- natural price, (i.e.) the cost of production is equals the value of an item consuming land, labor, capital and coordinations Austrians- cost of production is unimportant, value is determined by utility of and demand for the last, marginal item Todays concept- value is not objective and absolute, but is subjective and relative to the forces that create and forces that affect it.

What are the forces affecting value?

Utility- usefulness; ability to arouse a desire for possession Scarcity- a relatively short supply; lack of abundance Demand- desire to possess plus the ability to buy; effective purchasing power Transferability- the ability to change ownership or use

What are the forces affecting/influencing value?

Natural Forces - physical resources

-location -shape -topography -depreciation -climate condition -soil depth and fertility -size

Social Forces - developed resources

Family size and age group distribution Neighborhood stability and attitudes about property Population growth, decline, or shifts at the community, regional and national levels Lifestyles and living standards, often combined with other forces Attitudes about law enforcement, the role of government and individual responsibility Attitudes about development, growth and ecology Attitudes toward public education

Economic forces

Income level of neighborhood and community residents Employment opportunities and trends Level of wages Availability of money and credit and interest rate levels Price levels and property tax burdens Personal savings and investment returns General business activity Supply and demand in housing Production of goods and services

Political force

Zoning and land use regulations Building and safety regulations Environment protection laws Police, fire and health protection services Crime prevention, education and recreation services Public works, power, water, transportation, sewage and flood control Fiscal policy and taxation Monetary policy and controls Government-sponsored urban redevelopment and housing finance programs Regulation of industry and business

What are the guiding principles in valuation?

Principles of real estateMARKETABILITY Principle of substitution. This states that a prudent buyer will pay no more for a property than the cost of a substitute property that will provide equivalent usefulness. Principle of conformity Principle of progression and regression Principle of change. This states that the real estate market is dynamic rather than static; socio-economic forces are constantly changing, causing constant changes in value. Thus, market value today may not be the same as market value yesterday or tomorrow. Principle of supply and demand Principle of completion

Principles of real estatePRODUCTIVITY

Agents of production: land, labr, capital, coordination Theprinciple of contributionstates that the value of a given feature of a property is worth only as much as the amount of money it contributes to the value of the property as whole. For example, improvements to property may add more, less, or as much value to the property as they cost, depending on what the market is willing to pay for the features. Theprinciple of increasing and decreasing/diminishing returnsstates that states that with each additional unit of improvement, the marginal utility of each unit declines until the point at which any additional units cost more than the additional value they add to the property. Thisprinciple of highest and best useand consistent use states that the highest and best use of a property is the use that will bring the owner the highest economic benefit over the long run. Determining highest and best use is central to estimating market value because the use of a property for other than the current (or proposed) use may yield higher benefits to both the investor and the lender regarding greater investment returns and/or less risk than originally anticipated. Principle of anticipation. This states that the propertys marker value is based on the investors expectation about the future benefits the property will provide and the present value of those benefits.

What is Replacement Cost?

It is the cost of replacing the property being appraised with that of another having equivalent utility and amenities.

What is Reproduction Cost?

It is the amount of money required for the exact reconstruction of the improvements being appraised similar to the original.

What is Depreciation? For valuation purposes, depreciation is defined as a loss in value from any cause. It represent the difference in value between the building under appraisal and a new, substitute building. Depreciation for valuation purposes is not in any way related to depreciation used in accounting sense or in income tax accounting. Depreciation here can be in terms of physical depreciation or functional and economic obsolescence.

What are the different kinds of Depreciation?

Deteriorationor the physical wearing out of the property. This is represented by normal wear and tear, the action of the elements and catastrophic events such as earthquakes, typhoons and fires. Curable- if by treating the defects, the expected increase in value of the property will at least be more than the cost of treatment Incurable- if the cost of treating the defect will be more than the expected increase in the property value Functional obsolescence- or lack of desirability in terms of layout, style, and design as compared with that of a new property serving the same function. The loss in value from a decrease in functional utility due to technological improvements, new materials, and other innovations that make existing buildings obsolete for their original purpose. Economic obsolescence- relating to loss of value from causes outside the property itself. The loss in value from forces external to the property such as the deterioration of a neighborhood, encroachments of such nuisances as noise and smell.

What are the basic approaches* to valuation?

Cost approach

The current cost of reproducing a property less depreciation from all source that is, deterioration, and functional and economic obsolescence

Income approach

The value which the propertys net earning power will support based upon a capitalization of net income

Market data approach

The value indicate by recent sales of comparable properties in the market

*The appraiser utilizes all three approaches in most of his appraisal work. He may believe that the value indicated by one approach will be more significant than that of the other two, yet he will use all three as a check against each other and to test his own judgment. However, there are appraisal problems in which they cannot be applied such as in vacant land, the use of the cost approach, or in the case of an owner-occupied home, the use of income approach. All three approaches are needed in the solution of most appraisal problems.

What is a Cost Approach in Real Estate Valuation?

In cost approach, the appraiser obtains a preliminary valuation by adding to his estimate of the lands value, his estimate of the depreciated reproduction cost of the building and other improvements. This approach is based on the assumption that the reproduction cost is the upper limit of value. This also assumes that a newly constructed building would have advantages over the existing building as compared with the new building. The measure of this deficiency is called depreciation. For valuation purposes, depreciation is defined as a loss in value from any case. It represents the difference in value between the building under appraisal and a new, substitute building. Depreciation for valuation purposes is not in any way related to depreciation used in accounting sense or in income tax accounting.

What are the steps in Cost Approach?

The estimate of the lands value as if it is vacant The estimate of the current cost of reproduction of the existing improvements The estimate and deduction of depreciation from all causes The addition of the lands value and the depreciated reproduction of improvements

What is Income Approach in Real Estate Valuation?

In income approach, the appraiser is concerned with the present worth of the future net income of a property which will be produced in its remaining economic life. This future net income is then capitalized by computing its present worth. Choosing what capitalization rate to apply is one of the most critical steps in the income approach. A variation of only one half of one percent can make a difference of many thousands of pesos in the capitalized value of the income.

What are the steps in income approach?

Obtaining the rent schedule and the percentage of occupancy for the subject property and for comparable properties for the current year and for several years in the past. This information provides gross rental and the trends in rental and occupancy. This data is then related and adjusted by the comparative method to ascertain the estimate of gross income which the subject property should produce to attract investors in the market. Obtaining expense data such as taxes, insurance, and operating cost being paid by the subject property and by comparable properties. The trend in these expenses is also necessary. Estimating the remaining useful economic life of the building to establish the probable duration of its income. Selecting the appropriate capitalization rate and the applicable technique and methods for processing the net income.

What is capitalization in perpetuity?

In capitalizing net income earned on land, it is assumed that it will continue to earn more income indefinitely. The market value by capitalization in perpetuity formula is MV=I/R where I is the income and the income and R is the rate of return.

What is Market Data Approach?

The market data approach is essential in almost every appraisal of the value of the real property. The resulting value by this approach frequently is defined as the price at which a willing seller would sell and a willing buyer would buy neither being under abnormal pressure.

This definition assumes that both buyer and seller are fully informed as to the property and state of the market for that type of property, and that the property has been exposed in the open market for a reasonable time.

This approach produces an estimate of value of a property by comparing it with similar properties of the same type and class which have been recently sold or currently being offered for sale in the same areas. The comparative process utilized in determining the degree of comparability between two properties, involves judgment as to their similarity with respect to many value factors such as location, orientation, plottage, elevation, and size. The prices of those comparable properties will set the range in which value of the subject property will be.

What data are needed in Market Data Approach?

Sales or asking prices of comparable properties

Condition influencing each sale

Location of each property

Description of the land and improvements of each property

What is Correlation?

The last stage in the appraisal process is the correlation of the three values derived by the cost, income and market data approaches. In correlating these approached into his final estimate of value, the appraiser should take into account the purpose of the appraisal, the type of property, and the adequacy of the data available and used in each of the three approaches. These will determine the weight to be given to each approach. The appraiser should not average the three value arrived at by means of the cost, market date and income approaches. The appraiser instead should take the three value estimate and examines the spread between the minimum and maximum figures. He should then consider the approach which appears to be the most reliable. Then he should make adjustments in accordance with his judgment and experience.

What is an Appraisal Report?

A word portrayal of the property, the facts concerning that property, and the reasoning by which the appraiser has developed his estimate of value. The best report is the one which, in the fewest number of words, permit the reader to follow intelligently the appraisers reasoning and to concur in the conclusions reached thereby. As every report is an answer to a question by a client, it should show the facts considered and clearly outline the reasoning employed by the appraiser in arriving at his valuation.

What are the steps in appraisal process?

1. Definition of the problem

Analysis of the TCT

Prepare the plotting based on technical description stated in the title.

Compute the lot area based on the measurement on your plotting against the area stated in the title.

2. Determination of property rights

-Check the encumbrances annotated at the back of the TCT

-Watch for possible annotations that might affect the value of the land.

-All annotations, adverse or informative, should be included in the report, such as: lease contracts, claim of levy, right of way and Sec. 4, Rule 74 of the Rules of Court.

3. Preliminary survey and appraisal

Check the exact location at the cadastral map.

If the property appears to be an interior lot, which is without road frontage, verify the updated plan with the following offices: Land Registration Authority, Bureau of Lands, Assessors Office Mapping Section and Department of Public Works and Highways.

4. Preliminary analysis and data selection and collection (ocular inspection)

Use the compass to check the direction of the property pointed by the owner against technical plotting.

Check the actual shape and measurements of frontage and depth of the property against the technical plotting.

Observe the development in the area and the effect of the four forces which create value: social forces, economic forces, political forces and physical forces.

5. Analysis of the highest and best use

After observation of the development in the area, the appraiser must determine the use which at the time of appraisal is most likely to produce the greatest net return.

6. Application of the three approaches

market data or sales comparison approach

cost approach

income approach

7. Reconciliation of value indicators

8. Determination of Final value and written report

What is the summary of the appraisal process?

1. Reason for appraisal

advising prospective purchasers of real estate

advising prospective sellers of real estate

collateral for mortgages

ad valorem taxation

inheritance (estate) taxation

insurance

eminent

litigation

2. Identify the Problem

real estate to be appraised

property rights to be appraised

purpose of the appraisal

function (use) of the appraisal

type of value

effective date of appraisal

type of value

effective date of appraisal

special limiting conditions

3. Plan the appraisal

prepare the general and specific data

determine the highest and best use

do the basic approaches (coast, market, income approach)

reconcile and value conclusion

4. Prepare the report

certification or letter report

narrative report

forum report

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BONUS

Did you know that there is anomaly when the broker and the appraiser is one and the same person in a transaction?Read more...