2. In real estate appraisal, there are three
(3) basic approaches for valuing
property:
– Market Data Approach or “Sales
Comparison”
– Cost approach
-- Income approach
4. Basic concept:
The Market Data approach is based on the
economic principle of –
“Substitution” — if a thing can be
substituted for another, then their values
will be comparable. Hence, the value of a
property will be comparable to that of
similar properties with similar qualities.
The principle of Substitution recognizes
that a typical buyer will compare asking
prices and seek to purchase the property
that meets his or her wants and needs for
the lowest cost. In the Market Data
Approach, the appraiser attempts to
interpret and measure the actions of
parties involved in the marketplace,
including buyers, sellers, and investors.
5. Before the advent of professional
appraisers, the quick approach done by
real estate agents for valuing real estate
was to prepare a competitive market
analysis (CMA). In a CMA the value of a
property is estimated by comparing it to
the sale price of similar properties in the
same area. But a CMA is just a “snapshot”
because not all similar properties are
“exactly similar.”
6. A CMA done by a real estate agent is not a
formal and professional appraisal. It could
also have a bias since a CMA done by a
real estate agent aims to persuade an
owner to sell the property at a target
pricing level deem by the agent
marketable. Thus a CMA can be a guide
but should never be presented as an
appraisal. The appraisal prepared by a
professional appraiser which emulates the
CMA method is formally called the
“Market Data Approach.” It is also
popularly known as the “Sales Comparison
Approach.”
7. The Market Data Approach is more
sophisticated and reliable than just a CMA
prepared by real estate agents. The
Subject property is compared to recently
sold comparable properties. However,
because no two properties are exactly
alike, the sales prices of the comparable
properties are carefully analyzed and
appropriately adjusted up or down for
each of the differences between the
subject property and the comparable
properties.
8. When comparing different properties, not
just the physical differences in the
properties, such as the actual structures,
their ages and conditions, compared, but
also what property rights are being
transferred or were transferred in the
comparable properties, and also any
differences in encumbrances between
them. For instance, is a fee simple title
being transferred, or are there any
easements or deed restrictions on the
subject property or on the comparable
properties?
9. Data collection methods and valuation
process
The availability of market data is
essential. Market data can be prices,
costs, or offers. Market data is an
indicator of market value which is
defined as the most probable price at
which the property will sell, not
necessarily the average or the highest
price. The market value is considered
the cash price, so it does not take into
consideration any financial incentives or
financing arrangements.
10. Data is collected on recent sales of
properties similar to the Subject. Ideally,
only SOLD properties may be used in an
appraisal as they represent amounts
actually paid or agreed upon for
properties. However, in the Philippines,
the source of reliable market data is
limited.
11. Although real estate transactions are
required to be recorded with the BIR and
the LGU for the payment of transaction
taxes, these records are confidential and
not available to the general public.
Furthermore, many transactions are
under-valued. Other alternative sources
of reliable market data must therefore be
found in the private sector -- buyers,
sellers, real estate brokers and/or agents,
appraisers, and so on.
12. Important details of each comparable sale
are described in the appraisal report.
Since comparable sales are not identical
to the subject property, adjustments must
be made for date of sale, location, style,
amenities, square footage, site size, etc.
13. The main idea is to simulate the price
that would have been paid if each
comparable sale were identical to the
subject property. If the comparable is
superior to the subject in a factor or
aspect, then a downward adjustment is
needed for that factor.
14. Likewise, if the comparable is inferior to
the subject in an aspect, then an upward
adjustment for that aspect is needed. The
adjustment is somewhat subjective and
relies on the appraiser's training and
experience. From the analysis of the
group of adjusted sales prices of the
comparable sales, the appraiser selects an
indicator of value that is representative of
the subject property. It is possible for
various appraisers to yield different
indicators and these have to be
reconciled.
15. Terminologies
Subject – refers to the property to be
valued.
Comparable – refers to other properties
(the more the better) which can be
compared
“apple-to-apple” with the Subject
because they have closely similar
features.
Elements of comparison - are the various
characteristics that are commonly
comparable between the various
properties being considered such as price,
property rights, financing terms,
conditions of sale, market conditions,
location, physical and economic
conditions, etc..
16. Units of comparison – factors commonly
found in the comparables, price per
square meter; net income multiplier;
etc..
Market price - is the price that the
comparable property was sold for; it may
be more or less than the market value,
particularly if either buyer or seller
needed to complete the transaction
quickly, or if the transaction was not at
arm's length, such as a sale between
relatives or friends.
17. Market cost - is what it would actually
cost to buy the land and build the
structures. Market value and market cost
may not be the same; it is rarely the same
for improvements to the property. For
example, paying Php 200,000 to add a
new addition probably will not increase
the market value by Php 200,000. Market
cost estimates are partially needed to
make adjustment values upon
comparables.
18. Steps in the Market Data approach
1. Research the market to obtain information pertaining
to sales, and pending sales that are similar to the
subject property
2. Investigate the market data to determine whether
they are factually correct and accurate
3. Determine relevant units of comparison (e.g., sales
price per square foot), and develop a comparative
analysis for each of the comparables.
19. 4. Compare the subject and comparable
sales according to the elements of
comparison and adjust as appropriate
5. Reconcile the multiple value
indications that result from the
adjustment (upward or downward) of the
comparable sales into a single value
indication
6.Units of comparison – are the
components or units that allow
quantification of the elements of
comparison, such as price per sq. meter,
rent multiplier, income ratio; density
measures;
20. Example of Elements of comparison and Units:
Unit
Location :
Distance from amenity km.
Site specific data :
High vantage point, nice view, etc. %
Agri land – existence of irrigation %
Physical characteristics
Number of bedrooms, garage, etc. PhP value
Allowed Use
Level of commercial allowed C-1, C-2, etc. % or Php Height limit %
or Php
Economic characteristics
Land with coconut vs. fruit trees % or PhP
Neighborhood data
Surroundings clean, well-lighted, safe etc. %
Conditions of sale
Terms of payment, option, escrow, etc. PhP value
21. Methods of Comparison
There are two basic ways to compare market data
between a Subject and a Comparable:
Review and intuition or “observation” method; and
Adjustment grid data analysis
The Review and Intuition method is a simple
approach. It does not require any deep analysis, just a
simple comparison between the two properties. From
experience, the Appraiser makes a value judgment and
a declaration of value based on his observations past
and present. It is intuitive, not testable. No serious
computations are needed.
22. The Adjustment grid method is a more
sophisticated technique. It is systematic
and minimizes risk. It is also more logical
and allows the appraiser to back up his
indicated value by presenting the logic he
used in arriving at the estimate. The
adjustment grid is a worksheet where the
elements of comparison are arrayed and
adjustments are made.
23. The steps in the Adjustment Grid
method are as follows:
a. Comparables are arrayed in a
table horizontally
b. Common elements of comparison
arrayed horizontally; usually price
is given.
c. Adjustment on value in terms of
percentage or absolute amounts
developed
d. Adjustments are applied to make
comparables similar to the subject
property
24. Adjustment rules:
If the comparable is inferior, the market
price is adjusted upward, adjustment is
“plus.”
If the comparable is superior, the market
price is adjusted downward, adjustment
is
“minus.”
25. The adjustment rules can be confusing.
But the simple rational is this: The
comparable’s value is adjusted to make it
“equivalent” to that of the Subject
property.
If a feature or element in the
comparable property is inferior, then an
adjusting value
must be added to it to level up with the
Subject.
If the feature or element is superior, then
an adjusting value must be deducted
from it to level down with the Subject.
To better understand this methodology, a
simple example is presented below:
26. The Appraisal Assignment:
Appraiser was asked to value a 2BR house
in a subdivision made by Camella. After
doing research, he saw 3other 2BR homes
of the same model, and lot sizes, with
offering prices and features as follows –
Chouse#1 – P2.5M; is one km from the
park, has one-car garage and is 5 years
old. Chouse#2 - P2.7M; is 1.5 km. from
the park, has one-car garage, and is 2
years old. Chouse#3 - P2.6M; is 2 km from
the park, has 2-car garage, and is brand
new.
27. From research, he found the homes have
all the same lot size and the current value
of the lot is P 1.2M. Proximity to the park
which has a beautiful clubhouse is
considered a premium and a half-km
differential results in a 5% price
differential. The current cost of building
an extra one- car garage is P200,000.
Assume a useful life of 50 years.
28. Solution using the Adjustment Grid Method
Element of Comparison Comp
House#1
Comp House
#2
Comp
House #3
SUBJECT
1. Offer price (Asking) P 2,500,000. P 2,600,000. P 2,700,000. To derive
2. Location from park 1.0 km 1.5 km 2.0 km 1.0 km
3. Garage One-car One-car Two-cars Two-cars
4. Age of the house 5 years old 3 years old Brand new 2 years old
ADJUSTMENTS
1. For distance to park 0% (same as
subj)
Inferior +5% Inferior +10%
2. For garage Inferior +
P200K
Inferior
+P200K
Same, no adj.
3. For age Inferior
+3x30K
Inferior
+1x30K
Superior -
2x30K
Adjusted Values P 2,790,000. P 2,960,000. P2,910,000. Ave=
P2,886,666.
29. Notes:
The lots of these houses currently sell for
P 1.2M. From CHouse#3, a brand new
home costs (P2.7-P1.2) = P1.5M
A depreciation period of 50 years is
assumed. Thus average annual
depreciation is P1.5M/50 or P30,000/year.
Since the prices given are offering
prices (ceilings), I recommend a 5%
reduction for negotiation. Thus the
indicative market value for the Subject
House is 95% x P2.87M or about P
2,725,000.
