PROFCOR7&10.MIDTERM.LECTURE2.pptx

FUNDAMENTALS OF REAL ESTATE APPRAISAL  FUNDAMENTALS OF REAL ESTATE PRINCIPLES AND PRACTICES, THEORIES AND AppraisalPRINCIPLES IN to Practice refers APPRAISAL the professional service performed by a licensed Real Estate Appraiser based o...

FUNDAMENTALS OF REAL ESTATE APPRAISAL  FUNDAMENTALS OF REAL ESTATE PRINCIPLES AND PRACTICES, THEORIES AND AppraisalPRINCIPLES IN to Practice refers APPRAISAL the professional service performed by a licensed Real Estate Appraiser based on a defined standard, namely; Appraisal, Review, and consulting. It is also refers to the acts of estimating and rendering an expert opinion pertaining to real estate values. Appraisal is the act of determining the value of the property as of specific date for a specific purpose. It also refers to the rendition of professional and sound estimates of the value of real estate and/ or any interest therein as of a given time and for specific purpose and for fee. Appraisal is usually required when a real property is sold. financed, condemned, taxed insured or partitioned. For income tax purposes, it is the estimation of value for  FUNDAMENTALS OF REAL ESTATE PRINCIPLES AND PRACTICES, THEORIES AND PRINCIPLES IN APPRAISAL Appraisal is the processing of making an estimate of the value of any assets/property in accordance with generally accepted standards on a given date. It is an estimate or process through which conclusions of property value are obtained. It s also refers to the report setting forth the estimate and conclusions of value. It is result of valuing a property, making a cost estimate, forecasting earnings or any combination of two or more stated results. It is simply defined, as a person’s estimate or opinion of value, where an estimate is not a statement of value, determination of value and fixing of value.  FUNDAMENTALS OF REAL ESTATE PRINCIPLES AND PRACTICES, THEORIES AND PRINCIPLES In real estate INit APPRAISAL practice, is an estimate or opinion of value arrived at by a licensed Real Estate Appraiser who has the necessary competence, skills, integrity, sound judgment, experience an in-depth study, analysis and interpretation of pertinent data bearing on values, as well as the skillful application of generally accepted methods and approaches of estimating cost. Re-Appraisal validates and updates the appraisal values of lot and housing unit. Independent Appraisal is estimate of property value performed by an independent person or disinterested party, usually made by a licensed  FUNDAMENTALS OF REAL ESTATE PRINCIPLES AND PRACTICES, THEORIES AND PRINCIPLES Independent IN APPRAISAL value/Appraiser an Appraiser/value who meets the specific requirements of independence, which may attached to many assignments and are applied by regulation or by law with some clients. Also refers to an Appraiser/Valuer who together with any association has no material links with the client or the subject of the assignment. Mass Appraisal practice of appraising multiple properties by a systematic and uniform application of appraisal method and techniques that allows for statistical review and analysis of results at a particular date. Mass Appraisal Model a mathematical expression of how supply and demand factors inter-act in a market. Asset Valuation refers to valuation of land, buildings  FUNDAMENTALS OF REAL ESTATE PRINCIPLES AND PRACTICES, THEORIES AND Business PRINCIPLES IN or Valuation the act APPRAISAL process of arriving at an opinion or estimation of the value of a business or entity or an interest therein. Business Valuer/Appraisal a person who by education, training and experience is qualified to perform a valuation of a business, business ownership interest, security and/or intangible assets. Land and/or building improvements, including rights and interest therein refers to Real Estate or Real Property. The date of appraisal is significant because economic, physical and governmental condition changes constantly and such changes may cause a decrease or increase in the value of real or personal  FUNDAMENTALS OF REAL ESTATE PRINCIPLES AND PRACTICES, THEORIES AND PRINCIPLES Estate refers to the totality IN APPRAISAL of the assets owned by a person which include real and personal properties and the interest thereof. It signed the quantity of interest, share, right, equity of which fortune or riches may consist in real property. It is also the degree, quantity, amount and extent of interest which a person has in real property. Estate refers to all the property either real or personal, owned by a natural or juridical person. It is also the degree, quantity, nature and extent of interest which a person has on real property. Fair Market Value – is the highest monetary price a property has at a reasonable period of time, which the seller is willing to sell and the buyer is willing to buy. It is used as a basis of determining property taxes. It is also the highest price estimated in terms of money that the property will get if exposed for sale in the open market, allowing a reasonable time to find a purchaser who buys with knowledge of all the uses which the property is capable of  FUNDAMENTALS OF REAL ESTATE PRINCIPLES AND PRACTICES, THEORIES AND PRINCIPLES Real Estate INland refers to the APPRAISAL and all the permanent improvements thereon. Also refers to real property and its improvement. Arms length transaction a transaction between parties who are knowledgeable, capable and not under pressure. Betterment an improvement that adds to the value of real estate, such as sidewalks, sewerage’s, etc. Heterogeneity Principles states that no two lots have the same value although they may be adjacent to each other. Physical Depreciation is the loss in value due to impairment of physical condition. Capricious Value – value estimate derived by observing completed transactions involving a large degree or amenities or other personal and unpredictable factors Component Value – value of those components, created by the separation of the property interest.  FUNDAMENTALS OF REAL ESTATE PRINCIPLES AND PRACTICES, THEORIES AND PRINCIPLES Reconciliation IN APPRAISAL is the adjustment process between comparable property utilities equivalent to that of being appraised but constructed with modern materials and according to the current standards, design and layout. Remaining Economic Life refers to the remaining period during which a property can be profitably used or the period during which a building is expected to generate more income than operating expenses. Replacement Cost the cost of replacing an assets/property with an equally satisfactory substitute asset/property; normally derived from the current acquisition cost of similar assets, new or used or of an equivalent productive capacity or service potential. It also refers to the current cost of a similar new item having the nearest equivalent utility as the item being appraised. Reproduction Cost refers to the cost to create a virtual replica of the existing structure/property, employing the same design and similar materials. The current cost of creating a facsimile of the  FUNDAMENTALS OF REAL ESTATE PRINCIPLES AND PRACTICES, THEORIES AND PRINCIPLES Marginal Land IN APPRAISAL is land which barely pays the cost of working on it or using it. Market Value is the amount for which a property would sell if put on the open market and sold in the manner it is ordinarily sold, allowing a reasonable time to find and familiarize a purchaser with the properties uses and potentials. It is often referred to as the price at which a willing and informed seller would sell, and a willing and buyer would buy, neither being under any pressure to act. estimate reflecting prices actually paid for various types of property. Matched pair two recently sold properties selected for their similarities, which may be compared to determine the value of dissimilarities. The income approach to value is based primarily on the economic principle of anticipation. Net Operating Income (NOI) is to the net income derived from gross income after deducting the property operating expenses and reserves.  FUNDAMENTALS OF REAL ESTATE PRINCIPLES AND PRACTICES, THEORIES AND PRINCIPLES Over Improvement IN APPRAISAL an improvement which is not suitable to the site where it is placed due to excessive size or costs. Fractional Appraisal is an appraisal of portion or fractional interest in real estate Recapture Rate is the return of the capital over the economic life of the property. It is the rate of return earned by an investor which does not include the allowance of capital recovery. Real Estate Dealer refers to any person directly engaged as a principal in the business of buying, selling or exchanging real estate property whether on a full time or part time basis. It is either a natural or juridical person who performs any of the acts comprised in real estate brokerage with reference to his own property. It is the owner/developer of a land, subdivision, condominium, resort, country club, memorial parks, owner/lessor of an apartment, commercial building or other  FUNDAMENTALS OF REAL ESTATE PRINCIPLES AND PRACTICES, THEORIES AND PRINCIPLES Principles/Concepts IN APPRAISAL in Property Valuation a. Principle of Anticipation – value is the present worth of all the rights and future benefits accruing to ownership and use of real property. Value is created by the expectation of future benefits. b. Principle of Balance – value of a property will reach to its maximum level when the factors of productions are in balance. It also refers to the principal that holds that value is educated to the amount and utility of real estate. c. Principles of Change – the inevitable and constant factor affecting the possible increase in the value of the property, such as the cities; neighborhoods and etc. d. Principle of Competition – industry competition which arises from profits.  FUNDAMENTALS OF REAL ESTATE PRINCIPLES AND PRACTICES, THEORIES AND PRINCIPLES Principles/Concepts IN APPRAISAL in Property Valuation e. Principle of Conformity - the result of a reasonable degree of architectural homogeneity and compatible land uses brought about by market attitudes, societal trends, economic conditions and public policy. It is the principle of value which states that value of a property tends to be enhanced when there is reasonable homogeneity in use. f. Principle of Contribution – principle of increasing and decreasing returns applied to a portion or the whole of an improvement. It is a valuation principle that measures the value of a component, by how much it contributes to the volume of the property. g. Principles of Consistent Use – factor where the property is cannot be valued on the basis of one use for land and another use of improvements.  FUNDAMENTALS OF REAL ESTATE PRINCIPLES AND PRACTICES, THEORIES AND Principles/Concepts in Property Valuation PRINCIPLES i. Principle of Supply and IN APPRAISAL Demand – the factor where the value is increased if supply is reduced by effective demand, resulting scarcity. j. Principle of Highest and Best Use – the most profitable and likely use of the property at the time of appraisal that will likely produce the lands highest present value. It refers to that which in all probability will yield the maximum return at a given time. It is the first necessary consideration in studying a tract of land to estimate its value. Also refers to the use of a property which brings the optimum or highest returns or advantage over in all probability the property will yield the maximum return at a given time. The most profitable use of real property over specific period of time considering its utility and current element of risk. k. Principle of Regression an appraisal principle which holds that the value of a property tends to be adversely affected or enhance by association with inferior or superior properties. In real estate, a tremor principle alluding to the decrease in value of certain  FUNDAMENTALS OF REAL ESTATE PRINCIPLES AND PRACTICES, THEORIES AND PRINCIPLES Principles/Concepts IN APPRAISAL in Property Valuation l. Principle of Substitution – replaceable property, which tends to be indicated by the value of an equally desirable substitute. It also refer to the value of a replaceable property tends to be indicated by the value of an equally desirable substitute property. It is the principle which holds that when two or more commodities with substantially the same utility are available, the one with the lowest price receives the greatest demands and the widest distribution. m.Principles of Surplus Productivity – net income remaining after the cost of labor, capital and coordination have been paid. n. Principle of Utility – the meeting the desires and  FUNDAMENTALS OF REAL ESTATE PRINCIPLES AND PRACTICES, THEORIES AND PRINCIPLES IN APPRAISAL Evolution of the Value Theories a. Theory of Austrian School- relationship of market price an value; normal value under conditions of balanced supply and demand. b. Cost Theory of Adam Smith -Objective; value in use. c. Scarcity Theory of Malthus – emphasized the supply and demand factor. d. Labor Theory of Marx – value is a mere congelation of homogeneous human factor. e. Theories of the Mercantilist – subjective desires of the a factor in value. f. Social Theory of Mill – unearned increment of land abolished thru taxation; land value increase indefinitely. g. Theories of the Physiocrats – laid the foundation of today’s concept of economic rent.  FUNDAMENTALS OF REAL ESTATE PRINCIPLES AND PRACTICES, THEORIES AND PRINCIPLES Forced Sale (Liquidation)IN APPRAISAL Value – amount that might be realized from disposition of property used in the market assuming a relatively short period of time. It also refers to the property offered for sale to a desired use of equipment to an alternative user; usually made in six(6) months. It is the value where a property is sold lower than its market value. Purpose of Appraisal 1. For Financing - to secure a loan using the property as the collateral, which is based on the appraised value of the property. 2. For Partition and Distribution of estate – to an effect an equitable distribution of properties among heirs or co-owners. 3. Foe taxation – used as basis of fair assessment or for contesting government assessment of estate and donors  FUNDAMENTALS OF REAL ESTATE PRINCIPLES AND PRACTICES, THEORIES AND Purposes PRINCIPLES of Appraisal IN APPRAISAL 5. For Indemnification - to determine just compensation for property being expropriated by the government or public utilities, or coverage against losses, due to fire, floods, and other natural calamities. 6. To Maximized Utilization of property by considering maximum returns; and 7. As guide in pricing for purposes of sales, purchases, exchanges, for leases of real property Characteristics of Value(DUST) a. Effective Demand or Purchasing value – refers to desires, couples with the financial capacity of the buyer to acquire a piece of real property. b. Utility which is the ability of the property to satisfy human needs  FUNDAMENTALS OF REAL ESTATE PRINCIPLES AND PRACTICES, THEORIES AND PRINCIPLES Factors/Forces that affectsIN APPRAISAL Appraisal (PEPS) 1. Political forces which are government based. It is the degree of efficiency in the maintenance of peace and order and the effort of providing the essential services like; utilities, zoning and land use ordinances, anti-squatting law, rental control law and etc. 2. Economic forces includes the nature of basic industry and business activity in the in the neighborhood, trend of employment, and expansion 0f housing programs. 3. Physical forces refer to the location and age of the neighborhood( size, area, shape and Land topography), type of improvements an architectural trends, street pattern, sidewalks and  FUNDAMENTALS OF REAL ESTATE PRINCIPLES AND PRACTICES, THEORIES AND PRINCIPLES Reversionary Interest – is IN the APPRAISAL interest which a person has in his lands or other property upon the termination of the estate. Salvage Value is the amount that may be recovered when the property/asset will be retired or disposed at a future time. Scrap Value is the value of a depreciated building or the materials being recovered from it. Amount realized from the sale of a property sold which is not productively used. Sinking Fund – a method of calculating replacement reserves by multiplying the total cost by a factor. Sound Value – appraisal for the application of different rates to land and building. Step-Up Lease – rental shall be increased at various stipulated times in the future, the purpose is generally to provide a lower rental in the earlier years to enable a new improvement to become established in its earning power.  FUNDAMENTALS OF REAL ESTATE PRINCIPLES AND PRACTICES, THEORIES AND PRINCIPLES Under Improvement refersIN APPRAISAL to an improvement by reason of its small size or low cost failed to bring the property to its highest and best use. Valuation is a determination of the monetary values or worth of the property rights encompassed in an ownership at some specific time/period by an appraiser. Value – is the ability to serve useful purposes or to command goods including money, in exchange; utility; desirability. Value in realty is defined as the desirability of a property on account of its absolute or relative use. The power of goods in exchange for the present worth to typical users and investors of future benefits arising out ownership of a property; the money deemed to be the equivalent in worth of the subject property. It also refers to the worth of a thing in money or goods at a certain time. Formula (V = I/R)  FUNDAMENTALS OF REAL ESTATE PRINCIPLES AND PRACTICES, THEORIES AND PRINCIPLES IN APPRAISAL Yield Capitalization or Discounted Cash Flow Analysis is a method used to convert income into an estimate of value by projecting the income or cash flow expected for each year by a typical investment holding period, including any cash flow at reversion. It also estimates value by discounting the estimated income or cash flow, using a discount rate that represents the rate of return a typical investor will require, if he/she is to invest in the property.