Knowing how to appraise the value of real estate properties is very important on the part of the Real Estate Broker to be able to recommend the best property at a given budget as well to the buyers themselves so they can make the right investment decision. The skill in determining values of properties help the real estate brokers/agents determine saleable properties and organize their arsenal of selling prowess to prioritize on these saleable properties. As important would be the buyers who should also get to know the real value of what they have bought.
There are three approaches for determining value:
1) The cost approach
2) Sales comparison approach
3) Income Approach
|In cost approach, the value of a property can be estimated by summing the land value and the depreciated value of improvements. The land value is usually based on the prevailing market value in the area distinct from the zonal value set by the government. For house and lot properties, it is best to separate the land from the building/improvement and add them up together after knowing its individual values. For example, if you want to know the value of a house and lot in a subdivision in Mactan, a 3 bedroom house, 5 years old, with a floor area of 80 square meters and a lot area of 120 square meters. First, you will have to estimate the prevailing selling price of middle end subdivision in the area. Assuming the average is P6,000 per square meter, the value of the land would be 120 X 6,000 = P720,000.00 Then, estimate the value of the house. The acceptable prices ranges are as follows:
Low Cost housing : P16,000.00 to P25,000 per square meter
Middle End housing: P26,000.00 to P35,000 per square meter
High End housing: P36,000.00 to P45,000 per square meter
So, for the lot area of 80 square meters X P30,500.00 average price per square meter = P2,440,000.00
Then add the value of the lot = P720,000 = P3,160,000.00 excluding VAT which is 12%
Since the example above states that the property is already 5 years old, depreciation value shall then be deducted as follows:
Depreciation = P3,160,000 / 50 years = P63,200.00 cost of depreciation per year.
Depreciation cost for 5 years = P63,200.00 X 5 = P316,000.00
Therefore the appraised value of the property in this example shall be P3,160,00.00 less P316,000.00 depreciation = P2,884,000.00
The Sales Comparison Approach
The approach recognizes that a typical buyer will always compare by asking prices and seek to purchase the property that meets his or her wants and needs for the lowest cost possible. The actual selling prices happening in the same local area can be obtained from public records, buyers, seller, real estate brokers and/or agents, appraisers, and others. Important details of each comparable sale are described in the appraisal report by licensed real estate appraisers. Since comparable sales are not always identical to the subject property, adjustments are sometimes made for date of sale, location, style, bathrooms, square foot, site size, etc. The main idea is to simulate the price that would have been paid if each comparable sale were identical to the subject property.If the adjustment to the comparable is superior to the subject, a downward adjustment is necessary. Likewise, if the adjustment to the comparable is inferior to the subject, an upward adjustment is necessary. From the analysis of the group of adjusted sales prices of the comparable sales, the state licensed real estate appraiser selects an indicator of value that is representative of the subject property.
For example, the subject property in comparison has a bigger lot area, then compute the difference and deduct from the price to make an upward adjustment. If the subject property has a smaller floor area, then compute the difference from the price to make a downward adjustment. You will also have to compare the basic facilities, amenities, and other features of the property that make it more valuable than the other property. A careful balancing of all the variables is important in arriving at a good appraisal value based on sales comparison approach.
The income capitalization approach is used to value commercial and investment properties. Because it is intended to directly reflect or model the expectations and behaviors of typical market participants, this approach is generally considered the most applicable valuation technique for income-producing properties, where sufficient market data exists to supply the necessary inputs and parameters for this approach.
In a commercial income-producing property this approach capitalizes an income stream into a value indication. This can be done using revenue multipliers or capitalization rates applied to the first-year Net Operating Income. The Net Operating Income (NOI) is gross potential income (GPI), less vacancy and collection loss (= Effective Gross Income) less operating expenses (but excluding debt service, income taxes, and/or depreciation charges applied by accountants).
Author: Engr. Manuel R. Arengo Jr.
Licensed Real Estate Broker No. 1185
Tel. (6332)5838162 Mobile No. 0922-8320056