As an Exclusive Buyer Agent (EBA), I always keep on saying that I do not allow my client-buyers to be exposed to properties for sale like canned goods without proper label and full disclosure of contents. This article explains further the mechanics of real estate appraisal, which is one of the requirement in selling a property. In this connection, you may want to check out first my article entitled Property Folder Prep Guide.
This article is a self-help reviewer of Real Estate Appraisers.
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What is a Real Estate Appraiser?
According to the Real Estate Service Act of the Philippines (RA 9646), Real Estate Appraiser is defined as someone who is 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 the report in acceptable written form.
What is an Appraisal?
Appraisal is the process of estimating or making an opinion on the market value of an adequately described property as of a specified date.
What are the factors affecting accuracy of appraisal?
- § Competence of the appraiser
- § Integrity of the appraiser
- § Soundness of the procedure used in the appraisal
- § Availability of the pertinent data
What are the purposes/ functions of appraisal?
For banks/ financing institutions:
- § loans purposes
- § insurance purposes
- § selling purposes
For other purposes:
- § real estate tax assessment purposes
- § zonal valuation purposes
- § merger and consolidation
- § going concern value
- § liquidation purposes
- § joint venture purposes
- § determination of just compensation for eminent domain purposes
- § extrajudicial purposes or to distribute the assets of an estate
Why there is a need for an appraisal?
1. In connection with the transfer of ownership
- § To help prospective buyers decide on offering prices
- § To help prospective sellers determine acceptable selling price
- § To establish a fair basis for exchange of real property
- § To establish a basis for reorganization or merger of business companies
- § To distribute the assets of an estate
2. In connection with financing and credits
- § To arrive at the value of the security offered as collateral for a mortgage loan
- § To provide an investor with a sound basis for deciding whether to purchase real estate mortgage or bond
3. To establish just compensation in condemnation proceeding
- § To estimate value as a whole or before the taking
- § To estimate value after the taking
- § To allocate value between the part taken and damage to the residue
4. To establish a basis for taxes
- § To distribute assets into depreciable items such as building and non-depreciation items such as land and to estimate applicable depreciation rates
- § To determine gift or inheritance taxes
What is Value?
- § As per US Society of Residential Appraisers. “Value is the present worth of future benefits to a typical buyer.”
- § As per American Institute of Real Estate Appraisers. Value (actual cash) is the price property will bring in a fair market, after a fair and reasonable effort has been made to find a purchaser who will give the highest price.
- § In general, value refers to what a willing buyer, not forced to buy, will pay, and what a willing seller, not forced to sell, will accept, after exposing the subject property in a fee and an open market within a reasonable period of time.
What are the types of value?
- § Sale price vs. value
- § Cost vs. value
- § Value in exchange. This refers to the worth of an object relative to other objects with which it can be compared and for which it can be exchange.
- § Value in use. This refers to the use an object is put to, the service it renders, and the wants it satisfies.
- § Market value
- § Fair value
- § Investment value
- § Reversion value
- § Assessed value
- § Condemned value; consequential damage and severance damage
- § Insurable value
- § Loan value
- § Liquidation value
- § Book value
What is Market Value?
It is the highest price in terms of money which a property will bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus.
What are other values derived by appraisal?
- § Insurable value- to serve the need of insured, insurer and adjuster
- § Going concern value- to serve for corporate mergers the issuance of stock, revision of book figures and so forth
- § Liquidation value of price- for forced sale or auction proceedings
- § Assessed value- to establish a uniform schedule and tax roll for ad valorem taxation
- § Condemnation value- for eminent domain case
- § This list does not include all the function of appraisals but does indicate the broad scope of the professional appraiser’s activities.
What is the history of Value Theory?
- § Ancient Romans and Greeks- value of goods absolute, fixed by state and owner
- § Merchantilism- value in exchange affected by law of supply and demand, gold is the source of all wealth
- § Physiocrats- productivity of land, not gold as source of wealth; value created by the utility of an item
- § Adam Smith- natural price, (i.e.) the cost of production is equals the value of an item consuming land, labor, capital and coordinations
- § Austrians- cost of production is unimportant, value is determined by utility of and demand for the last, marginal item
- § Today’s concept- value is not objective and absolute, but is subjective and relative to the forces that create and forces that affect it.
What are the forces affecting value?
- § Utility- usefulness; ability to arouse a desire for possession
- § Scarcity- a relatively short supply; lack of abundance
- § Demand- desire to possess plus the ability to buy; effective purchasing power
- § Transferability- the ability to change ownership or use
What are the forces affecting/influencing value?
Natural Forces - physical resources
- § -location
- § -shape
- § -topography
- § -depreciation
- § -climate condition
- § -soil depth and fertility
- § -size
Social Forces - developed resources
- § Family size and age group distribution
- § Neighborhood stability and attitudes about property
- § Population growth, decline, or shifts at the community, regional and national levels
- § Lifestyles and living standards, often combined with other forces
- § Attitudes about law enforcement, the role of government and individual responsibility
- § Attitudes about development, growth and ecology
- § Attitudes toward public education
- § Income level of neighborhood and community residents
- § Employment opportunities and trends
- § Level of wages
- § Availability of money and credit and interest rate levels
- § Price levels and property tax burdens
- § Personal savings and investment returns
- § General business activity
- § Supply and demand in housing
- § Production of goods and services
- § Zoning and land use regulations
- § Building and safety regulations
- § Environment protection laws
- § Police, fire and health protection services
- § Crime prevention, education and recreation services
- § Public works, power, water, transportation, sewage and flood control
- § Fiscal policy and taxation
- § Monetary policy and controls
- § Government-sponsored urban redevelopment and housing finance programs
- § Regulation of industry and business
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