alawa cresar 2015 - basic appraisal for reb
DESCRIPTION
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An IEC project of:
NAR - USA
Member / Affiliate:
Basic Appraisal for Real Basic Appraisal for Real Estate BrokersEstate Brokers
COMPREHENSIVE REAL ESTATE SEMINAR & REVIEW (CRESAR) for PRC Licensure Exam
Phela Grande Hotel, General Santos CityApril 5, 2015
PRC Visiting Lecturer: Realtor® ARTURO M. LAWARealtor® ARTURO M. LAWA
Certified Property ValuerCertified Property ValuerRE Appraiser RE Appraiser PRC Reg. No. 0000248
RE Broker PRC Reg. No. 0002007Mobile Nos.: 0919-6757777; 0932-8222822
Email: [email protected]
An IEC project of:
NAR - USA
Member / Affiliate:
INTRODUCTIONINTRODUCTION
Real Estate Brokers are being confronted with the following “vital issues” “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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INTRODUCTIONINTRODUCTION
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 Brokers and salespersons often compile records from the marketplace, primarily similar properties that have been sold, known as competitive market analysis (CMA) competitive market analysis (CMA) . Though not a formal appraisal but it can be a reasonable value range as basis of price offering.
-RE Brokers who has the knowledge of basic principles of valuation can derive a better offer price offer price not unless a formal Appraisal Report is required by the buyer as basis of decision which is to be rendered by licensed and competent RE appraisers.
-Working knowledge of basic valuation principles will train the RE Broker to the next ladder in the profession as an associate RE Appraiser.
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Definition of Terms Definition of Terms (IVS/PVS) (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. Real Property has two (2) inseparable components: 1. Physical - the land and its improvements 2. Juridical - the rights of ownership, interests and benefits in owning it.
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Definition of Terms (IVS/PVS)Definition of Terms (IVS/PVS)
Appraisal – is an estimate or opinion of value based on supportable evidence and approved methods. (GAVP)
Valuation – is a determination of the monetary
values at some specified date of the property rights encompassing its ownership.
Appraiser – also known as ”Valuer”, refers to a person who conducts valuation/appraisal; specifically, one who possesses the necessary qualifications, license, ability and experience to execute or direct the valuation/appraisal of real property. (IVS/PVS/RA 9646)
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Definition of Terms 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: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 AppraisalTypes 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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Kinds of Formal AppraisalKinds of Formal Appraisal
1. Appraisal in business and finance -
Sale, lease or purchase of property Forming new corp., merger & consolidation, exchanges Mortgages, debenture, stock financing and sale-leaseback
2. Appraisal in litigation -
Condemnation proceedings Fraud cases Damage cases Division of estate cases
3. Appraisal for taxation - Property tax purposes Inheritance and gift tax purposes 4. Appraisal for insurance - Fire insurance coverage Theft and loss insurance coverage
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Accuracy of Appraisal Report Accuracy of Appraisal Report
- “Appraisal is only one person’s opinion of value. Different Appraisers may arrive at different estimates due to different assumptions.
- The accuracy and usefulness of the value estimate depends on appraiser’s skills, experience and judgment.” -(IVS/PVS)
Factors Affecting Accuracy of Appraisal: 1. Competence of the Appraiser. 2. Integrity of the Appraiser. 3. Soundness of the procedure used in the appraisal work. 4. Access to relevant data and information.
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What is VALUE What is VALUE
ValueValue – 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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Factors Affecting VALUEFactors Affecting VALUE
1. Social – forces relating to population growth, birth control measures and migration;
2. Political – related to efficiency of gov’t. in the maintenance of peace and order providing primary services and legislation;
3. Economic – relating to the nature of basic industry and business activity in the neighborhood, employment, income, housing, etc.;
4. Physical – forces that refer to the location and age of the neighborhood, size, area, shape, topography, improvements, trends.
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Distinction of VALUE Distinction of VALUE
Value in UseValue 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 ExchangeValue 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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VALUE, PRICE & COST VALUE, PRICE & COST comparedcompared ValueValue – is an economic concept referring to the price
most likely to be concluded by the buyers and sellers of a good or services that is available for purchase.
PricePrice – is a term used for the amount asked, offered, or paid for a good or service. Because of financial capabilities, motivations or special interest of a given buyer and/or seller, the price paid may or may not have any relation to the VALUE.
Cost 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 MARKET VALUE defineddefined
Market ValueMarket 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 arm’s-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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Other Meanings of ValueOther Meanings of Value
1. Plottage Value – when one or more parcels are consolidated so that its increment in value as a whole is much more than the total sum of the value of each parcel of land separately owned.
2. Rental Value – refers to the price fixed for the right to use a certain property for a specific period of time.
3. Cash Value – is the value of the property in all-out sale. It is synonymous to market value.
4. Investment Value – is the present worth of future benefit, or income of the property that the owner or investor has acquired. Economists consider this as the Economic Concept of value.
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5. Book Value – is the original cost of an asset or property less accrued depreciation.
6. Going Concern Value – is the value of the business in operation, or property that will continue to be utilized. It includes tangible property such as real estate, equipments and machineries, fixtures and inventories plus intangible assets such as franchises, patents and goodwill.
7. Liquidation Value – when corporation under receivership may sell its assets lower than its market value because the owners are forced to sell, or due to their ignorance of the real value of their assets
8. Taxable Value or Assessed Value – is the value of land or improvements for advalorem tax purposes. The assessed value is multiplied by the tax rate to produce the amount of tax due for payment.
Other Meanings of ValueOther Meanings of Value
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Other Meanings of ValueOther Meanings of Value
9. Salvage Value – is the amount that may be recovered minus cost of disposal when the assets will be retired or disposed of at a future time.
10. Loan Value – is the maximum level of value, or appraisal, against which a property may be mortgaged to secure payment of the loan. A loan-to-value rate is usually fixed by the bank.
11. Insurance Value – is the cost of the insurance coverage of a building or improvements to cover its loss due to earthquake, fire or other calamity. This is done by estimating the cost of replacing the entire building or the portion thereof that has been damaged. The value of the land is included in the estimate.
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Other Meanings of ValueOther Meanings of Value
12. Scrap Value – is the value of a depreciated building or the materials recovered from it.
13. Condemnation Value – is the estimated value of a property that is the object of expropriation for public use. Just compensation is the fair and full equivalent in money, for the loss sustained.
14. Zonal Value – is the mass appraisal value of land in a specific zone or area established by gov’t. (BIR).
15. Sentimental Value – is value in owning a cherished property where one is emotionally attached with and most of the times unquantifiable.
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Economic Principles affecting Economic Principles affecting ValueValue
Whether or not an Appraiser observes them, there is always a number of Economic Principles or Concepts at work that affect the Value of Real Estate, such as: 1. Anticipation 8. Highest and Best Use 2. Balance 9. Increasing/Diminishing Returns 3. Change 10. Plottage (Assemblage) 4. Competition 11. Regression/Progression 5. Conformity 12. Supply and Demand 6. Contribution 13. Substitution 7. Consistent Use 14. Surplus Productivity (Key word – ABCCCCC HIPRSSS)(Key word – ABCCCCC HIPRSSS)
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Economic Principles affecting Economic Principles affecting ValueValue Economic Principles or Concepts Economic Principles or Concepts affecting the value
of real estate.
1. Anticipation – value can increase or decrease in anticipation of some future benefit or detriment affecting the property.
2. Balance – All the agents of production must be equal – money, management, materials and methods.
3. Change – No physical or economic condition remains constant. Real estate is subject to natural phenomena such as fires, earthquakes and routine wear and tear
4. Competition – is the interaction of supply and demand. Excess profits tend to attract competition. Excess competition ruins profits.
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Economic Principles affecting Economic Principles affecting ValueValue 5. Conformity – value is created when a property is in
harmony with its surroundings. 6. Contribution – the value of any part of a property is
measured by its effect on the value of the whole.7. Highest and Best Use – means the most probable use of
a property which is physically possible, appropriately justified, legally permissible, financially feasible, and which results in the highest value of the property being valued. (IVS/PVS)
8. Increasing and Diminishing returns – the addition of more improvements to land and structures increases value only to the assets’ maximum value. Beyond that point, additional improvements no longer affect a property’s value.
9. Plottage – the principle of merging and consolidating adjacent lots into a single larger lot under a single land use tend to produces a greater total land value than the sum of two sites valued separately.. Process is called Assemblage.
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Economic Principles affecting Economic Principles affecting ValueValue
10. Regression and Progression – the worth of a better-quality property is adversely affected by the presence of a lesser-quality property and vice-versa.
11. Substitution – the maximum value of a property tends to be set by how much it would cost to purchase an equally desirable and valuable substitute property.
12. Supply and Demand – the value of the property depends on the number of properties available in the marketplace – the supply of the product. Other factors include the prices of other properties; the number of prospective purchasers; and the buying price that buyers will pay.
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Highest And Best UseHighest And Best Use analogyanalogyHighest And Best Use (HABU)- is the most probable use of a
property which is physically possible, appropriately justified, legally permissible, financially feasible, and which results in the highest value of the property being valued. (IVS/PVS)
Practical Rule of Thumb to established HABU1. Consider the land as if vacant even if improved. To see if the vacant
land can be profitably used for a different use other than its present use;
2. Consider only those uses allowed under current zoning laws, regulatory restrictions and other constraint such as private restrictions;
3. Consider only uses that are physically practical;4. Consider only uses that are likely to be in demand and profitable in
that location to justify the capital investment.
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Bundle of RightsBundle 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 owner’s 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.
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Specific Property RightsSpecific Property Rights
Property Rights: 1. Surface Rights 2. Subsurface Rights 3. Air Rights 4. Subject to rights reserved by the State
Fee SimpleFee Simple - is defined as the absolute estate without limitation to any particular class of heirs or restrictions. It is the greatest interest one can have in real property. An estate that is unqualified of indefinite duration, freely transferable and inheritable.
“Owner of a Fee Simple Title may do anything he wishes with the land, provided that he does not use the land as a nuisance”
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Restrictions on Property Restrictions on Property RightsRightsa. Rights retained by the State: 1. Police Power 2. Eminent Domain 3. Taxation 4. Escheatb. Restrictions imposed by Contracts: 1. Deed Restrictions in Contract to Sell 2. Lease 3. Easementc. Restrictions imposed by Grantor: 1. By Will or Testament 2. Deed of Donationd. Enroachment
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How to conduct Appraisal or How to conduct Appraisal or Valuation Valuation
(REVIEW - SUMMARY) (REVIEW - SUMMARY)
We are already familiar with the following terms: -Appraisal and Valuation theory -Value - principles - Its other meanings -Highest and Best Use (HABU) Analysis -Property Rights - bundle of rights - restrictions
Q. How then is Appraisal being done?How then is Appraisal being done?
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To arrive at an accurate estimate of value, Appraisers
traditionally use Three (3) Basic Valuation Three (3) Basic Valuation Approaches:Approaches:
1. Market Data ApproachMarket Data Approach 2. Cost ApproachCost Approach 3. Income ApproachIncome Approach
Three Approaches to determine Three Approaches to determine VALUEVALUE
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MARKET DATA ApproachMARKET DATA Approach
1. MARKET DATA APPROACH MARKET DATA APPROACH - an estimate of value is obtained by comparing the property being appraised (the subject property) with that of recently sold comparable properties (properties similar to the subject).
Since no two parcels are exactly alike, each
comparable property must be analyzed for differences and similarities between it and subject property.
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Adjustment Factors in ComparingThe 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 and the 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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MARKET DATA APPROACH ILLUSTRATIONMARKET DATA APPROACH ILLUSTRATION Subject Property Property Property Property FACTORS Property A B C _D_____ Sales Price ( ? ) P500,000 P550,000 P450,000 P600,000 Location good same poorer same same +20,000 Age of Bldg. 10 yrs. same same same same Size of Lot 12 x 10 same larger same larger -10,000 -10,000 Landscaping good same same same same Construction CHB same same same same No. of Bedrooms 3 same same same same No. of T/Baths 2 better same same same
-5,000 Floor Area 150 same same same same Condition-Interior very good poorer same same better
+10,000 -10,000 Condition-Exterior good same same same same Financing available same same same same Date of Sale current 2 yrs. Ago same same _____________________________________+30,000____________________________ Net Adjustment +5,000 +40,000 0 -20,000 Adjusted Value P505,000 P590,000 P450,000 * P580,000 ______________________________________________________________________________ *Conclusion: Therefore, subject property is comparable to Property C.Property C.
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COST ApproachCOST Approach 2. 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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Two Ways to look at the Construction Cost of a Two Ways to look at the Construction Cost of a Building for Appraisal purposes.Building for Appraisal purposes.
a. Reproduction Cost - is the construction cost at current prices of an exact duplicate of the subject improvement, including its benefits and drawbacks.
b. Replacement Cost New (RCN) - is the cost to construct an improvement similar to the subject property using current construction methods and materials, but not necessarily an exact duplicate.
Replacement Cost New is more frequently used in appraising older structures because it eliminates obsolete features and takes advantage of current construction materials costs and techniques.
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DEPRECIATION definedDEPRECIATION defined DepreciationDepreciation - in a real estate appraisal, it is a loss in value
due to physical deterioration (wear and tear) or obsolescence (functional or economic). It refers to a condition that adversely affects that value of an improvement to real property.
Depreciation is considered to be curable and incurable, depending on the contribution of the expenditures to the value of the property.
Depreciation is divided into three classes, according to its cause: 1. Physical deterioration1. Physical deterioration -- Curable - an item in need of repair, such as painting (deferred
maintenance), that is economically feasible and would result in an increase in value equal to or exceeding the cost.
Incurable - a defect cause by physical wear and tear if its correction would not be economically feasible or contribute a comparable value to the building. The cost of a major repair may not warrant the financial investment.
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DEPRECIATION definedDEPRECIATION defined2. Functional obsolescence2. 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 air-conditioned.3. External obsolescence3. 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 DEPRECIATION computed
Straight-Line Method Depreciation - Straight-Line Method Depreciation - In real estate appraisal, depreciation can only be
easily but least precisely determined by a Straight-line method, also called the economic age-life economic age-life methodmethod.
Depreciation is assumed to occur at an even rate over a structure’s Estimated Economic Life (EEL), the period within which it is expected to remain useful for its original intended purpose.
The property’s Cost is divided by Number of Cost is divided by Number of Years Years of its expected economic life to derive the amount of Annual depreciation.
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COST APPROACH computedCOST APPROACH computed
Cost Approach consists of five steps: 1. Estimate the value of the Land as if it is vacant and
available to be put to its highest and best use;
2. Estimate the current construction cost of Buildings and Improvements; 3. Estimate amount of accumulated depreciation resulting from the property’s physical deterioration, functional (internal) obsolescence and economic (external) obsolescence; (curable/incurable) 4. Deduct the accumulated depreciation (Step 3) from the construction costs (Step 2); 5. Add the estimated Land Value (Step 1) to the depreciated cost of Building and Improvements (Step 4) to arrive at the Total Property Value.
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COST APPROACH IllustrationCOST APPROACH Illustration Sample Problem: A Land with frontage of 12 meters and a depth of 20
meters is valued at P2,000 per sq. meter and site improvements such as driveway, walks, landscaping and others were constructed at P20,000. A Building with 150 sq. meter floor area was found on the lot with replacement cost of P5,000 per sq. meter. Upon inspection, the following were estimated:
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 - - - - - - - - P 100,000 Required: Compute the indicative Property Value by Cost
Approach.
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Answer: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 Indicative Property Value by Cost Approach . . . . . . . . P
1,150,0001,150,000
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INCOME Approach INCOME Approach
3. INCOME APPROACHINCOME 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 property’s 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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5 Steps of Estimating Value in 5 Steps of Estimating Value in Income Approach Income Approach
1. Estimate annual Potential Gross Income. An estimate of economic rental income must be made on market studies. Include other source such as vending machine, parking fees and laundry machines;
2. Deduct an appropriate Allowance for Vacancy and Rent Loss, based on the appraiser’s experience, and arrive at Effective Gross Income;
3. Deduct the annual Operating Expenses from the effective gross income to arrive at the annual Net Operating Income (NOI). Management costs are always included, even if the current owner manages the property. Mortgage payments (principal plus interest) are Debt Service and not considered operating expenses.
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5 Steps of Estimating Value in 5 Steps of Estimating Value in Income Approach Income Approach
4. Estimate the price a typical investor would pay for the income produced by this particular type or class of property. This is done by estimating the Rate of Return (or yield) that an investor will demand for the investment of capital in this type of building. This rate of return is called Capitalization Rate or “Cap Rate” and is determined by comparing the relationship of net operating income to the sales prices of similar properties that have sold in the current market.
5. Apply the capitalization rate to the property’s annual net operating income to arrive at the estimate of the property’s value. (See Example next slide)
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Example of Capitalization Rate:Example of Capitalization Rate:
Example. A comparable property that is producing an
Annual Net Income of P15,000 is sold for P187,500. The capitalization rate is P15,000 divided by P187,500, or 8%. 8%.
If other comparable properties sold at prices that yielded substantially the same rate, it may be concluded that 8% 8% is the rate that the Appraiser should apply to the subject property.
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INCOME APPROACH INCOME APPROACH –– illustration 1: illustration 1: Gross Annual Income estimate (potential rent income) - - P 120,000 Less: Vacancy and Loss of Rent (6% estimate) - - - - - - - - - 7,200 Effective Gross Income - - - - - - - - - - - - - - - - - - - - - - - P 112,800 Less: Operating Expenses Real estate taxes - P 2,000 Insurance - 1,500 Repairs - 6,000 Maintenance - 4,000 Management - 5,500 Net Annual Operating Expenses - - - - - - - - - - - - - - - - - - 19,000 Annual Net Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . P 93,800 Capitalization Rate (Bank’s Interest rate): 8% Capitalization of Annual Net Income = P93,800/.08 Indicated Property Value by Income Approach . . . . . . P 1,172,500 ========== With the appropriate capitalization rate and the projected annual net operating
income, the Appraiser can obtain the indicative of value by the Income Approach.
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INCOME APPROACH – illustration 2:INCOME APPROACH – illustration 2: With the appropriate Capitalization Rate and the Projected Annual Net Operating Income (NOI), the Appraiser can obtain the indication of value by the Income Approach.
These formula graphically illustrated and its variations are important in dealing with Income property: Income / Rate = Value Income / Value = Rate Value x Rate = Income
Net Operating Income / Capitalization rate = Value Example : P18,000 income / 9% cap rate = P200,000 value or P18,000 income / 8% cap rate = P225,000 NOTE: The relationship between the rate and value. As the rate goes down, the value increases.
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RECONCILIATION RECONCILIATION RECONCILIATIONRECONCILIATION – is the art of analyzing and effectively weighing the findings 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 Types of Appraisal ReportReport
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 Appraiser’s 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 THE APPRAISAL PROCESSPROCESS
1. State the Problem Identify the Property Property Rights (Fee Simple)Identify the Property Property Rights (Fee Simple) Purpose of Appraisal Function of AppraisalPurpose of Appraisal Function of Appraisal Effective Date Type of Value (P/$)Effective Date Type of Value (P/$)
2. List the Data needed and the Source Data Needed Time Flow Schedule Chart Data Source Service Contract/Scope of Work Personnel Needed Professional Fee
3. Gather, Record and Verify the necessary Data General Data Specific Data Data for Each Approach -National -Subject site -Market (Sales) Data -Regional/City -Improvements -Cost Data -Neighborhood -Comparables -Income/Expense Data
4. Determine the Highest and Best Use Land as if Vacant Land as Improved
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THE APPRAISAL THE APPRAISAL PROCESSPROCESS
5. Estimate the Land Value Comparables Capitalization Abstraction Residual Technique Allocation Development
6. Estimate the Value applying the Three (3) Approaches Cost Approach Market Approach Income Approach Replacement Cost New Comparison Unit Process Income Depreciation Comparables Multipliers
Land Value Adjustments Direct Capitalization Reconciliation Yield Capitalization
7. Reconcile the Estimated Values for the Final Value Estimate
8. Report the Final Value Estimate Submission of either Oral, Certificate or Letter-type, Form or Narrative Report.
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References: - Modern Real Estate Practice, 14References: - Modern Real Estate Practice, 14thth Edition, Edition, Galaty, Allaway & KyleGalaty, Allaway & Kyle - PARA – CREASAT and Review Materials, 2013 - PARA – CREASAT and Review Materials, 2013 - ALAWA Realty IEC Project, CRESAR 2013 - ALAWA Realty IEC Project, CRESAR 2013
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