Professional Documents
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Member / Affiliate:
NAR - USA
Member / Affiliate:
NAR - USA
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INTRODUCTION
Real Estate Brokers are being confronted with the
following vital issues upon acceptance of Listing
Agreements that end up to make or unmake their
closing of sale transactions:
1. Determining the exact location of the property listed.
2. Interpretation of technical descriptions.
3. Which property value is the logical offering price to the
buyer?
a. Value insisted by landowners- take it or leave it
attitude; or
b. Value heard from the neighborhood; or
c. Value referred by salespersons and other brokers.
4. Motivation to earn fat commissions, will he offer his own
self-determined valuation?
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INTRODUCTION
Some Facts in the Professional Practice:
-Opinion of Value are determined by professional RE Appraisers.
However, it takes a longer time to fully implement RA 9646.
-RE
Definition of Terms
(IVS/PVS)
Real Estate is defined as the physical land and
improvements that are permanently attached or affixed to
land. A tangible thing that can be seen and touch, above
or below the ground.
Real Property the land and improvements
including all the rights, interests and benefits related to
the ownership of real estate, normally demonstrated by
evidence of ownership, e.g., title deed.
Personal Property refers to ownership of interest
in items other than real estate. It can be intangible
(patents & debts) & tangible (chattels) not permanently
affixed to real estate and generally characterized by their
movability. Legally recognized as personalty in
distinction to realty.
inseparable components:
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1. Physical
theproject
land and its
improvements
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2. Juridical - the rights of ownership, interests
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Definition of Terms
Internal Appraiser is an appraiser under the
employ of the entity
owning the real property or
the firm that prepares the
appraisal report.
External Appraiser is an appraiser in the private
practice offering services for a fee to the general
public who are owners of real property.
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Comparison of:
Cost Estimation an estimate of the amount of money that
would be required at some specified date, to construct,
produce, replace or reproduce some tangible and/or
intangible thing, without regard to its ownership. (Ex.
Quantity surveying)
Earnings Forecast an estimate or forecast of the
future
net monetary returns, derivable from something owned or
considered as being owned. (Ex. Investments &
Income Appraisal)
Appraisal is an estimate or opinion of value, where an
estimate is:
a. Not a Statement of Value
b. Not a Determination of Value
c. Not a Fixing of Value
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Types of Appraisal
1. Informal Appraisal - Done by almost everyone. They are
usually
based on a combination of knowledge, experience
and
intuition, i.e. pricing merchandise for sale, making
analysis
as by a real estate broker or a salesperson
taking a property listing.
2. Formal Appraisal These are usually undertaken by
professionals
on this specialized field, who meet the rigorous
test of
education, training, competence and demonstrated
skills, and exhibits, maintain and follow the Code of Conduct
and
Standards of Professional Practice and
Generally
Accepted Valuation Principles (GAVP).
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What is VALUE
Value means the worth, usefulness or
utility of an object to someone for some purpose
at a future time.
To have value in the real estate market is to
have monetary worth based on desirability.
Characteristics of a Property to have a Value:
1. Demand the need or desire for possession or ownership
backed by the financial means to satisfy that need;
2. Utility the ability of the property to satisfy human
need;
3. Scarcity land is not scarce, its use for which it is
intended or
actually established is becoming
unique;
4. Transferability the relative ease with which ownership
rights
are transferred from one person to another.
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3.
4.
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Distinction of VALUE
Value in Use Refers to the value of a thing or
property to the
holder which includes the
amenities, benefits and income
derived from its
ownership, all of which are estimated in
terms of
money. This is subjective value.
Value in Exchange indicates the value of the
property traded in the open market for profit. This is
synonymous to objective value or market value.
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Cost
- is the amount required to create or
produce the good or services. Once that good or
service has been completed, its cost is an historical
fact. The PRICE paid for a good or service becomes its
COST to the buyer. Normally, Cost is less than Price.
The difference is Profit.
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MARKET VALUE
defined
Market Value means the estimated amount for which
a property should exchange on the date of valuation between
a willing buyer and a willing seller in an arms-length
transaction after proper marketing wherein the parties had
each
acted knowledgeably, prudently, and
without
compulsion. (IVS/PVS)
Elements: a) Estimated amount as of date
b) Willingness of both parties
c) Substantive knowledge and sound judgment by both
parties
d) Known in the open market
e) Under no pressure
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2.
3.
Cash Value is the value of the property in allout sale. It is synonymous to market value.
4.
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Bundle of Rights*
Bundle of Legal Rights is the juridical component of rights
of
ownership to real property, such as:
1. Right to possess and enjoy its use.
2. Right to destroy and improve
3. Right to profit from
4. Right to remove objects
5. Right to recover
6. Right to transfer rights during owners lifetime by sale or
gift.
7. Right to exclude others from enjoyment/disposal of its fruits.
8. Right to convey ownership by inheritance.
* An old English law during the middle ages, where a seller transfers
ownership to the buyer by giving a bundle of bound sticks or handful
of stones symbolic of these rights which can be separated and
individually transferred.
Restrictions on Property
Rights
a. Rights retained by the State:
1. Police Power
2. Eminent Domain
3. Taxation
4. Escheat
b. Restrictions imposed by Contracts:
1. Deed Restrictions in Contract to Sell
2. Lease
3. Easement
c. Restrictions imposed by Grantor:
1. By Will or Testament
2. Deed of Donation
d. Enroachment
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Adjustment Factors in
Comparing
The Market Data Approach has Principal Factor for
which adjustment must be made includes the
following:
1. Property Rights An adjustment must be made when
less than Fee Simple andthe full bundle of rights are
involved. This includes land lease, ground rents, life
estates, easements, deed restrictions and encroachments.
2. Financing concessions mortgages loan terms.
3. Conditions of Sale motivational factors that would
affect the sale, such as foreclosures, a sale among family
members or some non-monetary incentives.
4. Date of Sale adjustments if an economic change
occur between date of sale of comparable property and
date of appraisal.
5. Location similar properties might differ in price from
neighborhood to neighborhood or even locations within
the same neighborhood.
6. Physical features and amenities age, size and
condition of structures may require adjustments.
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Property
Property
Sales Price
Property
A
)
P500,000
Location
good
same
Age of Bldg.
10 yrs.
same
Size of Lot
12 x 10
same
Property
Property
_D_____
P550,000
P450,000
P600,000
poorer
same
same
+20,000
same
larger
-10,000
same
same
same
larger
-10,000
Landscaping
good
same
same
same
Construction
CHB
same
same
same
same
same
No. of Bedrooms
same
same
same
No. of T/Baths
better
same
same
same
same
-5,000
Floor Area
150
same
Condition-Interior
very good
poorer
same
Condition-Exterior
good
Financing
available
+10,000
same
Date of Sale
same
same
same
better
same
-10,000
same
same
same
current
same
same
2 yrs. Ago
same
same
same
same
_____________________________________+30,000____________________________
Net Adjustment
Adjusted Value
+5,000
+40,000
P505,000
P590,000
0
P450,000 *
-20,000
P580,000
______________________________________________________________________________
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COST Approach
2. COST APPROACH is an estimate of
value
based on the Principle of Substitution which states
that the
maximum value of a property tends to be set by
the cost of
acquiring an equally desirable and valuable
substitute
property assuming that no costly delay is
encountered in
making the substitution.
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b.
DEPRECIATION defined
Depreciation - in a real estate appraisal, it is a loss in value
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DEPRECIATION defined
2. Functional obsolescence Curable - outmoded or unacceptable physical or design
features that are no longer considered desirable by purchasers.
Example, an outmoded plumbing is usually replaced; bedroom
adjacent to a kitchen and converted to a family room.
Incurable - currently undesirable physical or design
features that could not be easily remedied because the cost of
cure would be greater than its resulting increase in value.
Example, an office building that cannot be economically airconditioned.
3. External obsolescence Incurable - caused by negative factors not on the subject
property, such as environmental, social or economic forces.
The loss in value cannot be reversed by spending money on
the property. Example, a proximity to a nuisance such as a
polluting factory or a deteriorating neighborhood, is one factor
that could not be cured by the property owner.
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DEPRECIATION computed
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Answer:
Land Valuation (12m x 20m = 240 sq. m. x P2,000)
- P
480,000
Plus: Site Improvements: driveway, walks, landscaping, etc. 20,000
P 500,000
Building Value:
Replacement Cost New
150 sq. m. at P5,000 - - - - - P 750,000
Less: Depreciation Physical Depreciation
-curable (items of deferred
maintenance) exterior painting
P 5,000
-incurable (structural wear & tear)
10,000
Functional Obsolescence(incurable-design)50,000
Locational Obsolescence (environs)
35,000
Total Depreciation - - - - - - - - - - - - 100,000
Depreciated Value of Building - - - - - - - - - - - - - - - - - - 650,000
Indicative Property Value by Cost Approach . . . . . . . .
P
1,150,000
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INCOME Approach
3.INCOME APPROACH - is based on the Present
Value of the rights to Future Income. It assumes that
the income generated by a property will determine the
propertys value.
The Income Approach is used for valuation of
income- producing properties such as apartment
buildings, rental condominiums, office buildings
and shopping centers.
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2.
3.
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With the appropriate capitalization rate and the projected annual net operating
income, the Appraiser can obtain the indicative of value by the Income Approach.
RECONCILIATION
RECONCILIATION is the art of analyzing and effectively
weighing thefindings from the Three Approaches. The process
of reconciliation is more complicated than simply taking the
average of the three estimates of value. This is not mere
setting the average of the three, but to ascertain which is
more reliable and applicable to the particular problem.
Example:
1. In appraising a home, the income approach is rarely valid,
and the cost approach is of limited value unless the home is
relatively new. Therefore, the sales comparison approach is
usually given greatest weight in valuing single-family
residences.
2. In the appraisal of income or investment property, the
income approach normally is given the greatest weight.
3. In the appraisal of churches, libraries, museums, schools
and other special-use properties where little or no income or
sales revenue is generated, the cost approach usually is
assigned the greatest weight.
Types of Appraisal
Report
Oral made verbally, includes statement of facts,
assumptions,
conditions and reasoning. All
notes, supporting data and
analysis preserved
on files.
Certificate or Letter a letter only with Appraisers
opinion of
value, without supporting data, analysis
and interpretation
preserved on files.
Form Report a pre-designed report form that suits
certain
requirement of the user.
Narrative Report - a comprehensive report providing
Appraisers
the opportunity to support and
explain opinions and
conclusions and to
convince readers to the soundness of
the
estimates.
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THE APPRAISAL
1. State the Problem
PROCESS
Identify the Property
Purpose of Appraisal
Effective Date
Property Rights
Function of Appra
Type of Value (P/
-National
-Subject site
-Regional/City
-Improvements
-Neighborhood
-Comparables
Data for
-Market (
-Cost Data
-Income/E
Land as Improved
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THE APPRAISAL
PROCESS
5. Estimate the Land Value
Comparables
Abstraction
Allocation
Capitalization
Residual Technique
Development
Inco
Proc
Mu
Direct
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