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Basic Appraisal for Real Estate Broker

Sep 26, 2015

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Real Estate Broker Review

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
CREASAR, GCR REALTY & EDUCATION CENTER Engr. Chrysler B. Acebu, CPV
REAL ESTATE APPRAISAL
- MARKET DATA APPROACH
CREASAR, GCR REALTY & EDUCATION CENTER Engr. Chrysler B. Acebu, CPV
MODULE 1
INTRODUCTION TO
PROPERTY APPRAISAL
CREASAR, GCR REALTY & EDUCATION CENTER Engr. Chrysler B. Acebu, CPV
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.
CREASAR, GCR REALTY & EDUCATION CENTER Engr. Chrysler B. Acebu, CPV
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.
CREASAR, GCR REALTY & EDUCATION CENTER Engr. Chrysler B. Acebu, CPV
“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.
CREASAR, GCR REALTY & EDUCATION CENTER Engr. Chrysler B. Acebu, CPV
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
CREASAR, GCR REALTY & EDUCATION CENTER Engr. Chrysler B. Acebu, CPV
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.
CREASAR, GCR REALTY & EDUCATION CENTER Engr. Chrysler B. Acebu, CPV
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
CREASAR, GCR REALTY & EDUCATION CENTER Engr. Chrysler B. Acebu, CPV
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
CREASAR, GCR REALTY & EDUCATION CENTER Engr. Chrysler B. Acebu, CPV
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.
CREASAR, GCR REALTY & EDUCATION CENTER Engr. Chrysler B. Acebu, CPV
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.
CREASAR, GCR REALTY & EDUCATION CENTER Engr. Chrysler B. Acebu, CPV
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.
CREASAR, GCR REALTY & EDUCATION CENTER Engr. Chrysler B. Acebu, CPV
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.
CREASAR, GCR REALTY & EDUCATION CENTER Engr. Chrysler B. Acebu, CPV
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.
CREASAR, GCR REALTY & EDUCATION CENTER Engr. Chrysler B. Acebu, CPV
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.
CREASAR, GCR REALTY & EDUCATION CENTER Engr. Chrysler B. Acebu, CPV
MODULE 2
LEGAL CONSIDERATIONS
IN APPRAISAL
CREASAR, GCR REALTY & EDUCATION CENTER Engr. Chrysler B. Acebu, CPV
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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CREASAR, GCR REALTY & EDUCATION CENTER Engr. Chrysler B. Acebu, CPV
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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CREASAR, GCR REALTY & EDUCATION CENTER Engr. Chrysler B. Acebu, CPV
FUNDAMENTAL DEFINITIONS OF LEGAL INTERESTS
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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CREASAR, GCR REALTY & EDUCATION CENTER Engr. Chrysler B. Acebu, CPV
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.
FUNDAMENTAL DEFINITIONS OF LEGAL INTERESTS
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CREASAR, GCR REALTY & EDUCATION CENTER Engr. Chrysler B. Acebu, CPV
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.
FUNDAMENTAL DEFINITIONS OF LEGAL INTERESTS
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CREASAR, GCR REALTY & EDUCATION CENTER Engr. Chrysler B. Acebu, CPV
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.
FUNDAMENTAL DEFINITIONS OF LEGAL INTERESTS
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CREASAR, GCR REALTY & EDUCATION CENTER Engr. Chrysler B. Acebu, CPV
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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CREASAR, GCR REALTY & EDUCATION CENTER Engr. Chrysler B. Acebu, CPV
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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CREASAR, GCR REALTY & EDUCATION CENTER Engr. Chrysler B. Acebu, CPV
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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CREASAR, GCR REALTY & EDUCATION CENTER Engr. Chrysler B. Acebu, CPV
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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CREASAR, GCR REALTY & EDUCATION CENTER Engr. Chrysler B. Acebu, CPV
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.
LIMITATIONS ON OWNERSHIP OF REAL ESTATE
PUBLIC (GOVERNMENT) RESTRICTIONS ON REAL ESTATE OWNERSHIP
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CREASAR, GCR REALTY & EDUCATION CENTER Engr. Chrysler B. Acebu, CPV
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.
LIMITATIONS ON OWNERSHIP OF REAL ESTATE
PUBLIC (GOVERNMENT) RESTRICTIONS ON REAL ESTATE OWNERSHIP
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CREASAR, GCR REALTY & EDUCATION CENTER Engr. Chrysler B. Acebu, CPV
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.
LIMITATIONS ON OWNERSHIP OF REAL ESTATE
PUBLIC (GOVERNMENT) RESTRICTIONS ON REAL ESTATE OWNERSHIP
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CREASAR, GCR REALTY & EDUCATION CENTER Engr. Chrysler B. Acebu, CPV
LIMITATIONS ON OWNERSHIP OF REAL ESTATE
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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CREASAR, GCR REALTY & EDUCATION CENTER Engr. Chrysler B. Acebu, CPV
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.
LIMITATIONS ON OWNERSHIP OF REAL ESTATE
PUBLIC (GOVERNMENT) RESTRICTIONS ON REAL ESTATE OWNERSHIP
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CREASAR, GCR REALTY & EDUCATION CENTER Engr. Chrysler B. Acebu, CPV
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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CREASAR, GCR REALTY & EDUCATION CENTER Engr. Chrysler…
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