5 AppraisalProcess MBC2015 PDF

THE APPRAISAL
PROCESS
Maya Bandolon-Cartojano, REC, REA, REB
mayacartojano@gmail.com, www.cartojanorealty.com
6/28/2015 MAYA BANDOLON-CARTOJANO, REC, REA, REB 1

The Appraisal Process is the orderly procedure
used by appraiser to solve a valuation problem
/engagement. Well defined ground rules were
established by professional appraisers for this
procedure. The appraisal process consists of:

THE APPRAISAL PROCESS
1. Clearly defining the appraisal problem

2. Formulating an efficient appraisal plan
3. Collecting and analyzing the pertinent data
4. Applying the appropriate value approaches
5. Arriving at a conclusion of value
6. Reporting the conclusion of value

DEFINING THE APPRAISAL PROBLEM
Any formal appraisal requires: clear and
concise statement of what to be
accomplished. Appraiser define the
questions to be answered and seek the
exact information the client requires.

1. Identification of the property Precise location.
Complete legal description preferred but less
formal street address identity, such as sales,
listings, contract, and other basic information are
acceptable.
2. Property Rights to be Appraised Appraise the
value of all the rights of absolute ownership
(commonly called fee simple). Appraisals
involving less than all the ownership rights are not
uncommon, e.g. the landlord interest, the leased
fee, or other partial interest in real estate. (
Statement of the property rights part of the
appraisal problem)

3. The Date of Value The date the value
estimate applies; Important because real estate
value constantly change. Appraisal conclusion
valid only as of a particular point in time. The
date of value, is the last date of inspection,
normally agreed upon by the client and
appraiser.
Sometime appraisals are needed to estimate

value as of a past or historical date, e.g.
inheritance tax, condemnation and other legal
purposes.
. The Purpose of the Appraisal To
4
estimate the Market Value. Often sought
in the sale and financing of a home. Other
purposes: e.g. replacement cost,
liquidation value, insurable value, going
concern value, tax purposes, loan value,
rental value etc.. Whatever, the purpose,
precise and formal definition must be
stated.

5. The Intended Use of the Appraisal Report
Buyers and sellers, banks and institutions and
public agencies all use appraisals for their own
unique purposes.( sale, lending, property
taxation, or public acquisition.) Each user has
different requirements as to form. Appraiser
must clearly understand the intended function
or use of the appraisal report. The length of the
report is often determined by the intended use
of the appraisal report

FORMULATING THE APPRAISAL PLAN
The second step, develop an appraisal plan.
A well-organized plan increases efficiency.
(scheduling the various tasks in the sequence)
A good plan reduce oversight or errors. Simple
checklist of tasks help especially for complex
engagements.

PLAN EXECUTION OF THE APPRAISAL STEPS
Preliminary inspection of the property
1.
Or the preliminary survey. Preview of
subject property and its neighborhood
helps size up the scope of works. Help
refine tentative plans. A preliminary
survey maybe unnecessary if the appraiser
is familiar with the neighborhood and the
type of property under appraisal.

2.List of Needed Data Itemized all general

and specific data during the planning
phase. Neighborhood and community
particulars, all factual data required for
the subject and comparable properties. If
special reports for engineering or
geological surveys are needed, these
should be noted.

Outline and Work Schedule Use

3.
appraisal outline. The sequence of points
to cover the appraisal report. The outline,
a flow chart of the order of work to be
done. A time schedule of all the work to
complete is a helpful tool.

COLLECTING AND ANALYZING the DATA
A formal appraisal report is not a wild
estimate of value. An estimate must be
supported by data and facts gathered in
the real estate market, commonly called
market data. They form the backbone of
all formal appraisal.

REQUIREMENTS OF MARKET VALUE
APPRAISAL
General Data on the Region, City, and
1.
Neighborhood Includes data on
population, employment, income, and
price index levels, and data on the
availability of financing and on current
construction cost.

APPRAISAL
Specific Data on the Subject Property
2.
detailed legal and physical data on the
land and the existing building/s.
3. Specific Data on the Comparable
Properties detailed legal and physical
data on comparable land and building/s,
detailed information on the terms and
sales prices of the comparable properties.
HOW MUCH INFORMATION IS
NEEDED?
The amount/quantity and kind of data
required for any appraisal depends in part
on what is known as a highest and best
use analysis- a study of how well-suited
the property is to its physical, legal, and
economic environment.

APPRAISAL
EXAMPLE: A single-family house in a
commercial lot/area may not be the most
beneficial use of the land. A well-prepared
highest and best use study, requires that
preliminary data on the region, city and
neighborhood be gathered. Once the
highest and best use has been established,
the collection of more detailed data starts.
The amount/quantity of data depends upon the
type of property being appraised, the purpose
of appraisal, and the type of appraisal report
required.
The type of property and purpose of appraisal
imply the most appropriate value approaches,
and the kind of data needed. A single-family
house being appraised for a loan usually
emphasize the cost and market approaches.
Cost and sale data will be part of the specific
information.

APPRAISAL
The intended use may govern the degree
of detail needed when data are collected.
Data in a longer form appraisal may be
more detailed than a short letter report.
For legal purposes, appraisal report
generally require more supporting data
than those for purchase and sale.

APPRAISAL
Comparable properties are the key.
Regardless of the type of property or the
type of report, most appraisals requires
sales information on comparable
properties fitting the general description
of the property being appraised.

USING THE VALUE APPROACHES
The fourth step in the appraisal process

group the collected data for further
analysis, using one or more of the three
approaches to value.
The Market Approach uses data sales of
comparable properties. The prices people
are willing to pay are usually a good
indication of the value of any commodity.
The Cost Approach - relies on the amount
required to buy vacant land and the cost
to construct the desired buildings and
structures upon it.
The Income Approach - analyzes the
income producing capability of rental
investment property to indicate its market
value.
Depending on the appraisal assignment,
one, two or all three approaches can be
tested. The one that clearly appear the
most pertinent should be applied.
Appraisal Method Approaches
Cost Approach
Appraisal
Income Capitalization Approach
Methods
Gross Income Multipliers

Appraisal Methods
1) Cost Approach
The cost approach estimates the value of a real
estate that has been improved by additional buildings.
This method separates the value of the land and the
buildings, taking into account the depreciation. The
estimates are combined to determine the value of the
entire property. The cost approach assumes that a
reasonable buyer would not spend more for an
improved piece of real estate than it would cost to buy
a bare lot and build a comparable building. This
method works well when the property is a type that
does not come to the market frequently, such as a
church, school, government building, or hospital.

Appraisal Methods
2) Income Capitalization Approach
The income approach represents another common
method of real estate appraisal. This considers the
relationship between the net income of a property
and the rate of return that an investor seeks.
Generally, the income capitalization approach is
used to put a value on income producing properties
including office buildings, apartment complexes,
and shopping centers. This type of appraisal is
straightforward when the property has consistent
and predictable revenues and expenses.

Appraisal Methods
3) Gross Income Multipliers
The gross income multiplier method is used
to value a real estate that could become a
rental property, such as single-family homes
or duplexes. The GIM method relates the
expected rental income to the sales price of
the real estate. For residential properties, the
gross monthly income is considered. For
industrial and commercial properties, the
gross annual income is considered.

THE MARKET APPROACH
The MARKET APPROACH, also known as the
Direct Market Comparison approach, is the
most direct and considered most reliable. It
compares the property being appraised to
similar properties recently sold in open market.
From the price paid, the appraiser estimates a
probable selling price or value for the subject
property. Makes careful analysis of differences
in sale, conditions, and property characteristics.

EXAMPLE (using the Market Approach):
Assume a subject property of medium-

quality, 10-year old, three bedroom
home, two car garage, 600 square
meters in area. The appraiser found
three similar houses sold in the
neighborhood at fair market prices. All
have identical number of rooms and
other amenities.

COMPARABLES
Data Comparable A Comparable B Comparable C
Price Paid Php1,500,000 Php1,400,000 Php1,250,000
Location Better than subject prop Equal to subject prop. Equal to subject prop.
Larger than subject Smaller than sub

Lot size Equal to subject prop. prop prop
Over all Worse than sub.

Cond. Better than subject prop. Equal to subject prop. Prop.

OPINION ADJUSTMENT FACTORS
Location difference -Php10,000.00
Lot size difference -Php 8,500.00
Overall condition -Php 6,500.00

difference

ADJUSTMENTS
Data Comparable A Comparable B Comparable C
Price Paid Php1,500,000.00 Php1,400,000.00 Php1,250,000.00

Location -10,000,00 0 0
Lot size 0 -8,500.00 + 8,500.00
Overall
condition - 6,500.00 0 + 6,500.00
1,483,500.00 1,391,500.00 1,365,000.00

Price comparison
would have sold for Conclusion: Subject propertys indicated value is
if they were like Php1,370,000.00
the subject home

Steps in Market Approach
1. Investigate the sale of comparable
properties, ascertain motives of
buyers and sellers; determine
conditions of the sale as to date,
price, terms, and market exposure.
2. Analyze and compare the sales with
the subject property, consider the
time of sale, location, and other
factors affecting market value.
THE COST APPROACH
The Cost Approach - based on principle
that property is worth what it would cost
in money to duplicate. Adjustments are
made for any loss in value due to age,
condition and other factors reducing
market appeal. Add the depreciated
reproduction cost of the improvements to
the value of the land- also known as the
SUMMATION APPROACH.
Applying the cost approach requires:
1. Estimate the value of the land as if
vacant and available for use.
2. Estimate the cost to build the existing
structure, based on present construction
prices.
3. Decide an appropriate amount for
accrued depreciation,(loss in value of
the subject building as compared to a
new structure.)
Subtract the estimated depreciation
from the cost of the hypothetical new
structure, giving a depreciated cost
estimate.
Add the value of the land to the
depreciated cost of the structure. The
result is the indicated property value
by the cost approach.

EXAMPLE (Cost Approach)
Assume a one-storey medium-quality, 3
bedroom house, 300 square meters in area, two
car open garage, constructed 20 years ago at a
cost of Php600,000.00. Estimated economic life-
30 years. Land area-600 square meters acquired
at Php500.00 per square meter. Present unit
value of land based on gathered data-
Php1,500.00

Suggested basic solution:
Replacement Cost New:
House: 300 sq.m. @ Php4,000.00 Php1,200,000.00
Less: Depreciation 20/30 x Php1,200,000. 799,920.00
Improvement Net Replacement Cost Php 400,080.00
Land Value: 600 sq.m. @Php1,500.00 Php 900,000.00
Indicated Value by Cost Approach Php1.300,000.00

THE INCOME APPROACH
The income approach (or capitalized income
approach) used to appraise commercial,
industrial, and residential-income properties
according to their use to produce income.
This involves estimating what the market will
pay for the propertys expected income. ( the
sales and cost approaches are emphasized in
appraisal, the income approach is often used to
test the results.)

Six steps in income approach:
1. Obtain annual rent schedules for the
subject property and compare them
with the competition to arrive at a
projection of reasonable gross rents for
the subject.
2. Estimate annual vacancy and collection
losses.
3. Subtract these from the gross income to
arrive at the effective gross income.

4. Estimate the annual expenses and subtract
them from the effective gross income to
arrive at the income. Net income is also
called net operating income.
5. Analyze comparable investments in order to
arrive at a capitalization method and rate.
6. Capitalize the projected net income into a
estimate of value.
There are a number of capitalization

methods in common usage, each designed
to handle a specific type of appraisal
problem.

EXAMPLE (Income Approach)
Assume a 10-unit apartment building has

a market rent of Php10,000.00 per unit per
month or Php1,200,000.00 per year. The
estimated factor for vacancies and
collection loss is 10% of the potential gross
income. Assessed Value is Php500,000.00.

Operating Expenses:
Property Taxes: (1% Basic 1% SEF of the Assessed Value) Php10,000.00
Insurance 50,000.00
Management 36,000.00
Repair and maintenance 12,000.00
Total Operating Expenses Php108,000.00
Potential Gross Income
Php1,200,000.00
Less: 5% Vacancies & Collection Loss 60,000.00
Effective Gross Income Php1,140,000.00
Less Operating Expenses:
108,000.00
Net Operating Income Php1,032,000.00
Divided by 10% /.10
Indicated Value by Income Approach
Php10,320,000.00

ARRIVING AT A CONCLUSION OF VALUE
When two or more approaches used to

estimate value, the fifth step is to review
the estimate produced by the approaches.
Reconciling the approaches is necessary to
arrive at conclusion. Three primary steps:

1. The appropriateness of each approach,
based on the purpose of the appraisal.
2. The adequacy and reliability of the data,
and the validity of any assumptions
made in its analysis.
3. The range of indicated values and the
position of each value within that range.

The market value approach the most
persuasive, most direct. Generally preferred
method in single-family appraisal.
Where unique property characteristics exist or
insufficient data, the cost or income approach
may be considered depending on the type of
property under appraisal.
The appraisal process is designed to be as
objective and factual as possible, the appraiser
personal judgment to reach a conclusion of
value is foremost.

The final value is dependent upon factual
market information, the judgment and
experience of the appraiser. The value
conclusion not based on simple
averaging of the three value estimates.

REPORTING THE CONCLUSION OF VALUE
(6th step in appraisal process)
Three Types of Report:

1. The Letter Report one to five pages
in length, setting forth the condition of
the assignment, nature and scope of the
investigation and opinion value. (Client
already familiar with the property,
detailed explanations unnecessary.

1. The Form Report uses printed sheet to
organize and standardized appraisal report
content. Checklist to describe property
characteristics. Banks, insurance agencies,
government agencies, among others, use this
form to suit their needs. Separate forms for
residential, commercial, industrial, and for
other classes are used.
2. The Narrative Report the longest and most
formal of the appraisal reports. A step-by-
step summary of the facts to arrive at a
value. Contains detailed methods to
interpret the facts. Preferred by client needs
to review each logistical step taken by the
appraiser.
Often required in court, as in eminent
domain cases. Common in the appraisal of
major investment properties.
Oral report is permitted, but any verbal

testimony on the appraisal must be
supported by recorded data.

VALUATION REPORTING (Under the
Philippine Valuation Standards)
This is considered similar to the 6th step,
states in part lies in communicating the
value conclusion and confirming the basis
of the valuation, the purpose of the
valuation and any assumptions or limiting
conditions underlying the valuation.

The analytical processes and empirical
data used to arrive at the value conclusion
may also be included in the valuation
report to guide the reader through the
procedures and evidence that the valuer
used to develop valuation.

The reporting requirements addressed in
this Standard apply to all types of
Valuation Reports. (2.1 p. 53)
Compliance with these reporting
requirements is incumbent upon both
Internal and External Valuers 2.2 p. 53)

Compliance Statement. An affirmative
statement attesting to the fact that the
Valuer has followed the ethical and
professional requirements of the IVS Code
of Conduct in performing the
assignments. (3.1 p 53)

Special, unusual, or extraordinary assumptions.
Before the acquisition of a property, a prudent
purchaser typically exercises due diligence. Making
enquiries about the property. A valuer makes
assumptions. Special, unusual, or extraordinary
assumptions may be any additional assumptions
relating to matters covered in the due diligence
process, or may relate to other issues, such as the
identity of the purchaser, the physical state of the
property, the presence of environmental pollutants
(e.g. ground water contamination), or the ability to
redevelop the property.

SEVEN ELEMENTS FOR THE SPECIFICATIONS
FOR VALUATION ASSIGNMENT
1. Identification of the real, personal (plant,
machinery, equipment, furniture and
fixtures), business or other property subject
to the valuation and other classes of property
included in the valuation beside the primary
property category.
2. Identification of the property rights (sole
proprietorship, partnership or partial
interest) to be valued;

3. Intended use of the valuation and
any related limitation, and the
identification of any subcontractors
or agents and their contribution;
4. Definition of the basis or type of
value sought.;
5. The date as of which the value
estimate applies and the date of
intended report;

6. Identification of the scope/extent of the
valuation and of the report;
7. Identification of any contingent and

limiting conditions upon which the
valuation is based. (3,4,1 to 3.4.7 p.54)

VALUATION REPORT (3.5 p 54)
A document that records:

Instructions for the assignment
Basis and purpose of the valuation
Results of the analysis that lead to the opinion
of value
Explain the analytical process
Meaningful information used in the analysis
Valuation report can be oral or written. The type,
content and length of a report vary according to the
intended user, legal requirements, the property type,
the nature and complexity of the assignment
Written Report. The results of a valuation
communicated to a client in writing. Includes
electronic communication. Written reports may be
detailed narrative documents containing all pertinent
materials examined and analyses performed to arrive
at a value conclusion or abbreviated pertinent
narrative documents, including periodic updates of
value, forms used by government and other agencies,
or letters to clients. (3.6 p. 54)


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THE APPRAISAL

6/28/2015 MAYA BANDOLON-CARTOJANO, REC, REA, REB 1

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1. Clearly defining the appraisal problem

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Sometime appraisals are needed to estimate

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2.List of Needed Data Itemized all general

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Outline and Work Schedule Use

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The fourth step in the appraisal process

Gross Income Multipliers

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Assume a subject property of medium-

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Price Paid Php1,500,000 Php1,400,000 Php1,250,000

Larger than subject Smaller than sub

Over all Worse than sub.

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Location difference -Php10,000.00

Lot size difference -Php 8,500.00

Overall condition -Php 6,500.00

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Price Paid Php1,500,000.00 Php1,400,000.00 Php1,250,000.00

1,483,500.00 1,391,500.00 1,365,000.00

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There are a number of capitalization

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Assume a 10-unit apartment building has

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When two or more approaches used to

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Three Types of Report:

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Oral report is permitted, but any verbal

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