Basic Appraisal for Real Estate Broker

Slide 1CREASAR, GCR REALTY & EDUCATION CENTER Engr. Chrysler B. Acebu, CPV
BASIC APPRAISAL FOR
REAL ESTATE BROKERS
CREASAR, GCR REALTY & EDUCATION CENTER Engr. Chrysler B. Acebu, CPV
REAL ESTATE APPRAISAL
- DEFINITION OF APPRAISAL; DEFINITION OF TERMS (per RESA/RA 9646)
- OBJECTIVES OF APPRAISAL
- USES OF APPRAISAL
- PRICE, COST & VALUE
- FAIR MARKET VALUE
Module 3) APPRAISAL PROCESS (METHODOLOGY)
- STUDY PERTINENT DOCUMENTS
REAL ESTATE APPRAISAL
- MARKET DATA APPROACH
MODULE 1
INTRODUCTION TO
PROPERTY APPRAISAL
DEFINITION OF APPRAISAL
APPRAISAL or VALUATION – an estimate or opinion of value concerning real
estate or other property.
- process of developing an estimate of value of an adequately
identified and described property as of specified date, supported by
logical presentation of factual & relevant data primarily based on
personal inspection of the property.
Important notes on Appraisal:
- It is not a guess. Value is determined only after
thorough observation, investigation, & analysis.
so as not to confuse it with other assets.
- Value of property today may not be the same
tomorrow.
DEFINITION OF TERMS
THE REAL ESTATE SERVICE ACT (RESA) OF 2009 – RA 9646
“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 valuation of real property.
“Assessor” – refers to an official in the local government unit, who performs appraisal & assessment of real properties, including plants, equipment, and machinery essentially for taxation purposes. Includes assistant assessors.
“Real Estate” – refers to land and all those items which are attached to the land. It is physical, tangible entity, together with all the additions or improvements on, above or below the ground.
“Real estate development project”- means development of land for residential, commercial, industrial, agricultural, institutional or recreational purposes or any combination of such including, but not limited to, tourist resorts, reclamation projects, building or housing projects whether for individual or condominium ownership, memorial parks and other of similar nature.
“Real estate developer”- refers to any natural or juridical person engaged in the business of developing real estate development project for his/her or its own account and offering them for sale or lease.
“Real property”- includes rights, interests and benefits related to the ownership of real estate.
“Real Estate Service Practitioners” shall refer to:
Real Estate Consultant – duly registered and licensed natural person who, for a professional fee, compensation or other valuable consideration, offers or renders professional advice and judgment on: acquisition; enhancement, preservation, utilization or disposition of lands or improvements thereon and conception, planning, management and development of real estate projects.
Real Estate Appraiser – duly registered and licensed natural person who, for a professional fee, compensation or other valuable consideration, performs or renders or offers to perform services in estimating and arriving at an opinion of or acts as an expert on real estate values, such services of which shall be finally rendered by the preparation of report in acceptable written form.
Real Estate Assessor – a duly registered and licensed natural person who works in a local government unit, who performs appraisal & assessment of real properties, including plants, equipment, and machinery essentially for taxation purposes.
Real Estate Broker - duly registered and licensed natural person who, for a professional fee, commission or other valuable consideration, acts as an agent in a party in real estate transaction to offer, advertise, solicit, list, promote, mediate, negotiate or effect the meeting of the minds on the sale, purchase, exchange, mortgage, lease, joint venture or other similar transactions on real estate or any interest therein.
Real Estate Salesperson - duly registered and licensed natural person who performs service for & in behalf of a duly licensed real estate broker for or expectation of a share in commission, professional fee, compensation or other valuable consideration.
OBJECTIVES OF APPRAISAL
PRIMARY PURPOSE OF PROPERTY APPRAISAL FOR BANKS/FINANCIAL INSTITUTIONS:
To establish a FAIR MARKET VALUE for the collateral offered in order to arrive at a sound credit decision.
To ensure a satisfactory return to the bank in the event of foreclosure and sale of acquired asset.
OTHER PURPOSES:
Sale & Disposition
PRICE, COST and VALUE
- Actual amount paid in a particular transaction
- Term used for the amount asked, offered, or paid for a good or service
- Generally an indication of a relative value placed upon goods or services.
COST
- Actual amount spent to build or put a property into being.
- The total cost of the property includes all direct & indirect costs of its production
- The amount of money required to create or produce the good or service.
VALUE
- A relationship between a thing desired and a potential purchaser.
- An economic concept referring to price most likely to be concluded by the buyers & sellers
- Is a hypothetical price, and the hypothesis on which the value is estimated determined by the valuation basis adopted.
Price and Cost are factual figures and considered as indicators of value.
Anything that is desired for financial, economic or sentimental
reason has value.
FAIR MARKET VALUE
HIGHEST PRICE IN TERMS OF MONEY WHICH A PROPERTY WILL
BRING IF EXPOSED FOR SALE IN THE OPEN MARKET, ALLOWING
REASONABLE TIME TO FIND A PURCHASER WHO BUYS WITH
KNOWLEDGE OF ALL THE USES TO WHICH IT IS ADAPTED OR
CAPABLE OF BEING USED.
A PRICE THAT A WILLING SELLER WOULD SELL AND A WILLING
BUYER WOULD BUY, NEITHER BEING UNDER ABNORMAL
PRESSURE.
a) Expropriation
b) Foreclosure
FACTORS THAT CREATE VALUE (DUST)
DESIRABILITY
- Desirability to be effective must be supported by purchasing
power.
UTILITY
SCARCITY
- An object must have limited supply in order to arouse desire in an individual.
TRANSFERABILITY
FORCES THAT AFFECT VALUE (SEPP)
SOCIAL - Factors emerging from man’s social instincts and
yearnings. Such as:
> Population growth & decline
purchasing power.
> Price levels, interest rates and tax burdens
> Employment and wage levels
> Climate and topography
schools, parks & recreation areas.
VALUATION PRINCIPLES
ANTICIPATION – Value tends to be set by the present worth of the future benefits or income that may be derived from the ownership of the property.
Example:
When an office building has a net income expectancy of P 100,000 per annum. Rate of return is @ 12%. Its value today or its present worth based on future benefits or future income is derived from the formula for capitalization
V = I/R
the property TODAY.
CHANGE – Value of property is influenced by the constant changes occurring in the environment. Value of today may not be the same tomorrow.
- Today evolved out of yesterday & is the shadow of
tomorrow.
Example:
A decade ago, real properties along Pasay Road were exclusively used for residential purposes. Presently however, the area is experiencing a rapid transition from residential to commercial land use. In effect, values of real estate within the vicinity tend to increase due to change.
COMPETITION – The principle stems from the fact that profit creates competition. Excessive competition dissipate profit. In real estate, profit is the monetary incentive for investment.
Example:
Office condominiums made large profits when they were first introduced in Legaspi Village, Makati. This potential influenced the construction of similar structures in the area which led to a great degree of competition. In the process, condominium markets slowed down and their values stagnated. Meanwhile, the profit which was initially shared by a few is now shared by a few is now shared by many.
CONFORMITY – Most satisfactory use of land is realized when it conforms to the standards governing the area where it is located. The principle holds that maximum value of a property is realized when a reasonable degree of sociological, architectural and economic homogeneity is present.
Example:
BF Homes Paranaque is a residential subd. Inhabited by middle-income family groups where improvements are mostly bungalows ranging from P 600,000 to P 800,000 construction cost. If a property within the subdivision were to be improved with a multi-million peso 3-storey structure, there will be a conspicuous lack of conformity between the property and its environment.
CONTRIBUTION – The principle states that the land and building is a single economic enterprise therefore, the value of land is dependent on the amount of net returns on investment on the building.:
Example:
The expenditure of P 50,000 needed to convert a basement into an apartment, or to add a recreation room to a home, is justified only if the result is the production of additional value, in excess of the amount spent. Similarly, the installation of modern elevators in place of the old one should increase the net income by either a reduction in operating expense or an increase in rentals.
HIGHEST and BEST USE (HABU) – The priciple states that the most profitable use of the property will yield the highest land value. Land has no value unless man can use it, but the amount of the value of land depends on how it is used. Because real estate owner wishes to reap the greatest possible net returns from his property.
Example:
Velez St. in Cagayan de Oro City is a commercial strip forming part of the city’s business district. If a
3-storey commercial building is constructed on a lot along this span, the improvement represents the HABU as it gives the most profitable use of land, hence, maximizes its value.
SUBSTITUTION – The principle states that no prudent buyer will pay more than what it will cost him to buy or build an equally desirable substitute property. When several properties or services with substantially the same utility are available, the one with the lowest price attracts the greater demand and the widest distribution.
Example:
Mr. Roxas decided to put up a boutique selling local and imported clothes; shoes and other accessories along the southeast side of Nicanor Reyes St. within the University Belt. He has to choose between the following spaces for rent:
Store Space 1
Store Space 2
Characteristics: good condition; newly renovated
Since the two (2) spaces offer almost the same features, utility and desirability, Mr. Roxas decided to occupy/rent Store Space 1.
SUPPLY AND DEMAND – The principle involves the interplay of economic forces affecting market value. Changes in the proportionate relationship between supply and demand tend to affect the price obtainble in the market. It also states that scarcity influences supply and desire influences demand. Demand of for a commodity is created by its usefulness ad the scarcity of supply.
Example:
There is an oversupply of office buildings in Makati, like in Salcedo and Legaspi Villages. Some of this buildings do not get maximum occupancy because the demand is less.
To compete in the market, owners have no option but to offer their buildings/condominiums for rent or for sale at the lower side of the price gamut/range prevailing in the area.
MODULE 2
LEGAL CONSIDERATIONS
IN APPRAISAL
LEGAL CONSIDERATION IN APPRAISAL
INTRODUCTION
Ownership of real estate is a direct function of constitutional guarantees.
Focuses on the various legal considerations involved in the ownership of real property that a professional appraiser must understand.
Six legal considerations:
Limitations on ownership of real estate
Forms of legal interests
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FUNDAMENTAL DEFINITIONS OF LEGAL INTERESTS
PROPERTY
All things which are, or may be the object of appropriation.
Res nullius are those physical things which "have not or have never had" an owner. Res nullius is a category of "things."(1) Those things have not been reduced to "property" because they are not, or more accurately cannot, be appropriated by individuals. Light, for example, is res nullius.
Res Alicujus - Things owned by someone - a particular
person or group of persons
Res Alienae - Things belonging to others
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REAL ESTATE
Real estate relates to the land and all improvements permanently attached to the land, either by nature or by people.
Real estate has the following five unique characteristics that distinguish it from other asset types:
1.Unique in location
5. Useful
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REAL PROPERTY
Real property relates to the interests, benefits, and rights inherent in the ownership of real estate.
Based on this distinction between real estate and real property, those involved in the valuation of real estate are technically real property appraisers as opposed to real estate appraisers.
Consistent with the concept of real property is the bundle of rights concept, a view of real property ownership suggesting that the rights inherent in the ownership of a parcel of real estate can be compared to a bundle of sticks whereby each stick represents a separate and distinct right in the ownership of that real estate.
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Bundle of Rights
Rights generally inherent in the ownership of real estate include but are not limited to the following:
The right to use (Jus Utendi)
The right to its fruits (Jus Fruendi)
The right to dispose (Jus Disponendi)
The right to recover (Jus Vindicandi)
The right to abuse (Jus Abutendi)
The bundle of rights can be divided through various instruments including leases, easements, and mortgages.
Through these instruments, one party owns or controls certain rights whereby another party owns or controls other rights.
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For example, in a lease arrangement, the person leasing the property (lessee) generally acquires the right to use and occupy the premises for a certain reason, for a certain period of time, usually at a specified rental rate.
The owner of the property (lessor) retains the right to receive rent for giving up the use of the property but also retains the right to the reversion, or the right to get the property back after the lease has ended.
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PERSONAL PROPERTY
Personal property is an item that is not real property.
It usually falls outside the subject of an appraisal.
Three examples of personal property that may appear to be related to the real estate are the following:
A portable microwave oven
A window air-conditioning unit
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FIXTURE
A fixture is an item that was once personal property that has become part of the real estate.
When a dishwasher has been delivered to a construction site and is awaiting installation, it is personal property. When installed, however, it becomes a fixture and is considered part of the real estate.
Following are examples of fixtures:
Light fixtures
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LIMITATIONS ON OWNERSHIP OF REAL ESTATE
The purest and most complete form of real estate ownership is fee simple. Yet, even though an individual may own a parcel of real estate in fee simple with no mortgage encumbrance, he or she does not have exclusive use of that property.
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PUBLIC (GOVERNMENT) RESTRICTIONS ON REAL ESTATE OWNERSHIP
There are four public or governmental restrictions known as the four powers of government.
These limit the ownership of all real property.
The four powers are as follows:
Police power
Eminent domain
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Police Power
Police power is the right of government to regulate land use for the public good. There are numerous examples of police power, but the most obvious ones are zoning and building codes.
Zoning is intended to promote orderly development of land. Zoning may allow commercial development along a major highway but may restrict adjoining land to residential usage. By promoting orderly development, zoning generally tends to maximize and maintain an individual parcel’s value.
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Police Power
Building codes are intended to protect the consumer from inappropriate or faulty construction.
The requirement of sprinkler systems in office buildings over four stories high may have a significant impact on construction costs and rental rates.
The requirement to reinforce foundation footings may insure the viability of a residential structure for years to come whereas the average consumer may be unaware of its importance.
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Eminent Domain
Eminent domain is the right of governments to acquire private property for public use, such as a road widening.
The process of acquiring private property for public use is called condemnation, whereas the right of government to acquire the property is eminent domain.
Whether we agree or disagree with this right as individuals, it is inherent in the Constitution.
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Eminent Domain
Laws recognize the power of eminent domain but go on to state that just compensation must be paid to the owner.
Examples in which the power of eminent domain is employed may include the following:
Highway construction
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Escheat
Escheat actually means going to the state.
If a person dies without a will, that person is said to have died intestate, and that person’s property transfers to the state.
Taxation
Governments are granted the right of taxation, that is, they are allowed to levy taxes on properties.
In many communities, property taxes are the primary funding basis for local operations including schools.
If property taxes are not paid, governments have the right to acquire the properties, although proper legal procedures must be followed.
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PRIVATE RESTRICTIONS ON REAL ESTATE OWNERSHIP
In addition to governmental restrictions, individuals may place private limitations on property, and these restrictions may or may not transfer with the property when it sells.
Following are examples of private restrictions:
Deed restrictions
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Deed Restrictions
A deed restriction is a limitation on the use of real estate through a written legal document that is usually recorded.
The recording document is usually referred to or stated in the transfer agreement such as a deed.
While a zoning restriction usually applies to many parcels, a deed restriction usually relates to a specific parcel or even a defined subdivision or planned use development.
When deed restrictions are in conflict with zoning, usually the more restrictive prevails.
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Deed Restrictions
One of the most common deed restrictions is a subdivision restrictive covenant. A subdivision deed restriction may state that the minimum size of a house must be 200 square meters, even though zoning may only require a minimum of 150 square meters.
Another common restriction, particularly in first-class residential subdivisions, would be state that the minimum cost of the house to be constructed on a parcel of land is P5,000,000.
Usually deed restrictions have time limitations, but under certain circumstances, they can be extended. Example: Bel-Air Subdivision in Makati City
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Easements
An easement conveys the right to use part of the land for a specific purpose. Easements thus divide the bundle of rights.
Utility companies have to acquire easements to extend utility lines through property.
In order to widen an existing highway, a governmental authority may have to acquire a temporary easement alongside the highway for construction purposes.
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Easements
An easement typically does not convey ownership of the majority of the rights in the bundle of rights; easements relate to specifically identified rights usually identifying a temporary or perpetual use.
An easement that runs with the land and can be conveyed from a seller to a buyer is called an easement appurtenant.
An easement that serves only one person that cannot be conveyed from a seller to a buyer is called an easement in gross.
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Leases
A lease is a contractual agreement between a property owner (lessor) and a tenant (lessee). It specifies the use of a property for an identified period of time. The tenant acquires the right to occupy and use a property. The owner usually receives the right to collect rent from the tenant and also has the right of reversion, that is, the right to get the property back at the end of the lease. Usually, sales of property do not nullify leases.
This concept is particularly important when valuing properties that are subject to leases.
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Mortgages
When real estate is purchased, there are usually some borrowed funds involved as part of the purchase price. When part or all of this money is borrowed from a lending institution, a mortgage instrument is usually created.
A mortgage is a loan or promissory note that is secured by the real estate. If the loan is not paid back according to the agreed upon terms and conditions, the lending institution providing the funds can acquire title to the property through foreclosure.
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Liens
A charge against a property in which the property is security for payment of a debt is called a lien. There are many forms of liens, or liens which may be placed on a property through a condominium association for nonpayment of mandatory association fees.
All mortgages are liens, but all liens are not mortgages (mechanic’s lien).
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Encroachments
An encroachment is a trespass on another’s land. If a fence has been installed over the property line onto the adjacent property, an encroachment has been created.
A house that extends over a property line is also an example of an encroachment. In most cases, the person doing the encroaching can be forced to correct the encroachment.
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Adverse Possession
Adverse possession is a method of acquiring ownership through possession. If a person utilizes another person’s property openly for an extended period of time, that property may be transferred as to ownership.
Several requirements are necessary for one to acquire title through adverse possession. Possession must involve all of the following:
Be apparent (open and visible)
Be continuous and uninterrupted for a certain period of time
Be exclusive
Be claimed, i.e., the person who has the apparent possession must make a claim to that possession
Be hostile with denial or opposition to the original owner’s title
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FORMS OF LEGAL INTEREST
Several forms of ownership of real property exist, varying from state to state. As noted previously, because appraisers are technically appraising real property rather than real estate, they must have a clear understanding of the ownership interest being appraised.
FEE SIMPLE ESTATE
The most complete form of ownership is a fee simple estate.
Although the purest form of ownership without any claims by heirs or private restrictions, a fee simple estate is limited by the four powers of government.
Usually, an appraisal of any interest less than fee simple begins with an analysis of the fee simple value.
PARTIAL INTERESTS
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Leased Fee Estate
A landlord’s (lessor’s) interest in a property when there is a lease encumbering the property is called a leased fee estate.
The lease document or lease contract itself has divided the bundle of rights.
The landlord usually retains the right to receive rent in exchange for giving up use of the property for a specified period of time; the landlord also retains the right to get the property back at the end of the lease (reversion).
In such an arrangement, the obligations accruing to the landlord and the obligations accruing to the tenant are usually specified by the lease.
Leasehold Estate
In contrast to the leased fee estate, the tenant’s (lessee’s) interest in a leased property is called a leasehold estate.
The tenant usually obtains the right to use and occupy the property but assumes the obligation to pay rent.
A leasehold estate can have a positive value (tenant has an advantage) if the contract rent (rent specified in the lease) is less than economic or market rent (rent which could be achieved in an open market).
A leasehold interest can have a negative value (tenant is at a disadvantage) if the contract rent is more than the economic or market rent.
Air Rights
Air rights are particularly important in urban areas. In many cases, buildings are constructed within an identified air space.
Air rights do not extend indefinitely. There are height limitations imposed by the restrictions, either public or private, related to air space.
PARTIAL INTERESTS
Surface/Subsurface Rights
Surface/subsurface rights also come into play more in urban areas.
A government agency may acquire (through eminent domain) subsurface rights for the construction of an underground sewerage system.
An owner of a parcel of land may retain the surface rights for use as parking and sell the air rights for an overhead walkway connecting to adjacent buildings.
PROPERTY OWNERSHIP FORMS
As appraisers, we are concerned with the valuation of an ownership interest (real property) in specified real estate.
The bundle of rights relates to real property and can be divided.
In addition to understanding rights, an appraiser should also understand the various types of ownership.
INDIVIDUAL (SEVERALTY)
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TENANCIES
Tenancy is created when the bundle of rights is divided, and in real estate generally has the following two meanings:
The possession of title or other ownership form
The right to use and occupy property
As discussed, the second meaning relates to leased property in which the lessee has the right to use and occupy the property, and the landlord has the right to receive rent and get the property back at lease termination.
UNDIVIDED INTERESTS
Related to the ownership of real property, there are several important ownership forms that warrant explanation.
They relate to an “undivided interest” in the real property. The undivided interest concept is difficult for many people to comprehend.
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SPECIAL FORMS OF OWNERSHIP
The following three special types of ownership evolved in recent years as the bundle of rights separated in more creative ways:
Condominium
Cooperative
Time-share
Condominium
The term condominium describes a type of ownership, not a type of building.
This is a form of ownership in which an owner has an interest (usually fee simple) in a certain unit defined such as the space between the interior walls, the ceiling, and the floor of that unit;
the owner also owns a pro-rata share of the common areas (drives, grounds, recreational amenities, etc.) within the development.
Cooperative
A cooperative is a form of ownership in which a corporation owns the land and improvements, and the residents own stock in the corporation. Then, the corporation signs an exclusive lease with the tenant-stockholder.
Cooperatives are common in certain regions of the country. This type of ownership allows tenant-stockholders to select their neighbors, voting on whether to allow or deny a prospective buyer to be allowed into the corporation, and thus occupancy of a unit in the building.
Time-Share
A time-share is a partial form of ownership in which other time-share owners (tenants in common) purchase the right of use/occupancy for a specified period of time, say one week per year.
Typically, 50 weeks per year are sold, with the other two weeks reserved for maintenance. Thus, an owner who buys one week will have a 2 percent ownership (1⁄) in the unit, but his ownership/occupancy may be restricted to a certain period or week of the year.
A Baguio time-share week is likely more expensive in April and May than is a week in February; hence, a buyer cannot purchase an inexpensive week in February and expect to use it during a more expensive week in April.
FORMS OF LEGAL DESCRIPTIONS
Legal descriptions are methods of describing real estate so that each property can be recognized from all other properties, recognizing its unique characteristics with regard to location.
Because land is a unique commodity in that it is immobile, it must be described specifically.
Following are the four types of legal land descriptions:
Metes-and-bounds description
METES-AND-BOUNDS DESCRIPTION
A metes-and-bounds description begins at a point of beginning (POB), and the terms metes and bounds relate to distance and direction. From the POB, the reader of the legal description is walked around the perimeter of the parcel using angles and distances, eventually returning to the POB.
A basic understanding of plane geometry is needed in this system because of the emphasis on angles and distances. In addition to defining the geometric shape, a metes-and-bounds description also makes reference to a specific land lot, within a district/barangay, within a city/municipality. Generally, all city/municipality are divided into several districts/barangays for identification purposes.
LOT-AND-BLOCK SYSTEM
Under the lot-and-block system, a certain plot of land is subdivided.
The key is the recording of the subdivision plat into public records.
Within each subdivision, the lots and blocks are identified, making reference to the recorded plat.
Which of the following is NOT one of the three tests of when personal property becomes a fixture and thus part of the real estate?
a. Cost of the item b. Manner of attachment
c. Intent of the parties d. Character of the item
A fee simple interest in a property is an example of
a. real property b. real estate
c. personal property d. element.
A window air conditioner that is permanently attached to a home and built-in with caulked, side/top/bottom molding and screwed to the window frame is an example of a(n)
a. trade fixture. b. fixture
c. personal property. d. encroachment.
REVIEW QUESTIONS
Which of the following is NOT one of the three tests of when personal property becomes a fixture and thus part of the real estate?
a. Cost of the item b. Manner of attachment
c. Intent of the parties d. Character of the item
A fee simple interest in a property is an example of
a. real property. b. real estate.
c. personal property. d. element.
A window air conditioner that is permanently attached to a home and built-in with caulked, side/top/bottom molding and screwed to the window frame is an example of a(n)
a. trade fixture. b. fixture.
c. personal property. d. encroachment.
REVIEW QUESTIONS
Which of the following is NOT a form of a private limitation?
a. Lease b. Mortgage
c. Severalty d. Easement
A tenant or lessee may most likely possess which type of interest?
a. Life estate b. Leased fee estate
c. Lien d. Leasehold estate
Which of the following is NOT a form of an ownership limitation?
a. Lease b. Tenancy
c. Mortgage d. Easement
Which of the following is NOT a form of a private limitation?
a. Lease b. Mortgage
c. Severalty d. Easement
A tenant or lessee may most likely possess which type of interest?
a. Life estate b. Leased fee estate
c. Lien d. Leasehold estate
Which of the following is NOT a form of an ownership limitation?
a. Lease b. Tenancy
c. Mortgage d. Easement
Which of the following is NOT a type of special ownership?
a. Escheat b. Condominium
c. Co-operative d. Time-share
Which type of title transfer offers a guarantee of the title from the seller to the buyer?
a. Quitclaim b. Title insurance
c. General warranty d. Adverse possession
Real property is
a. the same as real estate. b. different than unreal property.
c. an intangible interest in real estate d. the bricks and mortar.
REVIEW QUESTIONS
Which of the following is NOT a type of special ownership?
a. Escheat b. Condominium
c. Co-operative d. Time-share
Which type of title transfer offers a guarantee of the title from the seller to the buyer?
a. Quitclaim b. Title insurance
c. General warranty d. Adverse possession
Real property is
a. the same as real estate. b. different than unreal property.
c. an intangible interest in real estate. d. the bricks and mortar.
REVIEW QUESTIONS
Real estate is
b. different than unreal estate.
c. an intangible interest.
d. a microwave sitting on top of a kitchen counter.
Which of the following is used in determining when personal property becomes a fixture?
a. Weight of the item b. Size of the item
c. Cost of the item d. Manner of attachment
A ceiling fan installed in a home is
a. personal property. b. a trade fixture.
c. a fixture that is now part of the real estate. d. real property.
REVIEW QUESTIONS
Real estate is
b. different than unreal estate.
c. an intangible interest.
d. a microwave sitting on top of a kitchen counter.
Which of the following is used in determining when personal property becomes a fixture?
a. Weight of the item b. Size of the item
c. Cost of the item d. Manner of attachment
A ceiling fan installed in a home is
a. personal property. b. a trade fixture.
c. a fixture that is now part of the real estate. d. real property.
REVIEW QUESTIONS
Building codes and zoning represent which of the four powers of government?
a. Police power b. Eminent domain
c. Escheat d. Taxation
a. deed restrictions. b. powers of government.
c. personal property. d. private restrictions.
A toolshed that is partly on a neighbor’s lot is known as a(n)
a. lien. b. encroachment.
REVIEW QUESTIONS
Building codes and zoning represent which of the four powers of government?
a. Police power b. Eminent domain
c. Escheat d. Taxation
a. deed restrictions. b. powers of government.
c. personal property. d. private restrictions.
A toolshed that is partly on a neighbor’s lot is known as a(n)
a. lien. b. encroachment.
REVIEW QUESTIONS
A leased-fee estate is an interest controlled by the
a. mortgagee. b. management company.
c. landlord. d. tenant.
a. mortgage. b. lease.
Which is the most common form of ownership?
a. Severalty b. Joint tenants
c. Tenants by the entireties d. Tenancy in common
REVIEW QUESTIONS
A leased-fee estate is an interest controlled by the
a. mortgagee. b. management company.
c. landlord. d. tenant.
a. mortgage. b. lease.
Which is the most common form of ownership?
a. Severalty b. Joint tenants
c. Tenants by the entireties d. Tenancy in common
REVIEW QUESTIONS
A condominium is known as
a. tenancy in common. b. partial ownership.
c. joint tenancy. d. a type of special ownership.
Which is NOT a form of a legal description?
a. Metes-and-bounds method b. Special warranty deed
c. Monument system d. Government survey system
REVIEW QUESTIONS
A condominium is known as
a. tenancy in common. b. partial ownership.
c. joint tenancy. d. a type of special ownership.
Which is NOT a form of a legal description?
a. Metes-and-bounds method b. Special warranty deed
c. Monument system d. Government survey system
REVIEW QUESTIONS
MODULE 3
APPRAISAL PROCESS
VALUATION PROCESS
c) Floor Plan of the building
d) Tax Declaration of land & building
e) Tax Receipts
2) Pinpoint Location
d) Base Topographical Map (Bureau of Technical Maps)
3) Check/Verify Title/s
Inspect properties
b) Improvement (building features, age, condition)
c) Neighborhood (HABU Analysis)
Apply Approaches to Value
a) Market Data Approach
7) Write Report
PROCESS FLOW
MODULE 4
APPROACHES TO VALUE
MARKET DATA APPROACH
Substitution
properties that are comparable to the property appraised.
a. Direct Comparison Method (Actual Sales)
i) Describe and classify subject property
ii) Establish time period
iii) Determine Market area
iv) Gather Sales data
v) Analyze & modify sales data gathered
vi) Compare and adjust for differences
vii) Distill a single figure from an array of indicated prices
b. Inferential/Rectification Method (Opinion Survey)
- Gather opinion of values from reliable sources such as Real
Estate Appraisers, Brokers, etc.
on the knowledge and familiarity of the area being
surveyed.
APPROACHES TO VALUE
c) Development Approach
- Valuation of rawland properties
For a property to be a rawland, it should have the ffg.
characteristics:
- Suitable for development (flat, economical to develop)
- Ripe for development (per capita income able to support selling price;
successful subdivision within the vicinity/locality
* Weakness of the approach : Availability of sales data
MARKET DATA APPROACH – Direct Comparison
SUBJECT OF APPRAISAL
LOCATION
Corner Abby & Kensington Sts., Hillsborough Pointe, Cagayan de Oro City
CHARACTERSTICS
DATE OF APPRAISAL
October 8, 2014
MARKET DATA ANALYSIS
TYPE OF DATA
Islington St. cor. Roman St., H. Pointe, CDOC
Kensington Street, Hillsborough Pointe, CDOC
Abby Street, HillsboroughPointe,CDOC
MARKET DATA APPROACH – Opinion Survey
SUBJECT OF APPRAISAL
LOCATION
Corner Abby & Kensington Sts., Hillsborough Pointe, Cagayan de Oro City
CHARACTERISTICS
DATE OF APPRAISAL
October 8, 2014
RAWLAND VALUATION
APPROACHES TO VALUE
2) COST APPROACH
Substitution
> Estimate Replacement cost New (RCN)
> Arrive at the depreciated value of improvement using
straight-line method of depreciation and cost-to-cure
technique.
> Depreciated value of improvement is added to the Value of
Land.
a. Quantity Survey Method – includes a detailed inventory of all
materials, labor including indirect costs. Used by Engineers
& Architects.
Quantity Survey Technique. Use of installed prices of various
building materials.
c. Cost per Sq. Meter – is a product of Quantity Survey & Unit
Cost in Place methods. Established cost per area is
multiplied to the total floor area.
COST APPROACH – Sample Problem
Pine Street, P.N. Roa Valley Subd., Cagayan de Oro City
Land Area (Sq.M.)
Floor Area (Sq.M.)
(
APPROACHES TO VALUE
Anticipation
- Used in the valuation of income generating properties, such
as: Retail store properties, apartments, shopping centers,
office buildings, hotels, leased commercial & industrial
buildings
* Weakness of the approach : Selection of rates
INCOME CAPITALIZATION APPROACH
DIRECT CAPITALIZATION
It applies an overall rate, or all risks yield, which when
divided into a single year’s or stabilized net operating
income, produces a value indication.
Used in particularly, well-evidenced markets.
Basic Formula: Income/ Capitalization Rate
Example 1:
Income per year is P 3,000,000.00; Capitalization rate is 6%
Value = P 3,000,000.00/6% = P 50,000,000.00
DIRECT CAPITALIZATION
Direct Capitalization Method
Land Area (Sq.M.)
220
Building
2-storey commercial building; Average cost grade; Remaining Econ. Life – 40 years
Floor Area (Sq.M.)

Recapture rate = 1 / Remaining Econ. Life
Capitalization Rate = 3% + 2.5% = 5.5%
= 1/40
Value =
914,400.00
YIELD CAPITALIZATION
It considers the time value of money, and is applied to a
series of net operating incomes for a period of years.
A method called discounted cash flow analysis (DCF) is an
example of yield capitalization.
1
2
3
4
5
n
I1
I2
I3
I4
I5
pwf x I1
pwf x I2
pwf x I3
pwf x I4
pwf x I5
pwf x RV
Where: r = rate n = period (year)
pwf x In
Discounted Cash Flow (DCF) Analysis
A 2-storey commercial building has a Net Operating Income per year of P 12,000,000 with an
increment of 10% per year. Compute the value of the property today assuming a 10 year cashflow.
Lot area is 3,000 sq.m. at P 12,000 per sq.m.
Building Value at 10th year is estimated at P 57,600,000. PV Rate = 12%
YEAR
Php99,870,462.14
ADD:
VALUE OF LAND (Today) = 3,000 m2 x P 12,000/m2 x 0.32197
Php11,590,920.00
=P 57,600,000 x 0.32197
MODULE 5
BUYER–SELLER CURVES
MARKET PRICE
VALUE PARAMETERS
OVER APPRAISAL
VALUATION EMPIRICAL FORMULAS
MODULE 6
One of the factors that has impact on real estate value is the availability of credit.
The availability of debt money also influences real estate development and consequently the value of real estate.
When credit is plentiful, loans are easy to obtain, and the availability of money results in an active market.
When credit is scarce, illiquidity occurs, and prices often decline because only a few people can pay cash or qualify to borrow or find a bank to loan them money.
Decrease or increase in interest rates; decline in interest rates tends to expand the borrowing power of many people.
REAL ESTATE FINANCE AND ECONOMICS
LAMP2 Component 4 Canned Presentations 2010 ver
It is therefore, important that real property appraisers understand –
the basic impact of monetary and fiscal policy that impact the price and supply of money;
understand and differentiate between money and capital markets;
understand the basics of real estate finance including the basic terms, types of loans, and various forms of mortgages
in order to efficiently proceed through the appraisal process.
REAL ESTATE FINANCE AND ECONOMICS
REAL ESTATE FINANCE
Real estate transfers usually involve the use of money as opposed to other assets.
Also, most real estate acquisitions involve both the buyer’s investment in the property as well as the use of borrowed funds for the balance.
The buyer’s contribution is called equity, whereas the borrowed money is called a mortgage.
Mortgages are generally considered to be capital instruments because payback periods are usually 10 years or more.
Original Loan Amount
The original loan amount is the face amount of the original loan.
Equity
Equity is the down payment or the cash paid by the buyer.
Amortization
Amortization is the process of retiring a mortgage or debt over a specified time period.
An amortization usually calls for the systematic repayment of principal plus interest at some specified rate.
MORTGAGE FINANCING TERMS
Interest
Interest represents the money earned for the right to use capital. Mortgages are generally paid on a compound interest method in which interest is paid each month on the outstanding balance at the contractual interest rate.
Payment
Payment is also known as debt service.
A payment on an amortizing mortgage is comprised of both interest and principal. Dividing the annual debt service by the original loan amount equates to the mortgage constant. For instance, if a mortgage payment is P13,000 per month, or P156,000 per year, and if the original loan amount was P2,000,000, the annual constant is .078 (P156,000 ÷ P2,000,000).
Loan-to-Value
The loan-to-value (LTV) ratio is a percentage of the original or proposed loan to the value of a property (loan amount ÷ property value).
Mortgages are usually based on a loan-to-value concept that protects the lender from loaning too much on a property.
If a lender has a program that loans 70 percent LTV, and the property value is P1,000,000, the maximum loan will be P700,000. The remaining P300,000 is derived from a down payment (equity) or some form of other financing.
BSP regulation allows an LTV ratio up to a maximum of 80%.
MONETARY AND FISCAL POLICY
When real property is sold, a defined interest in real estate is exchanged for a defined amount of money.
Usually, the money exchanged is free to float in an open market, competing for other goods and services.
Most of the time, a portion of the money used to acquire a real property comes from borrowed funds, most often from banks or other traditional lending institutions.
Money should not be viewed as a fixed, static commodity, but rather one that is constantly changing in its availability and cost.
The Philippines operates on a fractional reserve banking system in which deposits are made to banks, and the banks lend from the deposits.
Although most of the deposits are loaned to various customers, the banks are required to keep some of the deposits in reserve.
Loans and reserves are directly influenced by monetary policy. The supply and cost of money is significantly affected by the policies issued by the Bangko Sentral ng Pilipinas (BSP).
MONETARY AND FISCAL POLICY
CREDIT REGULATION DEVICES
Discount Rate
The discount rate is the rate at which member banks can borrow funds from the BSP to loan to other customers.
Banks compete in the open market for deposits and must pay a certain level of interest. Banks also must charge customers higher rates than the rates being paid for deposits so that profit can be made.
If the BSP lowers its discount rate, banks are allowed to pass the savings onto customers through lower interest rates.
This spurs economic demand since the cost of acquiring borrowed funds has been lessened. Conversely, if the discount rate is increased, credit tends to become tight, and economic activity declines.
An economy that is expanding too rapidly may lead to inflationary conditions. The BSP is constantly trying to maintain a balance between economic growth through lowering rates and controlling inflation through raising rates.
CREDIT REGULATION DEVICES
Reserve Requirement
The reserve requirement is the percentage of deposits that must be retained by banks.
If the reserve requirement is increased, credit tends to tighten. Because of the limited amount of available funds, interest rates tend to rise, and economic activity decreases.
If the reserve requirement is lowered, more funds are made available for borrowers. Interest rates tend to come down, and economic expansion occurs.
Again, a balance between economic expansion and inflation control is the ultimate goal of the BSP.
Effective May 30, 2014, Reserve Requirement was adjusted as follows: a) Commercial/Universal Banks – 20% b) Thrift Banks – 8% c) Rural Banks – 5%
FISCAL POLICY
The government’s management of revenues (taxes) and expenses (appropriations) is called fiscal policy.
The Philippines’ fiscal policy is managed by the Department of Budget and Management (DBM).
The budget management and fiscal spending also affect interest rates.
Generally, the higher the amount of debt, the higher the inflation rate, which means the higher the interest rate.
Conversely, the lower the debt amount for the nation, the lower the inflation rate and the lower the interest rate.
MONEY MARKETS
Money markets are financial vehicles with traditional maturities or investment periods of less than one year.
Some examples of money market instruments are short-term certificates of deposit (a bank’s CDs), Treasury bills (short term government securities), and commercial paper (corporate promissory notes).
Money market instruments tend to influence short-term financing rates, such as loans for construction and/or development of real estate.
CAPITAL MARKETS
Capital markets include financial vehicles with usual maturities of more than one year.
Examples of capital market instruments include bonds, stocks, mortgages, and deeds of trust.
Capital market instruments tend to influence long-term financing rates, as well as required rates of return on real estate investments.
THANK YOU.
Step 1Analyze Gross Income
Gross Income = Total Cash Price
Total Cash Price = Selling Price of Developed Lot/Sq.M. x Saleable Area
Where:
Step 2Analyze Expenses
a) Development Cost
b) Administrative Expenses
d) Interest on Working Capital
e) Miscellaneous Expenses
f) Contractor's Profit
URV = Gross Income - Expenses
Step 4Compute Rawland Value/Sq.M.
Annuity Factor = 1 - (1+r)
-n
r
Example:
Mr. A offers his 10.0 hectare rawland in Lumbia, Cagayan de Oro City. Prices of developed lots in
Lumbia is at P 3,500/sq.m. Subdivision developers disclose a development cost of P 800/sq.m.
of the Gross Area; Admin., Sales & other expenses is estimated at P 21,000,000. At how much
should you buy the property given a 5 year development & sales period of 5 years?
Annuity based on a 12% interest rate is 3.60477.
a)Analyze Gross Income
Total Cash Price = Selling Price of Developed Lot/Sq.M. x Saleable Area
TCP = P 3,500/Sq.M. x 10 has x 10,000Sq.M./hectare x 70%
TCP = Php245,000,000.00
b)Analyze Expenses
Total Expense = Development Cost + Other Expenses= Php800/sq.m. x 100,000 sq.m. + Php21,000,000
Total Expense =Php101,000,000.00
=Php144,000,000.00
RV/Sq.M. =Php144,000,000.00 x 3.60477

Documents

Basic Appraisal for Real Estate Broker