THEORIES AND PRINCIPLES IN APPRAISAL

Principles of Values

1. Substitution -

• applicable to Sales Comparison or Market Data Approach and

Cost Approach to Value

• the comparables dictate the value of the subject property under

appraisal. The comparable with the very least adjustment is the

best comparable

2. Anticipation

• Applicable to Income Approach to value. Market value is the

present worth of present and future benefits derived from the

property

3. Change

• Changes affect the values of properties

• From agricultural to residential or commercial or industrial uses

• The build, build, build ( infrastructures) program of the

government enhances the values of properties

4. Competition

• Profit attracts competition, but to much competition adversely

affect the profitability of the project

• Competition tends to bring supply and demand back to balance

5. Conformity

• Value is preserved due to conforming use of properties in the

area, that is why there is housing and land-use regulation,

ordinance, police power

• You do not put a residential house in a highly commercial strip

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 6. Contribution-

• Positive Contribution

• If addition adds to the value of the property

• Or cost to cure is LESS THAN the value added

• Negative Contribution

• If addition to, say to the land is not in conformity with the

highest and best-use of the land

• Or cost to cure is GREATER THAN value added

7. Highest and Best Use

• An over-improvement or under-improvement is a violation of the

HBU principle or the conformity principle

• You cannot attain a surplus productivity if the land is not being

utilized in its highest and best-use

Four criteria in highest and best use

a. Physically possible – or with engineering solution, doable

b. Legally permissible – in conformity with the law

c. Financially feasible – availability of financing and cost of

borrowing, doable and profitable with the available

resources. A project might be physically possible but may

not be financially feasible

d. Appropriately/maximally justified - profitable

8. Plottage –

• The value of one is more than the sum of the parts

• Through consolidation higher value is attained especially on

commercial and industrial properties. The increased value thru

consolidation or merger is called plottage value

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 9. Progression

• Superior development enhances the value of adjoining lots

10. Regression

• Non-conformity or say, squatters colony adversely affect the

values and marketability of the adjoining properties

• Both progression and regression principles are product of the

LAW of ATTRACTION

11. Increasing and Diminishing Return

• Increase in demand brought by new development – increase

return or more buyers than sellers or seller’s market

• too much supply brought by too many competitors –

diminishing return – buyer’s market

• Seller’s market - a situation where there are more buyers

(demand) than sellers ( supply)

• Buyer’s market - a situation where there are more sellers

than buyers

• Perfect market – more sellers and more buyers

12. Supply and Demand

• We all know the law of supply and demand in relation to price

and marketability of the property. Refer to seller and buyer’s

market characteristics

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 13. Surplus Productivity – to better explain

• Land value of P5M

• gets 6% interest rate (return ON) = P 300,000.00
o (6% x P5M)

• Bldg. value of P10M gets

o 6% interest rate (return ON) = P600,000.00
o 2% recapture rate (return OF) = 200,000.00
= 800,000.00
• Target income should be at least P1,100,000.00

• If income is P1.2M, the excess goes to the land

• Land has the last claim over other factors of production

• If income is P1.0M, the deficiency is absorbed by the land

because the land is not a wasting asset

• This computation is an indication whether

the land is being used in its highest and best-use.

• The principles of values related to this Principle of Surplus

Productivity
o Highest and best use, balance, conformity,
o CONTRIBUTION

14. Balance
• The value of the land is in conformity with the structure
in relation to the highest and best-use principle – no over nor
under-improvement

15. Externalities
• Influence on values of the uses of the adjoining properties
• See progression and regression principle
• Economic obsolescence is a kind of depreciation to the
property value

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 16. Consistent Use
• Related to conformity principle
• You don’t put a residential house in a commercial strip
• Relates to the appraisal of improved property
• Requires both the land and the improvements to be valued
for the same use even, if they are being valued separately

Factors OR forces that Influence Real Estate Values:

1. Physical and environmental aspect

• Location, size, shape, elevation, soil quality, view, topography
• Environmental hazards, near earthquake fault, typhoon belt, flood
prone,
• Utilities like water, electricity, public transportation

2. Economic aspect
• Availability of money - financing and cost of money
• Purchasing power, high rent encourage ownership, plottage or
merger of 2 or more lots can give a greater site values than
separate site values
• Parking availability, corner influence

3. Governmental and political aspect

• Police power, subdivision and condominium projects restriction,
land zoning, easement, setbacks, eminent domain, taxes

4. Social
• Preferences of the people in a particular market that constitute
social forces influencing value in that market
• Social preferences with respect to recreational activities,
education, neighborhood quality, amenities of an area

Elements or Determinants of Values:

1. Demand
2. Utility
3. Scarcity
4. Transferability

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Physical Characteristics of the Land

1. Immobility -
• fixity in location
2. Indestructibility –
• that’s why only land is given the OCT or TCT
3. Non-homogeneity
• No two lots are exactly alike because they cannot occupy the
same exact place on earth – different coordinates
• Coordinates is the exact position of the lot on earth

Economic Characteristics of the Land

1. Scarcity - due to demand

2. Modification - from rawland to develop land
3. Fixity - in location
4. Area preference or situs - demand

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VALUE

Concept of value
• Value is the monetary worth of property, goods, services, etc

Economic theory of value

• Market is the interaction between buyers and sellers with regard to the
exchange of property

Different Kinds of Values

1. Assessor’s market value - found in the tax declaration

2. Assessor’s assessed value –

• Formula:
• Market Value x Assessment Level = Assessed Value

3. BIR zonal value

4. Appraiser’s market value – licensed appraiser

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 5. Loan value -
• Based on capacity to pay:

o Monthly paying capacity / M.A.F. = Loan Value

o Mo. Paying capacity x or present worth factor (PWF)
( S-1 / Si)

o Formula for Discount Factor or PWF : S -1 / Si

▪ Maybe used to bring into present value
series of income or payments in EQUAL AMOUNTS

▪ If not equal in amounts,

use DISCOUNTED CASH FLOW ( 1 / S)

• Based on collateral:

o AV x Loan to value ratio = Loan Value

6. Capitalized value

o General Formula: Income / Rate= Value

o Where :
▪ Income is net operating income for 1 year (NOI)
▪ Rate is capitalization rate
▪ For lot only,
▪ capitalization rate is INTEREST RATE
▪ For lot with improvement
Cap. rate is INTEREST RATE + RECAPTURE RATE

▪ Value is market value of property based on income

7. Book value
• Value of property in say, balance sheet of the company

8. Net book value (in accounting)

• Formula:
Acquisition Cost less Accumulated Depreciation = NBV

9. Estate tax value

• Value of BIR for the properties of the decedent at the time of
death

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 10. Value in use
• Value to the owner – subjective value

11. Value in exchange-

• The target of appraisal – market value or objective value

12. Cash value –market value

13. Just compensation value or condemnation value

• Value of property taken by the government plus consequential
damage less consequential benefits

14. Cost value

• Purchase price plus incidental cost ( selling price + CGT+ DST,
Transfer Tax, Registration Fee, etc

• Manufacturing Concern : Direct Labor + Direct Materials plus

Factory Overhead

15. Plottage value :

• The value of 2 or more properties merged as ONE UNIT has
more value than the sum of each unit

16. Rental value

• Market rent – willing lessor and willing lessee, rental based on
market

• Leasehold Value
• There is leasehold value to the lessee if market rent is higher
than contract rent

• No leasehold value if market rent is the same or lower than

contract rent

17. Investment value

- Maybe :
▪ Market value or
▪ Above market value or
▪ Below market value
▪ Is subjective value to the investor

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 18. Going concern value
• Say value of the company

19. Goodwill value

Example :
Net operating income of the business = P5M
Estimated Goodwill is 20% of NOI
Capitalization rate of Goodwill at 10%

Goodwill = P5M x 20% / Cap rate of 10% = P10M

• Going concern value

= MV of the enterprise + Goodwill value

20. Insurable value

• The value of a borrower - mortgage redemption insurance
• Value of the structure - fire insurance

21. Liquidation value

• generally below market value

22. Salvage value

• might still be used but less or no economic value, in general
• a fully depreciated equipment has a 20% salvage value per assessor
tax declaration per RA 7160 if it is still under use

23. Scrap value

• of very little value, like a demolished structures

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