M1&M2: Methodologies and Appraisal Approaches to Values and Theories and Principles in Appraisal (canvas)

Appraisal

is a professional opinion of the market value of a property prepared by a licensed appraiser.

Cost Approach (Cost Method)

estimates the value of a property by determining how much it would cost to construct an equivalent building today, deducting depreciation, and then adding the value contributed by the land or site characteristics.

Market (Sales Comparison) Approach

stimates value by comparing the subject property with recently sold properties that possess similar characteristics.

Income Approach

estimates property value based on its ability to generate future income.

1. Cost Approach

2. Market (Sales Comparison) Approach

3. Income Approach

The Three Appraisal Methods

Real Estate Valuetion

is the systematic process of determining the economic worth or market value of a property.

Market analysis

is a process of sensible observation. By understanding the factors that influence market value, appraisers and investors.

Value

used inaccurately by non-qualified practitioners. In an economic sense, it refers to the present worth of future benefits realized from ownership

Progression

A property's value may increase because it is surrounded by higher-quality properties within the same neighborhood.

Progression

A modest residential house located in an upscale subdivision tends to appreciate because neighboring homes have higher market values.

Regression

Property value may decrease when it is surrounded by lower-quality or poorly maintained neighboring properties.

Regression

A luxury residence located among deteriorated houses may not appreciate as expected.

Conformity

Properties tend to achieve maximum value when they conform to the characteristics of surrounding properties in terms of size, age, design, quality, and use.

Conformity

Building a luxury mansion in a neighborhood consisting primarily of standard houses may not produce an equivalent increase in market value.

Substitution

A buyer will generally pay no more for a property than the cost of acquiring another similar property offering comparable utility.

Substitution

Two comparable residential lots are available for sale. Buyers will usually purchase the lower-priced property first.

Change

Real estate markets continuously change because of economic conditions, demographic shifts, technological developments, government policies, and environmental events.

Change

Construction of a new transportation system may significantly increase nearby property values.

Anticipation

Current property value is often influenced by expectations regarding future benefits, developments, or income potential.

Anticipation

Land values often increase when a future commercial development or transportation project is announced.

Contribution

The value added by an improvement depends on how much it contributes to market value rather than its construction cost.

Contribution

A ₱500,000 kitchen renovation may increase the property's market value by only ₱300,000 depending on market demand.

Plottage

Land value generally increases when adjacent parcels are combined into one larger property under common ownership.

Plottage

Land value generally increases when adjacent parcels are combined into one larger property under common ownership.

Highest and Best Use

Property achieves maximum value when utilized in the most legally permissible, physically possible, financially feasible, and maximally productive use.

Highest and Best Use

Land located beside a major highway may generate greater value when developed commercially rather than as agricultural land.

Competition

Profitable investment opportunities attract competitors, increasing market supply and potentially reducing property values over time.

Competition

Numerous new condominium developments in one location may reduce prices due to increased market competition.

Fundamental Analysis

measures a securitys instinct value by examining related economic and financial factors

Capital Asset Price Model (CAPM)

Described the relationship betwenn systematic risk and unexpected return for assets

Divident Discount Model (DDM)

qualitative method used for predicting the price of a companys stock based on the theory that all present day price is worth the sum of all its future divident payments when discount back to their present value.

Absolute Valuation Model

Attempts to find the intrinsic of true value of an investment.

Relative Valuation Models

Comparing the company in question to similar companies

Sales Comparison

based on the recent selling prices of similar properties in the same neighborhood.

Cost Approach

propertys value should equal to the cost of building an equivalent building, taking into consideration the cost if the land and construction expenses less depreciation.

construction cost + market land value

what is the formula for new builing value

construction cost (present) + market land value

what is the formula for ecisting property value

Physical deterioration

cost to upgrade improvement or cure deferred maintenance

structural/ functional obsolescence

increased cost to operate older building (energy cost)

external obsolescence

this are the traffic, pollution, and crime changes

Income Approach

estimates the value of a property based on the income it generates

sale price/ gross rent

Formula for gross rent Multip[lier (GRM)

Net operating income/ sale price

Formula for Direct Capitalization

Discounted Casg Flow (DCF)

forecasting net cash flow for a predetermined hold period

Capitalization Rate

Rate of return that is expected to be generated on a real estate investment property.

(Net income which the property is expected to generate/ net operatin income) x 100%

Formula for Cap rate

Replacement Cost − Depreciation + Site Value

Formula for Property Value using Cost Approach

Net Operating Income ÷ Capitalization Rate

Formula for Property Value using income Approach