APPRAISAL SERVICE

Because much private, corporate, and public wealth lies in real estate, the
determination of its value is essential to the economic well-being of society.
It is the job of the "Professional Appraiser" to determine these values by
gathering, analyzing, and applying information pertinent to a property.

Unquestionably, the professional opinion of the appraiser, backed by

extensive training and knowledge, influences the decisions of people who
own, manage, sell, purchase, invest in, and lend money on the security of
real estate. And because the appraiser is trained to be an impartial third
party in the lending process, this professional serves as a vital "check in the
system," protecting real estate buyers from overpaying for property as well
as lenders from over lending to buyers. able to offer a complete
appraisal service to our customers.
HOW LONG DOES AN APPRAISAL TAKE?

The physical inspection of the real property being appraised can take from
approximately fifteen minutes to several hours, depending upon the size and
complexity involved.

After the initial inspection of the property, the appraiser spends time touring
through the neighbourhood or area. The purpose of this tour is to search for
comparable sales (other properties that are similar to the property being
appraised) that have sold within the last six months to a year or so. When
the field work is finished, the appraiser completes the report. The report can
consist of a short form report (typically under ten pages) to a long narrative
report which can sometimes exceed a hundred pages. A short form report
usually takes between three to six hours to complete. A narrative report can
take weeks or sometimes even months, depending upon the complexity of
the assignment.

WHERE DOES THE APPRAISAL INFORMATION COME FROM?

The appraiser gets his information from a wide variety of sources, including
the local Multiple Listing Service, local tax assessors records, local real
estate professionals, county courthouse records, private public record data
vendors, interviews with sellers and buyers, appraisal data co-operatives and
his or her own personal knowledge or office files from previous appraisals.
The quality and reliability of each piece of information is considered by the
appraiser.

WHAT DOES THE APPRAISER LOOK FOR?

Typically, an appraiser needs to document the condition of the property,
both inside and out, from the layout and features to degree of modernization
including any updates as well as the overall quality of construction. This
information will help to assist the appraiser throughout the valuation and
comparison process.

The appraiser will generally consider only permanent fixtures and real
property.

THE APPRAISAL PROCESS

1. Study pertinent documents:

a. Copy of the title
b. Certified Geodetic Engineer’s Plan
c. Floor plan of the building
d. Tax Declaration of land/building
e. Tax Receipts
2. Pinpoint the Location – this is very critical
a. Appraiser’s Plotting
b. Cadastral Reference Map
c. Certified Geodetic Engineer’s Survey Plan
d. Base Topographical Map:
i. From the title
ii. Based on the tie line
iii. Plot the base topographical map
e. Records from the Courts, National Land Title and Deeds
Registration
3. To check and verify Titles –verify preceding titles and the manner of
conveyance.

Note: verify up to the mother title

4. Inspect the Property/ies:

Basic elements:

a. Neighbourhood Analysis
b. Site Analysis
i. Frontage
ii. Depth
iii. Elevation and topography
iv. Condition of the fronting street
c. Improvement Analysis
5. Apply the approaches to value
6. Correlate Values and make Financial Estimates

- Determination of the range bracket

 7. Write the Appraisal Report

The appraisal process is an orderly and concise method of reaching an

estimate of value. The process has six major steps which include: definition
of the problem, preliminary survey and appraisal plan, data collection and
analysis, application of the three approaches to value, reconciliations of
value indications, final estimate of defined value. This process assists the
appraiser in reaching a sound conclusion. The major phase of this process
involves the application of the three approaches to value which include the
Market Data Approach, the Cost Approach and Income Approach. The three
approaches are reconciled and the value via most applicable approach, in
the opinion of the appraiser, is selected as the final estimate of value. In
most residential appraisals, particularly those of single or two family
dwellings, the direct sales comparison or market approach best reflects the
actions of buyers and sellers and is the most convincing and defendable
approach to value.

COMPARABLE SALE

A comparable sale is a property, which is similar to the subject property in

most respects, is located in a similar (nearby) location, and has sold recently
at arms length. The selection of comparable sales is in most residential
appraisals, the single most important determining factor in establishing
value. It is the appraisers responsibility to adequately research the local real
estate market and determine which comparable sales best represent the
value characteristics of the subject property.

ARMS LENGTH TRANSACTION

An arms length transaction is one in which both seller and purchaser act
completely independently of each other and have no connection or
relationship to each other.

MARKET DATA APPROACH TO VALUE

Market value or fair market value is the most probable price that a property
should bring (will sell for) 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. Implicit in this definition is the consummation of a sale as of a
specified date and the passing of title from seller to buyer under conditions
whereby: (1) buyer and seller are typically motivated; (2) both parties are
well informed or well advised; (3) a reasonable time is allowed for exposure
to the open market; (4) payment is made in terms of cash or in terms of
financial arrangements comparable thereto; and (5) the price represents the
normal consideration for the property sold unaffected by special or creative
financing or sales concessions granted by anyone associated with the sale.

GENERAL STEPS:

1. Research on Market Data from :

a. Registered sales
b. Fellow Brokers/Appraisers
c. Multiple Listing System
d. Advertisement
e. Assessor’s Office

2. Validate market data by ocular inspection to determine physical

attributes of the comparatives.
3. Apply adjustment factors:

a. Area
b. Plottage
c. Topography
d. Quality of Neighborhood
e. Utilities and facilities
f. Time Element

4. Estimate indicated value

RELIABILITY OF DATA

Not all registered sales are reliable data since a great majority may be
understated in price for capital gains tax purpose. Only property declared
and not understated sales should be considered. Some of the commonly
underpriced sales are:

a. Transactions between relatives

b. Involving foreclosures
c. As a consequence of expropriation, or
d. Which are obviously understated based on appraiser’s experience and
judgment

Prices quoted from advertisements and offerings are usually 10% to 15%
higher than what the sellers are actually willing to accept, to allow for usual
bargaining and/or broker’s commission.
ADJUSTMENTS

Adjustments are not the appraiser’s invention. They are manifestations of

buyer’s and seller’s reaction in the open market.

A 15% to 20% value adjustment is usually assigned to a corner lot. Relatively

large parcels or smaller lots may suffer a 10% reduction (resistance) in value
since these lots are over-adequate or inadequate in size and utility when
compared with typical-sized lots that can be used to their highest and best
use.

COST APPROACH TO VALUE

The cost approach combines an estimate of land value with an estimate of

depreciated reproduction or replacement cost of the improvements. The
principle of substitution is the basis of the cost approach, in that no rational
person will pay more for a property than the amount for which he can obtain,
by purchase of a site and construction of a building, with undue delay, a
property of equal desirability and utility.

USE OF THE COST APPROACH

1. Appraisal of special purpose properties such as churches, funeral

homes, schools and residential properties with unique or highly
individualized structures.
2. Appraisal of new proposed construction representing the highest and
best use of the land.

STEPS IN COST APPROACH

1. Estimate the value of land as if vacant (by market data)

2. Estimate depreciation from all causes.
3. Deduct estimated depreciation from present reproduction cost to
arrive at indicated value of improvement
4. Add land and improvement value to develop indicated property value.

REPRODUCTION COST

This is the cost of duplicating the improvement at current price, using the
same materials, construction standard, layout and quality of workmanship. It
is estimated by one of the following methods:

1. Quantity Survey Method. This is similar to a contractor’s procedure of

determining the quantity and grade of each type of material used,
 estimating labor required, and applying the unit cost to the materials
and labor quantities.
2. Unit-in-Price Method. This is a mathematical compression of the
quantity survey method and is based on the use of installed prices for
various building parts, using units convenient to simply such as square
meter.

For example:

Flooring: Total area x cost/ square meter = total cost of flooring

Roofing: Total area x cost/ square meter = total cost of roofing

3. Per Square Meter Method. Estimates are reached by dividing the total
building cost of similar structures by the total floor area. This will give
the average cost per square meter of the improvement which is
applied to subject property.

INCOME APPROACH TO VALUE

The income approach is based on an estimate of net income from the
operation of an income producing property and the selection of the property
capitalization rate from market indications of similar properties. The principle
of anticipation is the basis of the income approach and affirms that value is
created by the expectation of benefits to be derived from possession,
operation and/or capital gain at resale.

BASIC INVESTMENT PRINCIPLES

An investor in income or commercial property expects to receive three

things:

1. Rate of interest on that part of investment which is represented by

land.
2. Rate of interest on that part of investment represented by
improvement.
3. Received back in instalments that part of the property which is wearing
out in the course of time – the improvements.

STEPS IN THE INCOME APPROACH

1. Development of operating statement to arrive and annual net income.

2. Selection of interest rate.
3. Capitalization process.

ILLUSTRATION OF OPERATING STATEMENT

 Annual gross income PhP XXXX
Less allowance for vacancies/non-collection (5%-10%)
XXXX
_________
Effective gross income PhP XXXX
Less fixed and operating expenses XXXX
_________
Annual Net Income PhP
XXXX

HIGHEST AND BEST USE

Typically, highest & best use means the use or utilization that provides the
most profitable return on investment. It is that use, selected from reasonably
probable and legal alternative uses, which are found to be physically
possible, appropriately supported and financially feasible to result in the
highest possible land value.

DIFFERENT METHODS OF ESTIMATING COST:

1. Quantity Survey Method

(Construction breakdown)

2. Unit Cost-in-place Method

3. Cost per square meter/foot

DEPRECIATION

Depreciation represents a loss from the upper limit of value. It may be one or
all of three kinds.

1. Deterioration or the physical wearing out of the property.

2. Functional obsolescence, or lack of desirability in lay-out, style and
design as compared with new property designed to serve the same
function.

Example: narrow corridors or high floor-to-ceiling height

3. Economic Obsolescence, or less in value from environmental causes

such as proliferation of squatter colonies in the neighbourhood.
METHOD OF ESTIMATING PHYSICAL DEPRECIATION:

1. Over-all or Simple Age-Life Method.

This involves an estimate of effective age of the improvement by

deducting remaining economic life from total economic life.

The following is an example:

Present Reproduction Cost PhP 5,000,000.00

Total Economic Life 50 years
Remaining Economic Life 40 years
Effective Age 10 years
Total Accrued Depreciation is 20% (10/50) of PhP5 Million or PhP1
Million.

2. Modified Age-Life Method. This involves

a. Estimating the cost to cure all curable items
b. Deducting the sum of costs of curable items from reproduction cost; and
c. Deducting further from the remaining reproduction cost a percentage of
effective age viz-a-viz total economic life.

Present Reproduction Cost PhP5,000,000.00

Less Curable Items 200,000.00
______________
PhP4,800,000.00

Less Age-Life (10/50 x PhP4.8 Million) 960,000.00

______________
Present worth of improvement PhP3,840,000.00

3. Observed Condition-Breakdown Method

This involves an estimate of the costs of the various factors for depreciation.
The sum of the estimates is then deducted from present reproduction cost. Loss
in the value may arise from four causes:
a. Curable physical deterioration – such as painting, rain gutters, sagging
ceilings, warped floorings, etc.
b. Incurable physical deterioration
c. Curable functional obsolescence
d. Incurable functional obsolescence