VALUATION PROCEDURE AND RESEARCH
1. International Valuation Standards Committee’s (IVSC) vis-à -vis the Philippine Setting (PVS) lay down terms and concepts that are fundamentals to all appraisal/valuation.
Real Property, in the legal sense may be defined as ownership rather than the physical entity of land, buildings and tangible personal items. In this context, the IVSC identifies four (4) general types:
Real Property Personal Property Businesses Financial Interest
2. It is significant to the Appraisal/Valuer
and the Users of appraisal/valuation services that appropriate methods be carefully understood, competently applied and adequately explained.
By meeting this objective, Appraisal/Valuers contributes to the soundness and reliability of Market Value estimate and the well-being of the markets in which they practice.
3. Promotion of understanding and avoidance of abuses in the market requires that the Appraiser/Valuer and the Users of appraisal/Valuation services should carefully distinguish between the types of property. Failure to do so can result in improper or ill-advised market decisions and misrepresentations of reported values.
Over or under-reporting of value is a common result where property type are confused or mixed. Real Estate Appraisers/Valuers recognized the complexities of market and the real estate bought and therein.
4. Difference in real estate markets and between individual properties are reflected accurately and reliably were generally accepted valuation principles (GAVP) are followed.
It is recognized that the appraisal/valuation of real property requires special education, training and experience. Real Property is valued as a distinct “entity�, i.e. as physical assets to which particular ownership rights apply.
5. Market Value of real property is always valued in accordance with International Valuation Standard 1 (IVS 1). When a real property value estimate is incorporated as an element of a business valuation, it is a Market Value estimate of the property.
6. It is important to stress, that
Appraisers/Valuers are trained in such procedures and that the procedures are included in he generally accepted practices. In application, Appraisers/Valuers commonly apply several procedures in each valuation and then reconcile the result into final indication of Market Value (MV) or other specified value.
7. An Appraisal work present the licensed
Real Estate Appraiser’s opinion of the property’s credible monetary value in the open and competitive market. In developing a final opinion of value the Appraiser used several approaches to appraisal/valuation (market data/sales comparison approach, cost approach and income capitalization approach.)
The method in which the Appraiser applies a particular approach may be determined by the type of the property being appraised and the factors/forces which may affect the property value and its significant.
8. The appraisal beings with specific assignment of the Appraiser. From that aspect, every appraisal requires the organized collection and analysis of data specific data pertaining to the Subject general data about the surrounding area/vicinity and data applicable to the approached being used should researched.
9. There are Steps in Appraisal/Valuation Process that we have to observe/follow-
1st – Definition or Identification of the Problem 2nd – Determination f the Scoop of Work
a. Property Identification/Identification of Real Estate
Complete legal description of the subject Plotting of the property title to determine the shape and orientation to the cardinal direction (north, east, west and south) May use the tax map of the Assessor’s Office, subdivision plan if property is within a subdivision
ďƒź Due diligence should be done if property to be appraised will be used as mortgage or to be brought by a prospective purchaser ďƒź Verification of adjoining lot owners, if applicable ďƒź Have proper identification of the property although there are assumptions and limiting conditions
b. Identification of Property rights to be appraised Fee-simple-absolute ownership (bundles of rights) Leased fee or leasehold interest Interest in right-of-way/easement Registered rights/title in partnership/corporation or join with others
C. Definition of the Value to be estimated/appraised
ďƒź Understand as to the kind of value being appraised like: Special Value, Just Compensation, Typical Market Value (Exchange Value), Market or Economic Rent, Investment Value, Owner’s Value in the like
d. Purpose and intended Use of the Appraisal/Valuation
ďƒź It should be agreed by the Appraiser and the Client on what the assignment should accomplish ďƒź Scope of work on the assignment which should be agreed by the Appraiser and the Client as to the purposed/intended use such as: payment of just compensation, selling or buying, market rent, etc.
e. Effective Date of Value Estimate or Opinion of value
ďƒź Because of constant movements/changes of real estate value an opinion of value is suitable only on the date it is specified ďƒź The effective date is usually time of inspection or the date of the past in the case of expropriation assignment, date when he appraisal report was created, or may be some future date
f. Assumption and limiting Conditions of the Appraiser/Valuer
ďƒź The purpose thereto is to protect the Appraiser and to inform and protect also the client and other users of the appraisal report
3rd – Preliminary Analysis, Data Selection and Collection Once the Appraiser knows which appraisal methodology/approach(es) will be used the information/data needed can be listed/itemized such as:
● Appraisal/Valuation of vacant lot or House and Lot (Residential Property)
○ Market Data Comparable lots through Data from the Client, Residents within the vicinity of the Subject, Fellow licensed Real Estate Brokers and Appraisers ○ Advertised properties (newspaper, internet, etc.) ○ Acquired assets listed by banks and other financing institutions ○ Government Offices like BIR, ROD, Assessor’s Office, etc.
● Valuation of income generating (Residential Property) o Determination of the Potential Income, allowance for vacancy and bad debts based on actual experience ○ Interest rates and recapture rate to be used ○ Capitalization Method to be used (Direct, Residual or Annuity) ○ Determine the Land and Building Value to find out if the property is in its highest and best use (HaBU)
Appraiser should • be familiar enough with the sources of the information to state exactly what sources • know the types of data needed and should be collected and recorded for future use and data’s correctness should also be verified • complies general data on the geographic and economic features of the country, region, city and neighborhood
• verify property location as influence by both natural and economic factors • specific data on the Subject-physical description • gather comparable sales date, cost data or income and expenses if appropriate • double-checked against other sources (This is the most critical in the appraisal assignment because it will form the basis for the Appraiser’s opinion of the property)
4th – Highest and BestUse(HaBU) Analysis or Determination of HaBU
Understanding or Interpretation of relevant data performing the HaBU analysis that reflects on the market forces/factors which influence the Subject to be able to establish the property’s most profitable use on which to base the final opinion of value
ďƒź evaluating the physical, legal and locational features present in the Subject and reflect on the extent to which those attributes/features perform the requirements of the marketplace (the Subject HaBU satisfy the human need that as revealed by the economic indicators as supply, demand and absorption) ďƒź Appraiser may conclude that the HaBU of the land is not its present use
5th – Form opinion of Land Value
Physical features and facilities of the Subject Site are compared with those of similar properties within the vicinity having the same HaBU
Adjustment are made for many significant differences and the adjusted prices of the properties most like the Subject Site are use form an opinion of the Subject’s value
6th – Application or Form opinion of
Value by each of the 3 Approaches to Value (MDA, CA, ICA)
7th – Reconciliation of Value for Final Value Estimate or Opinion of Value Appraiser should
• connection the information and decide what conclusions can be drawn from the volume of collected factual data •
never just averages differing/conflicting value determinations
• find out the figure that most truly reflects the value wanted based on the most relevant approach, analysis and judgment
8th – Reporting of Defined or Final Opinion of Value
Appraiser/Valuer can report the opinion of Value to the client in a written standard Appraisal Report (Letter/Certification, Short Form or Narrative Appraisal Report)
10. Comparable data – related to properties that
have characteristics similar to those of the property being valued (the subject property) . Data are generally used in valuation analysis to develop value estimates. Elements of Comparison are specific characteristic of properties and transactions that cause the prices paid for real estate to vary. Elements of Comparison like: property rights conveyed, financing terms, conditions of sale, market conditions, location, and economic characteristics.
11. Highest 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.
12. Units of Comparison – a factor produced by two components which reflects precise differences between properties and facilities analysis in the three approaches to value, e.g price per sqm./sq.ft ratio of property sales price to its net income.
13. Value in its broadest sense – is defined as the relationship between something owned and an individual or individuals who wish to own it. Market value has evolved in concept and definition under the influence of market forces and in response to various principles of real estate economics. In market Value situation it is also common for the independence or external status of the Appraiser/Valuer to be established in an affirmative statement.
14. The Valuation Process reflects the generally
Accepted Valuation Principles. Market Value applications require the development of valuation solely on the basis of market data. Appraisal/Valuation includes all the research, data, reasoning, analysis and conclusions necessary to arrive at the value estimate. It is necessary under the GAVP that adequate records be kept to demonstrate that a Valuation Process was followed and the conclusions are credible and reliable.
15. It is appropriate and customary that the client’s instructions shall be stated in writing in a letter or contract of services. The agreement or contract of services sets the business relationship between the Valuer and the Client, the fees, the payment terms, special directives and limitations and identification of the Standard to be applied and other pertinent matters. The Appraiser/Valuer and the Client should agree on the context and the scoop of the valuation (Definition of the Assignment or Problem)
16. Identification of: Real Estate involved in the valuation Property rights to be value Intended use of the valuation date of which the value estimate will apply the intended report
and
Scope/Extent of valuation and the report Contingent and limiting conditions which the valuations is based
17. In the performing the Preliminary Analysis, data selection and collection the Appraiser/Valuer becomes familiar with the general market and subject property, thereby proceeding to a position from which more specific analysis can be made. General: Economic Data are collected at the neighborhood, city, regional and even national and international levels, depending on the property involved.
18. Social, economic, governmental factors that may have bearing on MV are examined to better understand the particular property. Any other specific forces that must be considered are investigated detail. Property: Specific data or more directly relevant to the property being valued and to comparable properties are also gathered and examined. Supply and demand data on the most probable market. - Market are analyzed to determine market trends, relationships between supply and demand, absorption rates and other market - specific information.
19. Basic Determinants of HABU includes the answer to the following questions:
Is the suggested use a reasonable and likely one? Is the use legal or is there a reasonable likelihood that a legal entitlement for the use can be obtained? Is the property physically suited to the use or can it be adapted to the use? Is the suggested use financially feasible? And Of those uses the meet of the 1st four tests, is the selected HABU the most productive use of the land?
20. Methods used for land valuations – Their applicability differ according to the type of value estimated and availability of data. It is reasonable for the Appraiser/Valuer to consider each Approach, unless there are restrictions or other compelling reasons for a particular omission such as: lack of supporting data. Each approach is based in part, on the Principe of Substitution, which hold that when several similar the lowest price attracts the greatest demand and widest distribution.
21. Simply, the price of a property is established by a given market is limited by the prices commonly paid for properties that complete with it for the market share, the financial alternatives or investing money and cost of building a new property or adopting old property to a use similar to the subject property.
22. In the appraisal process, reconciliation of the value indicated by each of the three (3) approaches to value is significant. ďƒ˜ In Market Data or Sales Comparison Approach (MD/SCA), the utilities of the Comparable properties were compared with the Subject and Sales Princes were adjusted to derive an estimate of value
ďƒź
Formula: Value of Comparable add (+)/or deduct (-) Adjustment= MV
In Cost Approach (CA), the cost of Producing/replacing the structure/improvement net of depreciation is added (+) to land value (LV) Formula: RCN less (-) Depreciation Add (+) land value = Market Value
In income approach, Value was based on income the property should be capable of earning Formula: NOI/CR = Building and Land Value
23. The value reached by the different techniques well almost be never be the same, yet the Appraiser should make a final determination of the single best supportable estimate of value. In practice, it Appraiser reached the same value indication for all 3 approaches; the credibility of the Appraisal Report could be seriously questioned.
24. Absorption Rate – a rate at which the units or lots are sold in the market. It measures on how fast the subdivision lots are sold or absorbed by the market. Also refers to the amount or number a particular development can affectively and reasonably accommodate in the market.