APPRAISAL: Questions and Answers

1. Which of the following courses would benefit a professional appraiser? Why or why not?

a. Answer: Real estate financing, land-use planning, real estate laws, real estate
economics, statistics, real estate principles, urban sociology, demographics, and
information systems, taxation , and other subjects specified under RA9646

b. Answer : All the courses listed above would benefit a professional appraiser because
they touch on topics that must be understood in order to prepare a well-reasoned
appraisal report.


2. Should an appraisers compensation be based on the value of the property being appraised?
Why or why not?

a. Answer : An appraiser compensation should not depend on the estimate of value
obtained, to avoid even the appearance of impropriety (failure to observe standard or
show honesty or modesty) or conflict of interest. The appraisers compensation may,
however, reflect the complexity of the work required in dealing with the subject
property.


3. An appraisers pays finders fee to a licensed real estate agent without disclosing the
amount of the fee to the appraisal client.

Is this practice allowed or prohibited by the Uniform Standards of Professional Appraisal
Practice ( USPAP) ? Answer : Prohibited

Which part of the USPAP provided the basis for your decision?
Answer : Ethics provision management


4. After accepting an assignment, an appraiser realizes that he is not qualified to complete the
assignment.

What part of USPAP deals with this problem? Answer : Competency provision

What course of action is suggested?
Answer : The appraiser is obligated to notify the client and to:
Take all steps necessary or appropriate to complete the assignment
competently;
Describe in the report the appraisers lack of knowledge and / or experience and
the steps taken to complete the assignment competently.

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5. Why is the distinction between real estate and personal property important to the appraiser?
Answer : If an item is personal property, it could not be considered in estimating the
value of real property. On the other hand, if the item were real estate, then its
contribution to the value of the real property would have to be estimated

6. What is the highest form of real property ownership?
a. Answer : Fee simple

7. What estates in real property are owned by tenant and landowner?
a. Tenants estate is leasehold
b. Landowners estate is leased fee
c. Sublessors interest in sandwich lease ( lessee and sublessee) is subleasehold

8. What is the difference between servient estate and dominant estate ?
a. Servient estate is the one giving easement or right-of-way (grantor)
b. Dominant estate is the one asking for right-of-way or easement (grantee)

9. Differentiate land and site
a. Land is the earths surface and everything under it or on it.
b. Site term if land is improved by the addition of utilities like water, electricity and other
services such as sewers and it becomes suitable for building purposes

10. Why would an appraiser need to know site valuation
a. In the cost approach
Answer : In applying the cost approach, site value must be distinguished from the cost
of improvements, as indicated in the following formula:
RCN Depreciation + Site Value = Estimated Property Value
b. For tax purposes
Answer : In computing depreciation for tax purposes, site value must be subtracted
from total property value, because land is not a depreciable asset.

11. Of the six methods of valuing site, which method is preferred and why?
Answer: Sales comparison approach because of the underlying presumption that recent
sales of comparable sites competitive with the subject site are the most reliable guide to
the probable current market behavior and reactions of informed buyers.

12. Synonyms :
a. Market rent - economic rent
b. Contract rent scheduled rent
c. Interest rate is return on investment (interest on land and building)
d. Recapture rate is return of investment (recapture of building cost in its economic life.
No recapture on land since it is not a wasting asset

13. What is the difference between valuation and appraisal?
a. Valuation - is the process of determining value; it can be done even by unlicensed real
estate appraiser, say a mechanical engineer estimating the value of machinery.
b. Appraisal - opinion on value; can only be done by a licensed appraiser.

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14. What should be the primary qualifications of the appraiser?

a. Education - knowledge in computation and accounting is invaluable.
b. Experience it can be done through on-the-job training or employment in a real estate
appraisal company to gain experience.
c. Objectivity - render an opinion which is fair and just (impartiality) and any personal
interest must be disclosed to the client.

15. How do we compute for appraisers compensation
Compensation should not be based on final opinion of value to avoid even the
appearance of conflict of interest. It should be based on time required and scope of
appraisal assignment. See our sample computation on our handouts first set.

16. Purposes of appraisal
a. Please our handouts (first set)

17. Differentiate
a. (1) principle, ( 2) fundamentals, (3) economics, (4) assumption, (5) factor,
b. (6) characteristics, (7) art, (8) science, (9) accounting (10) enterprise

c. Principle - a rule of science explaining how things act; a truth that is a foundation of
other truths.
Example : Principle of values (substitution, anticipation, highest and best-use, etc.)

d. Fundamentals - essential, very important, basis or foundation, primary principle.
Example: Fundamentals in real estate appraisal ( what create values, principles of
values, factors which affect values of properties, etc.)

e. Economics - the science of the production, distribution and consumption of wealth.

f. Assumptions - in appraisal, they are suppositions taken to be true whether they are
primary or secondary information. Assumption and limiting conditions of the appraiser
is part of the appraisal report.

g. Factor any one of the cause ( say factors which create value DUST)

h. Characteristic distinguishing a person or thing from others.
Example: Characteristic of values : physical and economic; used in distinguishing
comparables from subject property. Characteristic of market value (its definition)

i. Art - skill, principle or methods, like appraisal is more of an art than a science since it
deals more on opinion of values.

j. Science knowledge of facts and laws arranged in an orderly system. It is a broad body
of knowledge systematically arranged so as to show the operation of general principles.
Example : Mathematics, economics

k. Accounting an art of recording, classifying, summarizing, in a significant manner, in
terms of money, transaction and events, which are in part, at least, of a financial

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character and interpreting the result thereof similar to appraisal process. Process is a
system like appraisal process steps done in appraisal to develop an opinion of value.

l. Enterprise - an undertaking, like in business enterprise.
Example: An investor put up P5 million in a business enterprise.

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REAL ESTATE APPRAISAL

1. What is real estate appraisal?
It is the process of estimating and giving an opinion of value.
Can only be done by a licensed appraiser, however, valuation can be done even by an
unlicensed appraiser. Appraisal is more of an art than science because it deals with
estimates.

2. Accuracy of the appraisal reports depends on the following:
Data gathered by the appraiser ( comparables should be in an arms-length transactions)
Education and experience of the appraiser
Credibility of the appraiser

3. Qualifications of the appraiser
1. Must be licensed by Professional Regulation Commission
2. Education plus experience
3. Credibility and honesty (fairness and objectivity)

4. Differentiate real estate, real property, personal property
1. Real estate is the physical property ( land, building and other structures, plants and trees) or
land and anything attached to the land whether by natural or artificial attachment.
2. Real property is the right or interest over real estate ( bundle of rights)
3. Personal property is property other than real property. Movable, tangible or intangible
properties such as goodwill and patent

5. Differentiate attachment and severance
1. Personal property becomes real estate by attachment like construction materials converted
to building and other structures; machineries and equipment when attached to the building
become real estate like elevator and escalator.
2. Real estate becomes personal by severance. Example is an elevator taken out from the
building for it is not anymore functional.

6. Differentiate value in use and value in exchange
1. Value in use value to the owner; subjective value
2. Value in exchange target of appraisal; market value; objective value

7. What are the 3 approaches to value?
1. Market data or Sales comparison approach
2. Cost approach
3. Income approach

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8. Definition or characteristics of market value:

1. estimated price or probable amount property would be exchange in a typical market
2. in terms of cash or its equivalent
3. in an arms-length transactions (not unrepresentative sale)
- buyer and seller are acting in their own self-interest
4. buyer and seller are knowledgeable on the legal uses of the property
5. buyer and seller are not under duress or not compelled to buy and sell
6. it is an exchange or objective value

9. Elements or determinants of value ( D U S T )
Demand, utility, scarcity and transferability

10. Forces which affect values of properties
Governmental, physical and environmental, social and economic

11. Differentiate market value, price and cost
1. Market value is the most likely price the property would be sold in an open market. It is
commonly the target of an appraisal assignment- an objective value.
2. Price actual selling price of the owner or the amount the property is actually sold.
3. Cost the amount of money used to construct say a building plus the land value.

12. Give at least 5 principles which affect values of real estate
Substitution, anticipation, highest and best use, law of supply and demand,
conformity, contribution, increasing and diminishing return, surplus productivity,
plottage, progression, regression, consistent use, externalities

13. Examples of unrepresentative sales not to be used as comparables
1. Fire sale or liquidation sale
2. Foreclosure sale
3. Sale of parents to children
4. Sale of company to an affiliated company

14. Sequence of adjustments in market data approach
1. Terms of sale or condition of sale ( installment price should be adjusted to cash value). This is
an adjustment to comparable
2. Time element (value of comparable should be adjusted to the time ov valuation. This is an
adjustment to comparable.
3. Other adjustments like location and physical character of the property (size, shape,
elevation). This is an adjustment to comparable to make it equal to the subject property.

15. Applicability of Market Data Approach
1. Old residential dwellings (depreciation is hard to estimate)
2. Vacant lots
3. Income approach is also using market data or comparables to get overall rate, interest rate,
GIM and GRM

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16. Applicability of Cost Approach

1. New or relatively new buildings (because depreciation can easily be estimated)
2. Special purpose real estate like schools, church, industrial complex, malls

17. Applicability of Income Approach
1. For commercial properties
2. Residential apartments
3. Commercial vacant lot (ground rent capitalization)

18. Steps in estimating value of land and improvement in cost of approach
Estimate the value of land, as if vacant (using market data approach);
Estimate the reproduction cost new of the improvement;
Estimate the depreciation from all causes;
Deduct total depreciation from reproduction cost-new;
Add the depreciated value of the improvement to the value of the land.

19. Give at least five(5) purposes of real estate appraisal.
Sale or purchase of property ; Financing and credit; Taxation ( local & national)
Just compensation on expropriation cases; Merger and Consolidation
Insurance; Partition and liquidation of estate

20. Differentiate value in use and value in exchange
Value in use value to the owner of the property or subjective value;
Value in exchange the fair market value of the property or objective value

21. Three methods in estimating reproduction cost
Quantity survey method - detailed computation of all the elements of cost (labor, materials
and overhead) and the hardest for its time consuming;
Unit-in-place method - estimating various parts of building like cost per sqm of flooring,
walls, ceiling and roof
Per sq. meter method - the simplest method commonly used by appraisers.

22. Give at least three methods in estimating depreciation (see handouts for details)
Over-all or simple age life method :
Modified age life method:
Observed Condition Breakdown Method
Sales comparison method:
Capitalization method

23. Physical characteristic of land (M-D-H )
1. Immobility exact in location; cannot be moved
2. Indestructibility - land is durable; not a wasting asset; you can abuse or modify
3. Non-homogeinity no two parcels are exactly alike; they cannot occupy the same exact
place on the earth

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24. Economic characteristic of the land

1. Scarcity the earth does not expand
2. Modification - also called improvements. Site is an improved land. Rawland is undeveloped
land. Land when developed increases its value
3. Fixity - investment in real estate is long term also called permanence of investment.
4. Area preference also called situs, refers to peoples preference in certain areas

25. Two general methods in income approach to value
1. Direct capitalization
a. GIM Method
b. GRM Method
c. Residual Methods Straight line ( Land, Building and Property Residual Methods)
d. Residual Methods Annuity (Land, Building and Property Residual Methods)
2. Indirect capitalization
a. Yield capitalization or Discounted Cash Flow Method

26. Why is called direct and indirect ?
1. Direct because you only use one year NOI to compute for the value; without regard to
future increases on income.
` 2. Indirect because periodic or yearly income is converted to present value.

27. What is the general formula for income approach?
1. Value = Income / Rate WHERE: Income is NOI; Rate is capitalization rate
2. Rate = Income / Value
3. Income = Value x Rate

28. What is capitalization rate? Capitalization process?
1. Capitalization rate
1a. Use interest rate to convert income of land to value of land
1b. Use overall rate ( interest rate + recapture rate ) to convert land and building
income to value.
2. Capitalization process is converting one year Net Operating Income to Value of the property

29. How is Net Operating Income distributed?
1. Portion is income to land (interest on land or return ON investment)
2. Portion is income to building (interest on building or return ON investment)
3. Portion is recapture of investment in building which is a wasting asset ( return OF
investment)

30. What is recapture, recapture rate?
The owner of the property has to allot a portion of the yearly income as recapture of the
building which is a wasting asset; there is no recapture provision for the land because it is
indestructible.

Recapture rate is percentage of the value of the wasting asset to be deducted from NOI as
return OF investment. Example: If the building value is P10M and the estimated useful life is 50
years, using straight line recapture, the recapture rate is 2% per year ( 100% / 50years ) or P200K
(P10M x 2%)

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31. What are the usual annuity factors being used in income approach?

1. Future Value Factor or S ( compounding of interest )

where: S = ( 1 + i)n
Where : i = interest per period; n = no. of paying period

Future Value = Present Value x Future Value Factor

Applicability : Applicable to all


2. Reversion Value Factor or 1 / S ( Discounting)

Present Value = Future Value x Reversion Value Factor

Applicability :
1. Leased Fee Estate and Property Residual Method Annuity
2. Yield Capitalization or Discounted Cash Flow


3. Present Worth Factor or S 1 / Si ( Discounting)

Present Value = One Periodic Receipt x PWF

Applicability:
When computing the Present Value of an Income Stream
which are equal in amounts or periodic receipts in equal amounts


4. Amortization Factor or Si / S 1 ( interest based on diminishing balance)

Example : Monthly Amortization = Loan Value x MAF
(equal amounts)

Applicability :
To compute periodic amortization, say monthly, in amortizing loan in equal
amounts, such as installment sale in subdivision and condominium; amortizing
bank loan

32. How to extract overall rate from market?

Formula :
OAR from market = NOI of comparable / Selling Price of comparable
Value of subject property = NOI of subject property / OAR of comparable

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32. How to extract overall rate from Band of Investment Method?

Formula :
Participation Interest Rate Composite Rate
Bank say 75% 10% 7.5%
Investor 25% 12% 3.0%
Overall rate 10.5% (capitalization rate)

33. How to extract interest rate from market comparable?

NOI of comparable P1.8M
Less : Recapture value of comparable (Cost /Useful life) 200K (P10M x 2%)
Pure income to land and building 1.6M
Divided by : Selling price of comparable 20M
Equals : Interest rate based on market comparable 8%

34. What are generally included in the operating expenses?
1. Fixed expenses such as realty tax and insurance
2. Variable expenses such as payroll of laborers
3. Reserve for replacement

35. What are not included in the operating expenses
1. Financing costs like interest expense
2. Income tax payments
3. Depreciation
4. Capital improvements

36. How to compute for Net Operating Income and Net Cash Flow
Potential gross income say P1,000,000.00
Less : Allowance for vacancy 20% 200,000.00
Effective gross income 800,000.00
Less: Operating expenses 200,000.00
Net Operating Income (NOI) 600,000.00
Less: Debt Service (loan amortization/yr.) 300,000.00
Net Cash Flow P300,000.00

37. What are the methods of site valuation?

1. Market data or sales comparison approach
Value of comparable + or adjustments = Value of subject property

2. Extraction or abstraction method
Value of comparable H&L less Bldg. value = Land value / Lot area = Value/sqm.

3. Allocation Method
Selling price of land and building is P5M; building ratio to land is 3:2, therefore,
Land value = P5M x 2/5 = P2M

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4. Ground Rent Capitalization

NOI / Interest rate = Land value by Income approach

5. Land residual method in income approach
NOI - Income and Recapture to building / Interest rate

6. Subdivision development method
Selling Price - ( Dev. Cost + Operating Exp. + Developers Profit) = Rawland Value
Discounted Cash Flow maybe applied here.


38. What is 4-3-2-1 rule or depth rule?
It means that the subject lots are subdivided in 4 equal parts according to its depth. If the value
of the 1st part fronting the road is P1,000.00/sqm., then the succeeding part next to it is
P750.00/sqm. (P1,000 x ); the third portion is P500/sqm (P1,000 x 2/4) and the deepest part is
P250/sqm (P1,000 x ).


39. What if the 10-hectare lot with different owners was sold at P10M, how is the sharing using 4-3-
2-1 rule?
First part = P10M x 40% = P4M
Second part = P10M x 30% = P3M
Third part = P10M x 20% = P2M
Last part = P10M x 10% = P1M
Total = P10M


40. Give three interests in lease.
1. Leased fee estate - interest of the owner-lessor
2. Leasehold - interest of the lessee
3. Subleasehold - interest of the sublessee

41. Differentiate market rent and contract rent
1. Market rent - sometimes called economic rent; the probable rent that the property would
get if exposed to the market
2. Contract rent - the actual rent amount stipulated in the lease contract.

42. Situation where there is a positive leasehold and subleasehold
1. Positive leasehold if contract rent is lower than market rent.
2. Positive subleasehold if sublease rent is lower than market rent.
3. Excess rent if contract rent or sublease rent is higher than market rent (negative leasehold)

43. What is sandwich lease?
Lease between the lessee and the sublessee

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44. Appraisal Process

1. Definition of the problem
a. Identification of real estate
b. Property rights to be appraised
c. Date of value estimate
d. Use or purpose of appraisal
e. Definition of value
f. Assumption and limiting conditions

2. Preliminary analysis, data selection and collection
a. General data ( social, economic, government, environment - FORCES)
b. Specific data ( site and improvement, sales, cost, income and expense)

3. Highest and best-use analysis
Land as though vacant, property as improved

4. Land value estimate

5. Application of the three approaches
Cost, market data and income approach

6. Reconciliation of value indications and final value estimate

7. Report of defined value.

45. Three types of appraisal report
1. Self-contained report
2. Summary report
3. Restricted use report

46. Styles of written appraisal report
1. Form style report
2. Narrative style report



REAL ESTATE ECONOMICS

47. What is economics?
It is a branch of social science that studies the production, consumption and distribution of
goods and services.

48. What is real estate economics?
It is the use of economic techniques and principles for the growth of real estate markets. It
describes, explains, and predicts patterns in the price, supply and demand of goods and services
available in the industry.

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50. What is market?

It is any structure, institution or system whereby buyers and sellers meet and exchange goods or
services with value at negotiated prices. It facilitates the trade and enables the distribution and
allocation of resources in a society

51. Major types of economic system
1. Traditional economy traditions, customs and beliefs determine the operation of a countrys
economy; typical in underdeveloped countries
2. Market economy or capitalism consumers and their purchasing power decide and drive the
economy
3. Command economy or socialism government makes all major decisions related to the
production, consumption, and distribution of goods and services including price regulations;
focuses on what is needed not what is wanted
4. Mixed economy combination of market and command economy.

52. Main participants in the real estate market
1. Consumers - buyers
2. Producers - developers, dealers
3. Distributors - facilitators like brokers

53. Buyers market vs. Sellers market; Perfect market vs. Imperfect market

1. Buyers market - more sellers than buyers ( OLIGOPSONY)
2. Sellers market - more buyers than sellers ( OLIGOPOLY)
3. Perfect market - many sellers and buyers competing against each other
4. Imperfect market - either buyers market or sellers market
5. Monopoly single seller, multiple buyers
6. Monopsony single buyer, multiple sellers

54. Unique characteristics of real estate market
1. Durability land is indestructible
2. Heterogeneity - non-homogeinity, no two properties are exactly alike
3. High transaction costs - local and national taxes, commission
4. Long time delays construction delays like condominium buildings
5. Investment (return on) and consumption (use)
6. Immobility - buyers come to the goods not goods come to the buyers

55. Agents of production
1. Land - rent
2. Labor - wages
3. Capital - interest
4. Entrepreneurship - profit

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56. Value Concepts

1. Theories of Mercantilists - value depends on utility; desire or demand
2. Theories of the Physiocrats - laid the foundation of economic rent
3. Cost theory of Adam Smith - objective (market forces); value in use
4. Rent theory of Ricardo - scarcity; population = more mouths to feed; more
mouths = need for more grains = more land
5. Scarcity theory of Malthus - Law of supply and demand factor
6. Labor theory of Marx - human labor as the sole creator of value
7. Social theory of Mill - unearned increment in land abolished thru taxation
8. Theories of Austrian School - relationship of market price and value; perfect and
imperfect market

HUMAN AND PHYSICAL GEOGRAPHY

57. Geography
Study of earth as the home of people
Studies the earth and its lands
Bridge between the human and physical realms (field or world)
Location is important is the most fundamental principle
Considered the mother of all sciences

58. Ways of identifying location
1. toponym - nominal location; name given to a place
2. Site - physical character of the location
3. Situation - relative location of a place compared with other places, like identifying
landmarks
4. Mathematical situation absolute location on the earths surface

59. What is physical geography?
Branch of geography that studies the earth and its natural features.

60. Major spheres of the earth
1. Hydrosphere - mass of water
2. Atmosphere - layer of gases surrounding the earth
3. Lithosphere - outermost shell, uppermost mantle
4. Biosphere - surface of earth where life dwells

61. Specialized fields in Physical Geography
1. Geomorphology - study of various landforms on the earths surface
2. Pedology - about soil
3. Biogeography - relationships of plants and animals
4. Hydrology - study of water
5. Meteorology - circulation of atmosphere over short time spans
6. Climatology - circulation of atmosphere over longer time spans

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