Knowing how to appraise the value of real estate properties is one of the most important skills for real estate brokers. While property valuation is best left to certified professionals, a working knowledge of it can also be quite beneficial to owners themselves.
Q: How much is my property worth?
A: How much your property is worth is based on its current market value. The Philippine Valuation Standards, which is the Philippines’ adaptation of the International Valuation Standards, precisely defines market value as:
The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion.
The key phrase to take note of here is the “date of valuation,” which is indicative of how your property can be valued differently at different times.
Q: So how do I figure out how much my property is worth now?
A: There are three approaches commonly utilized when appraising property:
This approach is used exclusively to value commercial and investment properties. Essentially, income-producing properties are assessed by applying revenue multipliers or capitalization rates to the property’s net operating income (NOI).
The formulae for Capitalization Rate and NOI are as follows:
Capitalization Rate = Annual Net Operating Income ÷ Cost or Value
NOI = Gross Potential Income – (Vacancy + Collection Costs) – Operating Expenses
Land value is commonly based on the prevalent market value in the area where the property is located. The market value is distinct from the zonal value established by the government. For house and lots, it is best to establish land and building (with its improvements) values separately before summing them up as a whole.
This essentially involves understanding the selling prices of similar properties located within the same area as your own property. Prices can be obtained via public records, real estate brokers, appraisers, or the sellers themselves.
Comparable properties will most likely not be identical to yours, so naturally, adjustments must be made. This could include lot size, number of bathrooms, date of sale, etc. The main idea is to simulate the value of your property using the values of others, with adjustments to make them identical to yours.
Each of the three approaches has their own merit, and when applicable, professional appraisers will often elect to use all three to establish a property’s value. However, for you, as an owner simply looking to know the worth of your property, the cost approach is the most recommended as the values required for this approach is the easiest to obtain. Any changes your property undergoes, whether enhancing or devaluing in nature, can readily be taken into account each time you need to make an estimate.
Remember, you can estimate your property’s worth on your own to get a better idea of its current value and have a basis as you map out its usage and enhancement. However, if you are looking to put it up on the market in the foreseeable future, it is recommended to get advice from a professional appraiser before you proceed.