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Basic Appraisal For Real Estate Brokers

This document defines and discusses appraisal and the appraisal process. It explains that an appraisal is an estimate of a property's value based on describing the property, analyzing its condition and utility, and determining its probable monetary worth in an open market. The accuracy of an appraisal depends on the data gathered, and the experience and credibility of the appraiser. Real estate appraisals can be used for various purposes like sales, financing, taxes, and development costs. The document also defines different types of property values like market value, price, cost, value in use, and value in exchange.

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429 views4 pages

Basic Appraisal For Real Estate Brokers

This document defines and discusses appraisal and the appraisal process. It explains that an appraisal is an estimate of a property's value based on describing the property, analyzing its condition and utility, and determining its probable monetary worth in an open market. The accuracy of an appraisal depends on the data gathered, and the experience and credibility of the appraiser. Real estate appraisals can be used for various purposes like sales, financing, taxes, and development costs. The document also defines different types of property values like market value, price, cost, value in use, and value in exchange.

Uploaded by

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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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PAREB–QCRB : Real Estate Manual 2013

14.1 BASIC APPRAISAL FOR REAL ESTATE BROKERS

DEFINITION

• As defined in USPAP, an appraisal is an estimate of value. It is a process of es-


timating and supporting an opinion of value. An appraisal includes:
o Description of the property under consideration
o Appraiser’s opinion of the property’s condition, its utility for a given
purpose and probable monetary value in an open market where sellers
and buyers are both acting in their own self-interest, an arm’s length
transaction.
• The term appraisal is used to refer to both the:
o Process by which the appraiser reaches certain conclusions (USPAP
Standard 1) and
o The written report in which those conclusions are communicated (US-
PAP Std.2)
• It is important to realize that appraisal is the appraiser’s or valuer’s opinion of
the property’s worth and the appraisal process requires subjective judgments
of the appraiser. As a result, appraisal is not an exact science, and it is not un-
usual for three appraisers to produce three different values for the same prop-
erty.

ACCURACY OF AN APPRAISAL REPORT DEPENDS ON WHAT FACTORS


1. Data gathered by the appraiser
2. Experience and education of the appraiser
3. Credibility of the appraiser

PROPERTIES SUBJECT FOR APPRAISAL


1 Real estate – land and anything attached to it, more or less permanent in na-
ture.
Attachment includes:
o Building and other structures
o Machinery equipment
o Plants and trees

2. Real Property – all the rights and interests, and benefits related to the owner-
ship of real
estate.
o Real property is a legal concept while real estate is a physical asset

3. Personal property

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PAREB–QCRB : Real Estate Manual 2013

o A legal concept referring to all rights, interests and benefits related


to ownership of items other than real estate. Personal property
maybe tangible, such as chattel, or intangible, such as a debt or
patent. Personal property is typically not permanently affixed to
real estate and is generally characterized by their movability.

PURPOSES OF APPRAISAL
1. Sale or purchase or sale of real estate
2. Market rent or economic rent determination
3. Financing and credit
4. Corporate mergers, acquisitions, liquidations or bankruptcies
5. Partition of estate
6. Eminent domain
7. Government valuation (local and national taxes)
8. Highest and best-use analysis
9. Insurance
10. Valuation of land and development cost in joint venture agreement
11. And many more. . .

DEFINITIONS AND CHARACTERISTICS OF MARKET VALUE


• The Appraisal Institute in America defines market value as –
1. the most probable price in terms of money (not highest price)
2. that a property will bring in a competitive and open market
3. under all conditions requisite to a fair sale,
4. the buyer and seller each acting prudently and knowledgeably
5. and assuming the price is not affected by undue stimulus.

• The Philippine Valuation Standard defines market value as –


1. the estimated amount for which the property should exchange
2. on the date of valuation
3. between a willing buyer and a willing seller
4. in an arm’s-length transactions
5. after proper marketing
6. wherein the parties had each acted knowledgeably, prudently
7. and without compulsion

MARKET VALUE / PRICE / COST


• Market value - the probable price or amount that a willing seller and a
willing buyer would agree in an open market
• Price - the amount for which the property is actually sold. It
is the transaction price.

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PAREB–QCRB : 14.1 Basic Appraisal for Real Estate Brokers
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PAREB–QCRB : Real Estate Manual 2013

• Cost - the amount of money used to construct improve-


ments plus the value of the land

• Example of Price, Cost and Market Value:


A property owner purchased a lot and built a house for a cost of P5million
(inclusive of lot cost). Ten years later, it was offered for sale at market
value appraised at P8million. The property after three months of market-
ing was sold at a price of P7.5million.
o Question: How much is the price, cost and market value
o Answer:
▪ Price - P7.5 million (actual selling price)
▪ Cost - P5.0 million (original cost 10
years ago)
▪ Market value - P8.0 million (estimated exchange
value)

VALUE IN USE and VALUE IN EXCHANGE


• Value in use – concerned chiefly within the property itself. It is the value to
the owner.
It is a subjective value.

• Value in exchange – involves forces outside of the property, in effect, its


value to others. This is the target of appraisal – an ex-
change value or market value;

DIFFERENT KINDS OF VALUE:


1. Market value (assessor) – value of the assessor for the property based on
classification and as shown in the tax declaration; being used in computing
local taxes like realty tax, special education fund tax and idle land tax
2. Assessed value (assessor) – taxable value; basis of realty tax
3. BIR zonal value – assigned values for the lots and condominium units (no
ZV for houses)
4. BIR market value – tax declaration value or zonal value whichever is
higher (for lot only) OR,
5. BIR market value – usually zonal value for the lot + tax dec. value for the
improvement
6. BIR taxable value or Tax Base is
a. BIR market value in case of donation, estate tax, exchange, assign-
ment
b. In case of sale, Tax Base is BIR market value or Selling Price, which-
ever is higher

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7. Book value – the value of the property as appearing in the books of ac-
counts (asset account)
8. Cash value – property should be appraised in cash value or its equivalent;
it is market value
9. Capitalized value – value arrived in income approach = Net operating in-
come / cap rate
10. Cost value – an estimate derived from cost actually paid to bring a prop-
erty into being.
11. Economic value – an estimate based on the market place, in which primary
consideration has been given to scarcity (supply), utility (demand), and fu-
turity (future benefits).
12. Estate tax value – value of the estate at the time of death
13. Going concern value – the value in an existing established business prop-
erty compared with the value of selling the real estate and other assets of a
concern whose business is not yet established. The term takes into account
the goodwill and earning capacity of a business.

14. Insurable value – the highest reasonable value that can be placed on prop-
erty for insurance purpose.
15. Insured value – an estimate reflecting the amount agreed upon for maxi-
mum indemnification for a particular type of loss.
16. Investment value – the worth of investment property to a specific investor
17. Just compensation value or condemnation value – an estimate arrived at for
property taken according to laws governing the taking.
18. Liquidation value – value which is below market value
19. Loan value (appraised value of property x loan to value ratio) – based on
capacity to pay
20. Market value (appraiser) – exchange value or objective value; most likely
value in case of sale
21. Plottage value – increase in value when two or more parcels are combined
into one property
22. Rental value – the price fixed for the right to use a certain property for a
specific period of time.
23. Salvage value – the amount that may be recovered minus cost of disposal
when the asset will be retired of disposed at a future time.
24. Scrap value – value of materials recovered from a depreciated property.
25. Value in exchange – market value, objective value
26. Value in use – value to the owner of the property, subjective value

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