Appraisal Service

8/9/2019 Appraisal Service

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APPRAISAL SERVICE

Because much private, corporate, and public wealth lies in real estate, thedetermination of its value is essential to the economic well-being of society.It is the job of the "Professional Appraiser" to determine these values by

gathering, analyzing, and applying information pertinent to a property.

Unquestionably, the professional opinion of the appraiser, backed byextensive training and knowledge, influences the decisions of people whoown, manage, sell, purchase, invest in, and lend money on the security of real estate. And because the appraiser is trained to be an impartial thirdparty in the lending process, this professional serves as a vital "check in thesystem," protecting real estate buyers from overpaying for property as wellas lenders from over lending to buyers. able to offer a completeappraisal service to our customers.HOW LONG DOES AN APPRAISAL TAKE?

The physical inspection of the real property being appraised can take fromapproximately fifteen minutes to several hours, depending upon the size andcomplexity involved.

After the initial inspection of the property, the appraiser spends time touringthrough the neighbourhood or area. The purpose of this tour is to search forcomparable sales (other properties that are similar to the property beingappraised) that have sold within the last six months to a year or so. Whenthe field work is finished, the appraiser completes the report. The report canconsist of a short form report (typically under ten pages) to a long narrativereport which can sometimes exceed a hundred pages. A short form reportusually takes between three to six hours to complete. A narrative report cantake weeks or sometimes even months, depending upon the complexity of the assignment.

WHERE DOES THE APPRAISAL INFORMATION COME FROM?

The appraiser gets his information from a wide variety of sources, includingthe local Multiple Listing Service, local tax assessors records, local realestate professionals, county courthouse records, private public record datavendors, interviews with sellers and buyers, appraisal data co-operatives andhis or her own personal knowledge or office files from previous appraisals.

The quality and reliability of each piece of information is considered by theappraiser.

WHAT DOES THE APPRAISER LOOK FOR? Typically, an appraiser needs to document the condition of the property,


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both inside and out, from the layout and features to degree of modernizationincluding any updates as well as the overall quality of construction. Thisinformation will help to assist the appraiser throughout the valuation andcomparison process.

The appraiser will generally consider only permanent fixtures and realproperty.

THE APPRAISAL PROCESS

1. Study pertinent documents:a. Copy of the titleb. Certified Geodetic Engineers Planc. Floor plan of the buildingd. Tax Declaration of land/buildinge. Tax Receipts

2. Pinpoint the Location this is very criticala. Appraisers Plottingb. Cadastral Reference Mapc. Certified Geodetic Engineers Survey Pland. Base Topographical Map:

i. From the titleii. Based on the tie line

iii. Plot the base topographical mape. Records from the Courts, National Land Title and Deeds

Registration3. To check and verify Titles verify preceding titles and the manner of

conveyance.

Note: verify up to the mother title

4. Inspect the Property/ies:

Basic elements:

a. Neighbourhood Analysisb. Site Analysis

i. Frontageii. Depth

iii. Elevation and topographyiv. Condition of the fronting street

c. Improvement Analysis5. Apply the approaches to value6. Correlate Values and make Financial Estimates

- Determination of the range bracket


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7. Write the Appraisal Report

The appraisal process is an orderly and concise method of reaching anestimate of value. The process has six major steps which include: definitionof the problem, preliminary survey and appraisal plan, data collection and

analysis, application of the three approaches to value, reconciliations of value indications, final estimate of defined value. This process assists theappraiser in reaching a sound conclusion. The major phase of this processinvolves the application of the three approaches to value which include theMarket Data Approach, the Cost Approach and Income Approach. The threeapproaches are reconciled and the value via most applicable approach, inthe opinion of the appraiser, is selected as the final estimate of value. Inmost residential appraisals, particularly those of single or two familydwellings, the direct sales comparison or market approach best reflects theactions of buyers and sellers and is the most convincing and defendableapproach to value.

COMPARABLE SALE

A comparable sale is a property, which is similar to the subject property inmost respects, is located in a similar (nearby) location, and has sold recentlyat arms length. The selection of comparable sales is in most residentialappraisals, the single most important determining factor in establishingvalue. It is the appraisers responsibility to adequately research the local realestate market and determine which comparable sales best represent thevalue characteristics of the subject property.

ARMS LENGTH TRANSACTION

An arms length transaction is one in which both seller and purchaser actcompletely independently of each other and have no connection orrelationship to each other.

MARKET DATA APPROACH TO VALUE

Market value or fair market value is the most probable price that a propertyshould bring (will sell for) in a competitive and open market under allconditions requisite to a fair sale, the buyer and seller, each actingprudently, knowledgeably and assuming the price is not affected by unduestimulus. Implicit in this definition is the consummation of a sale as of aspecified date and the passing of title from seller to buyer under conditionswhereby: (1) buyer and seller are typically motivated; (2) both parties arewell informed or well advised; (3) a reasonable time is allowed for exposureto the open market; (4) payment is made in terms of cash or in terms of


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financial arrangements comparable thereto; and (5) the price represents thenormal consideration for the property sold unaffected by special or creativefinancing or sales concessions granted by anyone associated with the sale.

GENERAL STEPS:

1. Research on Market Data from :

a. Registered salesb. Fellow Brokers/Appraisersc. Multiple Listing Systemd. Advertisemente. Assessors Office

2. Validate market data by ocular inspection to determine physicalattributes of the comparatives.3. Apply adjustment factors:

a. Areab. Plottagec. Topographyd. Quality of Neighborhoode. Utilities and facilitiesf. Time Element

4. Estimate indicated value

RELIABILITY OF DATA

Not all registered sales are reliable data since a great majority may beunderstated in price for capital gains tax purpose. Only property declaredand not understated sales should be considered. Some of the commonlyunderpriced sales are:

a. Transactions between relativesb. Involving foreclosuresc. As a consequence of expropriation, ord. Which are obviously understated based on appraisers experience and

judgment

Prices quoted from advertisements and offerings are usually 10% to 15%higher than what the sellers are actually willing to accept, to allow for usualbargaining and/or brokers commission.


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ADJUSTMENTS

Adjustments are not the appraisers invention. They are manifestations of buyers and sellers reaction in the open market.

A 15% to 20% value adjustment is usually assigned to a corner lot. Relativelylarge parcels or smaller lots may suffer a 10% reduction (resistance) in valuesince these lots are over-adequate or inadequate in size and utility whencompared with typical-sized lots that can be used to their highest and bestuse.

COST APPROACH TO VALUE

The cost approach combines an estimate of land value with an estimate of

depreciated reproduction or replacement cost of the improvements. Theprinciple of substitution is the basis of the cost approach, in that no rationalperson will pay more for a property than the amount for which he can obtain,by purchase of a site and construction of a building, with undue delay, aproperty of equal desirability and utility.

USE OF THE COST APPROACH

1. Appraisal of special purpose properties such as churches, funeralhomes, schools and residential properties with unique or highlyindividualized structures.

2. Appraisal of new proposed construction representing the highest andbest use of the land.

STEPS IN COST APPROACH

1. Estimate the value of land as if vacant (by market data)2. Estimate depreciation from all causes.3. Deduct estimated depreciation from present reproduction cost to

arrive at indicated value of improvement4. Add land and improvement value to develop indicated property value.

REPRODUCTION COST

This is the cost of duplicating the improvement at current price, using thesame materials, construction standard, layout and quality of workmanship. Itis estimated by one of the following methods:

1. Quantity Survey Method. This is similar to a contractors procedure of determining the quantity and grade of each type of material used,


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estimating labor required, and applying the unit cost to the materialsand labor quantities.

2. Unit-in-Price Method. This is a mathematical compression of thequantity survey method and is based on the use of installed prices forvarious building parts, using units convenient to simply such as square

meter.For example:

Flooring: Total area x cost/ square meter = total cost of flooring

Roofing: Total area x cost/ square meter = total cost of roofing

3. Per Square Meter Method. Estimates are reached by dividing the totalbuilding cost of similar structures by the total floor area. This will givethe average cost per square meter of the improvement which is

applied to subject property.

INCOME APPROACH TO VALUE The income approach is based on an estimate of net income from theoperation of an income producing property and the selection of the propertycapitalization rate from market indications of similar properties. The principleof anticipation is the basis of the income approach and affirms that value iscreated by the expectation of benefits to be derived from possession,operation and/or capital gain at resale.

BASIC INVESTMENT PRINCIPLES

An investor in income or commercial property expects to receive threethings:

1. Rate of interest on that part of investment which is represented byland.

2. Rate of interest on that part of investment represented byimprovement.

3. Received back in instalments that part of the property which is wearingout in the course of time the improvements.

STEPS IN THE INCOME APPROACH

1. Development of operating statement to arrive and annual net income.2. Selection of interest rate.3. Capitalization process.

ILLUSTRATION OF OPERATING STATEMENT


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METHOD OF ESTIMATING PHYSICAL DEPRECIATION:

1. Over-all or Simple Age-Life Method.

This involves an estimate of effective age of the improvement by

deducting remaining economic life from total economic life. The following is an example:

Present Reproduction Cost PhP 5,000,000.00 Total Economic Life 50 yearsRemaining Economic Life 40 yearsEffective Age 10 years

Total Accrued Depreciation is 20% (10/50) of PhP5 Million or PhP1Million.

2. Modified Age-Life Method. This involvesa. Estimating the cost to cure all curable itemsb. Deducting the sum of costs of curable items from reproduction cost; andc. Deducting further from the remaining reproduction cost a percentage of

effective age viz-a-viz total economic life.

Present Reproduction Cost PhP5,000,000.00Less Curable Items 200,000.00

______________ PhP4,800,000.00

Less Age-Life (10/50 x PhP4.8 Million) 960,000.00 ______________

Present worth of improvement PhP3,840,000.00

3. Observed Condition-Breakdown Method This involves an estimate of the costs of the various factors for depreciation. The sum of the estimates is then deducted from present reproduction cost. Lossin the value may arise from four causes:a. Curable physical deterioration such as painting, rain gutters, sagging

ceilings, warped floorings, etc.b. Incurable physical deteriorationc. Curable functional obsolescenced. Incurable functional obsolescence

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Appraisal Service