real estate: Basic Appraisal

1. BASIC APPRAISAL
DR. RODRIGO B. MALLONGA, CE, ENP, MBA, LLB, DPA
RE BROKER / APPRAISER / CONSULTANT

2. 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.

3. SELLER BUYER
Cost ---------- Price ------- Value
P1Million P2Million P1.5Million
capital expense in the / amount paid/offered for a / worth, usefulness, utility
formation/construction / particular property. For the/ of an object to someone
of a finished product. / seller, it is the subjective / for a purpose. It is the price
It includes the original / value of the property or the/ an asset will bring under the
cost of land and the / value in exchange. It may / present market condition of
construction materials / either be higher or lower / supply. It is either lower or
as well as profit and / than cost. / higher to price and cost.
professional fees. (1994, 1998, 1999 BE)
FINAL/ULTIMATE GOAL IS TO DETERMINE THE VALUE

4. 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)

5. 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

6. 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.

7. 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)

8. 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

9. 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)

10. 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

11. 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)

12. 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

13. APPROACH OF PROPERTY VALUATION
1. MARKET DATA APPROACH
(Sales Comparison Approach)
2. COST APPROACH
3. INCOME APPROACH

14. 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.

15. 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.

16. 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.

17. 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.

18. 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)

19. 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)

20. 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)

21. 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

22. 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)

23. 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.

24. 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.

25. 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.