PAMANTASAN NG LUNGSOD NG MAYNILA

(University of the City of Manila)

Gen. Luna cor. Muralla St., Intramuros, Manila, Philippine

Credit Management and Collection Policies

FIN 3104-2
Group 6
Written Report

Submitted by:

Arizala, Nathaniel D.
Bugayong, Donna Marie S.
Canilao, Allexandra D.
Diaz, Kate

Submitted to:

PROF. RAGRCIEL G. MANALO

 Module 2: Practices and Procedures

Module 2: Chapter VI: Inspection and Appraisal

Lecturers:

Arizala, Nathaniel D.
Bugayong, Donna Marie S.
Canilao, Allexandra D.
Diaz, Kate

Topic Outline:

Inspection and Appraisal

a. Nature, Purpose and Objective
i. Nature of Inspection
ii. Nature of Appraisal
iii. Differences between Inspection and Appraisal (addendum) –
Bugayong, Donna Marie S.
iv. Purpose of Inspection
v. Pros and Cons of Inspection – (Addendum) –
Bugayong, Donna Marie S.
vi. Purpose of Appraisal
vii. Pros and Cons of Appraisal (addendum) –
Bugayong, Donna Marie S.
viii. Objective/Functions of the Inspections
ix. Objective/ Functions of the Appraisals
x. Importance of the Inspection and Appraisals (addendum) –
Bugayong, Donna Marie S.
b. Types of Properties and how can it be offered as a collateral
i. Real Estate
ii. Land Improvements
iii. Chattels
iv. What is Collateral? (addendum) – Arizala, Nathaniel D.
v. How Collateral Works – (addendum) - Arizala, Nathaniel
vi. Collateralization – (addendum) - Arizala, Nathaniel
vii. Interest Rates for Collateralized vs. Unsecured Loans –
(addendum) - Arizala, Nathaniel
viii. Example of Collateral Loans – (addendum) - Arizala, Nathaniel

c. Guidelines in Conducting Actual Appraisal

i. Determine the purpose and scope of the appraisal, clarifying
the nature of the value to be estimated. Define the value.
Fix appraisal date.
ii. Determine the nature of the interest or property rights on the
property to be appraised.
iii. Identify the property by description.
iv. Determine the “highest and best use” to which the property
may be put. – Diaz Kate
v. Classify the type of property.
vi. Outline the data applicable to the problem, inspect the
property and gather the needed.
vii. Relate the data to the approaches to value, and calculate
value by each approach.
viii. Reconciliation of Value Indications and Final Value Estimate
- (Addendum) – Diaz Kate
ix. Prepare an Appraisal Report – Diaz Kate

d. Valuation Approaches
i. Cost approach
 o Examples of Cost Approach – (addendum) – Canilao,
Allexandra.
ii. Income Approach
o Examples of Income Approach and other definitions –
(addendum) – Canilao, Allexandra.

iii. Market Data Approach

o Steps in the Sales Comparison Approach and
Examples of Market Data Approach – (addendum) –
Canilao, Allexandra.

Learning Objectives:
i. Comprehend the meaning of Inspection and Appraisal and its
connection to Credit
ii. Discern the different types of Properties and how it can be pledged
as a collateral
iii. To explore and apply the different guidelines in conducting Actual
Appraisal and Valuation Approaches and its computation as well.

INTRODUCTION:
When we say Inspection and Appraisal, it is the evaluation and inspection
of properties to further identify its true worth in the present economic value. One
should be knowledgeable enough to appraise and inspect so that he can measure
and assess the amount when a buyer is requesting, or it is ordered by the bank.
To further explore the true meaning, our group will satisfy your curiosity and feed
your mind with relevant topics in this chapter.
LECTURER: Bugayong, Donna Marie S.

Nature of Inspection
The Inspection requires checking, examining and evaluating the property to
convince that it meets the specific standard. As an inspector, it needs to guarantee
 that the property is impressive and also not breaking any laws. Furthermore,
Inspectors requisite to determine that the materials of a property is in good
condition with the right of quantity.

Nature of Appraisal
Appraisal looks at how much the property is worth. An Appraiser will assist you to
make further decisions as they will provide you with an accurate and convincing
opinion of the value that reflects the particular market evidence.

Addendum: Differences between Inspection and Appraisal

Inspection Appraisal

Examination of a property to regulate the The appraisals will give you the estimated
condition of the said property. value of the property cost.

The goals of the inspection will give you The goal of appraisals is to evaluate the
detailed information that will assist you to market value of the property so that the
make a decision to purchase the property. seller will not give a higher price of the
property’s actual cost.

The average inspection costs range The appraisal fee ranges around $300 to
between $300 and $350. $500.

Purpose of the Inspection

There are two main goals of a home inspection. The inspection can help buyers
feel confident that the property they are buying is solid and has no major problems.
The seller can also use the inspection to find places that need fixing or to show
potential buyers that the property is in good shape.

The inspector will conduct the property assessments including:

● Inspect any problems of the property
● Checks the exterior of the property
● Checking for the safety issues
● Inspect all the defects of the property
● Checks the electrical system and water system

Addendum: Pros and Cons of Inspection

Pros Cons

You can easily determine that this In inspection they might discover
meets your standards and regulations. some structural damage or other
issues that you ain't financially
prepared for.

You will find out that the property has Some inspectors are very strict, even
a higher value than you expected. the small and might find problems on
the property where none actually exist.

Purpose of the Appraisal

The purpose of appraisal is to estimate the value of any property interest or to

manage the analysis for the real property decisions.
 Other type of value:
● Market value - This is the price of the currently offered assets that reflects
the market conditions.
● Insurable value - The approximately cost of the insurance company to
pay and replace your property if it will consider an actual total loss.
● Assessed value - It is used to determine the applicable property tax
which is also known as ad valorem tax.
● Use value - Value of the specific property for its specific use, may or not
may be the highest and best use of the property.
● Investment value - This is the value an investor is willing to pay in order
to acquire an asset and investment which is based on their unique
investment goals and criteria.

An inspection allows a buyer to consider the benefits and cons of investing in a

property, whereas an appraisal establishes its value. A home inspection takes 2 or
3 hours to complete, compared to an appraiser's half-hour visit. An assessment
considers more than just the home's condition to determine its value, such as its
location and crime rate. Most appraisals seek market value. Market value is the
highest estimated price a property will bring if sold on the open market, providing
enough time to locate a buyer who knows all the ways it can be used. It's the price
at which a willing seller will sell and a willing buyer will buy without coercion.

Addendum: Pros and Cons of Appraisals

 Pros Cons

Property appraisal assignments offer Take more work which leads to longer
higher fees. time to finish the assignment because
of some additional resources not
available to find.

Complex assignments are usually Competency becomes an issue you

interesting and often give an appraiser have to be competent in order not to
a chance to expand their knowledge withdraw the assignment.
that can lead to more clients.

Objective/Functions of the Inspections

1. It Provides an "Out" - A good home inspection can tell you important things
about how a house and its systems are doing. This lets the buyer know what costs,
repairs, and upkeep the house may need right away and in the future. If the buyer
isn't happy with what the home inspector finds, it's usually their last chance to back
out of the deal.

2. Safety -There are radon, carbon monoxide, and mold these are all safety
problems that can be found during a home inspection. All homes should be
checked for these things.

3. Reveal Illegal Additions or Installations - Home inspections might identify

unpermitted rooms, garages, and basements. Illegal room additions harm
insurance, taxes, usability, and most importantly, value.

4. Protection - Home inspections are even more important if you are buying a
short sale or foreclosure "as is." Boarded-up homes often get dangerous mold
problems that are expensive to fix and can be bad for your health.
5. Negotiating Tool - A home inspection report gives you the chance to ask the
seller to make repairs and/or lower the price or give you a credit.

6. Forecast Future Costs - A home inspector can estimate how long ago the
plumbing, heating and cooling systems, and water heaters were put in. They can
tell you what's wrong with the building itself and how long the finishes have been
there. Every part of the house has a "shelf life." Knowing when they need to be
replaced can help you make important decisions about your budget and will tell
you what kind of home insurance or warranties you should look into.

7. Determine "Deal-Breakers" - Property inspections can help purchasers

determine how much they are willing to spend to get the home to their personal
perspective.

8.Learn to Protect Your Investment - Home inspectors educate. He or she can

offer house maintenance ideas

9. Reveal the Big Picture - People use home inspections to learn more about
what might be one of the biggest purchases they've ever made. "People fall in love
with a piece of property based on the color of the walls, the location of the home,
or something else. They don't see the problems that can turn that dream home into
a nightmare,"

10. Insurance - Certain issues or lack of certificates may disqualify a home from
insurance. Any appraisal's principal goal is to determine the property's fair market
value based on local and economic variables. An appraiser can best help the bank
by determining the property's cash value as collateral for the loan. Even in horrible
conditions, such as when the appraiser is urged to overvalue the property,
evaluation must be objective.

Objective/ Functions of the Appraisals

Transfer of ownership
● Help out the potential buyers set offering prices
● To assist proposed sellers to ascertain the acceptable selling price
● Set up the foundation in the real property
● To build the basis of the real property exchanges
● To reorganize and merging the ownership of the multiple properties

Relation to the financing credit

Litigation
● To evaluate the market value of a property.
● The market value of the left over after a taking
● To evaluate the damages to the property that cause by a taking
● To evaluate the market value of the property contract argument
● To evaluate the market value of the real estate as the part of a portfolio
● To evaluate the market value of the partnership interest
● To evaluate damages that caused by the environmental violations
● To evaluate damages that is caused by the environmental accidents

Tax Matters
● To evaluate assessed value
● To discrete the assets into depreciable items includes buildings and also
the non-depreciable items such as land.
● To evaluate the value of the real estate elements of the estate plan which
represents the basis for future capital gains and inheritance taxes.
● To regulate inheritance and gift taxes investment counseling and decision
making

Addendum: Importance of the Inspection and Appraisal

Inspection and Appraisal is essential because on inspection you can easily
determine the minor or major problems to the property that needs to be repaired
before or after purchasing it while on appraisals importance is for mortgage
approvals to confirm the property is worth the price.

LECTURER: Arizala, Nathaniel D.

Types of Properties (offered as collateral)

 A. Real Estate

Real estate encompasses both the land and any permanent structures or
improvements related to the property, such as a house, whether they are made of
natural or manmade materials. Real estate is one kind of property. It contrasts with
personal property, which includes things like cars, boats, jewels, furniture, and
farm equipment but is not affixed to the land permanently.

1.nnLand

Land is made up of all the plants, rocks, and liquids that are found on the
earth's surface up to its center and in the upper atmosphere above it. The
immobility, invulnerability, and uniqueness of land, with each piece of ground
differing geographically, are some of its physical attributes.

a. Agricultural Properties

Any piece of real estate exclusively used for agricultural purposes is

considered an agricultural real estate property. Farms, lands, and
farmlands are some examples of agricultural real estate. Crops and
other forms of human nourishment are largely grown on lands and in
other agricultural resources. Land can be used for various purposes
besides growing crops, which makes it a viable investment model.
Particularly when it comes to investment and the potential for large
returns on investment, agricultural real estate differs from traditional
real estate.

Similar to conventional real estate, agricultural real estate can be

leased or sold. Investors and farmers should pay close attention to
how much land they need to own, lease, or, in the case of selling the
property, how much land they need to purchase based on their
investment needs and already available resources. (Kabartay, 2019)
 Types of Agricultural Properties

● Mixed crop and livestock.

● Dairy farming.
● Grain farming.
● Livestock ranching.
● Mediterranean agriculture.
● Commercial gardening and fruit farming.

B. Residential
Single-family homes are the most typical type of residential real estate,
which is widely defined as real property (land and any buildings on it) utilized for
residential purposes. Contrarily, commercial real estate consists of land and
structures that are solely permitted for use in businesses (apartment buildings,
office buildings, hotels, etc.). This is not meant to imply that residential real estate
cannot be profitable. Homeowners can live in their residential homes and sell them
for a profit when property prices rise, or they can rent them out for passive income.

Types of Residential Properties

1. Standalone houses - The most typical kind of residential real estate
consists of single-family residences that stand alone or are situated on
separate parcels of land.

2. Townhouses - A townhouse, often known as a townhome, is a privately

owned residence that frequently has many levels and shares one or two
outside walls with nearby property.
 3. Apartment - Duplexes and fourplexes, which are buildings with two or four
units, are examples of apartments. Typically, structures with five or more
separate living units are referred to as commercial real estate.

4. Condominiums - In a community of other units, such as townhomes, high-

rise structures, or a condo complex, a condominium (or condo) is a privately
owned individual residential unit. Unlike apartments, which are typically held
by large corporations or property management firms, condos are frequently
owned by an individual in joint sovereignty with a condo owner’s
organization (COA).

C. Commercial
Commercial real estate (CRE) is land that is only used for business-related
activities or to offer a workspace, as opposed to being utilized as a residence,
which would fall under the category of residential real estate. Most frequently,
renters are leased commercial real estate to conduct businesses that generate
cash. This vast category of real estate can range from a small shopping mall to a
single storefront.

There are several types of commercial real estate. It could be anything, such as
an office complex, a duplex, a restaurant, or even a warehouse. Commercial real
estate can provide income for people, businesses, and corporate interests by
renting it out or by keeping it and reselling it.

Types of Commercial Properties

 1. Office - Urban and suburban office buildings can often be divided into two
categories. Skyscrapers and other high-rise structures that are used as
urban office buildings can be found in cities; some of them have a size of
up to a few million square feet. Office buildings in suburbs are frequently
smaller and arranged in office parks.

2. Retail - Properties that house the shops and eateries we frequently visit are
classified as retail. They may be multi-tenant (typically with an anchor, or
main tenant, who helps draw traffic to the site), or they may be independent,
single-use structures. The retail industry is complex because numerous
factors, such as size, idea, types, and numbers of tenants, as well as trade
area, determine the type of shopping center.

3. Strip / Shopping Center - Smaller retail buildings called "strip centers" may
or may not have anchor businesses. Simply put, an anchor tenant is a larger
retail tenant that typically attracts customers to the site. Wal-Mart, Publix, or
Home Depot are a few examples of anchor tenants. Small retail
establishments like Chinese restaurants, dry cleaners, nail salons, and so
forth are frequently found in strip centers.

4. Hotel - The hotel industry includes businesses that offer lodging, meals,
and other services to tourists and travelers. Hotels can be independently
owned (boutique) or branded, which signifies they are a part of a well-known
hotel chain like Marriott or Sheraton.

D. Industrial Real Estate

 Offering premises for exclusive commercial usage is what industrial real
estate is all about. The place where behind-the-scenes work is done is an industrial
facility, which is rarely accessible to clients. From mechanical engineering to
scientific research to package transportation, the specific applications for this kind
of property are incredibly diverse.

Types of Industrial Properties

1. Manufacturing Facilities - One possible industrial use for real estate
properties is as a manufacturing facility. From simple manual assembly
lines to heavy-duty metal workers, every product needs somewhere to
come into existence.
2. Industrial Building for Storage and Distribution - Storage and
distribution represent one of the largest markets for owners of industrial real
estate. People enjoy owning and purchasing things. Well, until it is put in
the cart, that stuff needs a place to sit. Many businesses also need a
foundation for their machinery, excess inventory, vehicles, or parts. A nice
room with easy access and flexible possibilities can be used for a virtually
unlimited number of things.

3. Flex Space - A flex space is an industrial building that is partially converted

into office space. Usually, the office space portion of these buildings takes
up around one-third of the property, while the rest remains a flexible space
for multi-purpose use. The idea behind a flex space industrial property is to
give companies a place where they can work and operate a business right
beside where the heavy work goes on. Here are a few examples of these
kinds of spaces.

E. Mixed-use Properties
 While they have their own unique characteristics, mixed-use properties can
really combine any of the aforementioned kinds of commercial property. The most
typical type of mixed-use properties are retail/restaurant buildings with offices or
homes perched on top, particularly in cities. Consider a typical downtown high-rise
building; chances are good that the asset is categorized as mixed-use.

F. Special-Purpose
The major types of commercial real estate are covered by the real estate
categories mentioned above. However, investors also build and hold a variety of
different real estate kinds that would be categorized as commercial. The concept
of "special purpose" property is then relevant. It roughly falls within CRE's
miscellaneous label.

G. Vacant Land/Raw Land

Unoccupied property that is not being used. Typically, it is undeveloped
property with no buildings or other modifications.

2. Land Improvements
Buildings are typically written off when a business buys them towards the
end of their useful lives. However, the land that is purchased along with the building
is not depreciated. Why, one could ponder. The life of the earth is endless. It won't
decay over time like a structure would. Land can never be exhausted and cannot
be destroyed.

Land improvements stand entirely apart from the actual land. Because of this, land
improvements are viewed as entirely different assets than actual land. The cost of
land improvements is not included in the purchase price of the land. It is
depreciated over the course of its useful life much like other fixed assets and is
instead viewed as a wholly different asset purchase.
3. Chattels
The tangible, mobile personal property is referred to as chattel. It can be
used to describe both living and non-living items, including pigs, furniture, and
vehicles. A chattel mortgage may be used to borrow money against this asset.
Because chattel property and other personal property might deteriorate more
quickly than land or improvements made to land, they are monitored separately
from these items. Legal regimes also treat chattel rights differently from rights
granted to actual property. Real property rights often have longer statutes of
limitations and are more difficult to challenge.

*Addendum*

What is Collateral?

A valuable asset that a borrower promises as collateral for a loan is known

as collateral in the financial industry. The house is used as collateral for the loan
when a home buyer gets a mortgage. The automobile is the security for a car loan.
When a company seeks bank funding, it may use valuable assets like real estate
or equipment as collateral for the loan. An unsecured loan has a higher interest
rate than one that is secured by collateral. If there is a default, the lender has the
right to sell the collateral to make up the difference. (Kagan, 2022)

*Addendum*

How Collateral Works

Lenders want to be sure that you have the means to pay back any loans before
they give them to you. Because of this, many of them need security of some kind.
Collateral is a type of security that lowers the risk for lenders. It aids in ensuring
that the borrower fulfills their financial commitment. If the borrower does fall behind
on the loan, the lender has the right to seize the collateral, sell it, and use the
proceeds to cover the outstanding balance. In order to recover any outstanding
balance, the lender may decide to file a lawsuit against the borrower.

As previously stated, collateral can take many different forms. It usually has to do
with the type of loan; for example, a mortgage is secured by the residence,
whereas a car loan is secured by the vehicle in issue. Other assets may be used
as security for other unsecured personal loans. A cash deposit equal to the credit
limit, such as $500 for a $500 credit limit, could be used to establish a secured
credit card.

Collateral-backed loans frequently have interest rates that are much lower than
those of unsecured loans. A lien is a legal right or claim made by a lender against
assets held by a borrower in order to pay off a debt. Because they risk losing their
home or other assets used as collateral if they don't make their payments on time,
the borrower has a strong incentive to pay back the loan. (Kagan, 2022)

Addendum:

Collateralization

Collateralization is the process of using a priceless item as security to obtain

a loan. The lender may seize and sell the asset to recoup their loss if the borrower
defaults on the loan. Collateralizing assets offers lenders some protection from the
risk of default. It may make it easier for consumers with bad credit histories to get
loans. Loans with collateral are regarded as secured loans, hence their interest
rates are typically much lower than those of unsecured loans. (Kagan, 2022)

Addendum:

Interest Rates for Collateralized vs. Unsecured Loans

For example, as of May 2022, here are sample interest rates for collateralized vs.
unsecured loans: (Kagan, 2022)
Collateralized: An auto loan could be obtained at an average interest rate of
4.68% by an applicant with a good credit rating.

Collateralized: A 30-year fixed-rate mortgage could be obtained for an average

interest rate of 5.54%.

Unsecured: On the other hand, the median rate of interest across all credit cards
in the Investopedia card database was 19.62%.

Unsecured or Secured: Interest rates for personal loans, which can be either
collateralized or unsecured, ranged from 3% all the way up to 36%.

*Addendum*

Example of Collateral Loans:

Residential Mortgages

A mortgage is a loan where the house serves as the security. The loan
servicer may start legal processes if the homeowner stops making mortgage
payments for at least 120 days. These actions may result in the lender eventually
taking possession of the property through a foreclosure. The property can be sold
to pay off the loan's remaining principal once it has been transferred to the lender.
LECTURER: Canilao, Allexandra

VALUATION APPROACHES

Valuation approaches are required for various purposes, including

financing, sales listing, investment research, property insurance, and taxation.
However, the most common use of valuation is establishing the asking or purchase
price of an asset.

COST APPROACH

The value of a property in a location should cost the same as creating the
property from the ground up, according to the cost method to appraising real estate
holdings. The top limit of value is really determined by the cost method. The
weakness of this approach lies in the difficulty of estimating accrued depreciation
accurately (Corporate Finance Institute, 2022).

Addendum:

One of three approaches that investors use to evaluate buildings when

making investments is the cost approach to valuing commercial real estate. This
approach often performs well when assessing more recent properties. It can also
be helpful when valuing unique properties that may not be easy to replicate or
frequently sold (Carrigan, 2021).

The cost approach calculates using the following formula:

Property Value = Replacement/Reproduction Cost – Depreciation +

Land Value
Steps in the Cost Approach

The cost approach technique of real estate appraisal works as follows:

1. Determine the building's replacement or reproduction costs.

The first stage in the cost approach is to determine the

building's cost. You may accomplish this by using either the
reproduction or replacement technique. The key distinction between
these two strategies is how you calculate building and material
expenses.

Replacement Cost: Costs are calculated based on recreating the

identical structure using contemporary building methods, materials,
and standards

Reproduction Cost: Costs are calculated based on recreating the

original property using the same materials, labor, and design.

Construction cost: estimating is the process of forecasting the cost

of building a physical structure. It is the estimated value of the work,
including all materials the structure needed.

2. Calculating Depreciation

The next step is to compute depreciation, using either the

replacement cost approach or the reproduction cost approach.
Depreciation is only a measurement of the building's value decline,
including any upgrades.

There are a few other kinds of depreciation to take into consideration:

Physical depreciation: The decrease in value brought on by the

normal aging and wear and tear of a property.

Two Kinds of Physical Depreciation:

 ● Repairs (Curable): Deterioration is economically feasible to
treat if the rise in the value of the asset (after repair) is more
or equal to the cost of repairing.
● Incurable Physical Deterioration: it is the type of
deterioration that is incurable. This means the cost of
undertaking such repairs would be more than the value it will
generate.

Two Categories of Functional Depreciation

● Curable Functional Depreciation: One needs to calculate

the asset's value increase, if any, as a result of the repair. For
instance, an earthquake might cause damage to a house's
roof. The roof needs 5,000 in repairs. It is feasible to do this
repair because doing so will undoubtedly raise the home's
value.
● Incurable Functional Depreciation: The asset's added
value is still less than the cost of repairs. For instance, a
house's foundation may have a flaw. The house needs to be
completely rebuilt in order to be fixed. In all of these situations,
the expense of curing or repairing the asset consistently
remains relatively high in comparison to the asset's final worth
after the repair.

Functional depreciation: Potential value loss brought on by

changing consumer trends and demands

Economic depreciation: Variations in real estate values brought on

by regional and national economic issues

3. Determine the Value of the Land (Market Value)

 Consider the value of the land, or its market value, after you have
estimated the approximate amount of depreciation. There are a few
methods you may use to figure out how much the land is worth, but the
direct sales comparison technique is the simplest and most direct. This
approach based the value of the land on nearby, recently sold parcels of
land of a comparable size.

● Land Residual Technique of the Income Approach: In the

land residual technique, the net operating income attributable
to the land is isolated and capitalized to produce and
indication of the land’s contribution to total property value.
● Sales Comparison or Market Data Approach: Account the
selling prices of comparable, recently sold properties and
necessitates that there be an active market for similar
properties. These sales prices have been modified to account
for the context, circumstances, and distinctions between the
subject property and the comparable properties.

4. Deduct Depreciation From the Construction Cost

You may start your valuation now that you have the key values
needed for the cost method to evaluate.

Start by deducting depreciation from the building cost (whether you

chose to follow the reproduction or replacement method).

5. Include the Land Value

To arrive at the final estimated value, combine the land's valuation (which
you discovered in step three) with the depreciated cost of building.

You may use this as a rough guide when determining the property's worth
and whether it fits into your investing plan.
Addendum:

Cost Approach Example

It's time to look at a cost method to evaluate examples now that the formula
and processes have been clearly laid out.

The cost of construction is 3,000,000

The depreciation is 450,000

The land is worth 2,250,000

Start by deducting depreciation from the building cost:

3,000,000-450,000=2,550,000

Then, add the value to the land value:

2,550,000+2,250,000=4,800,000

In this cost approach example, the value of the property is 4,800,000

Income Approach

The income approach is a method of appraisal that enables appraisers to

determine the value of a property based on the predicted income the property will
provide. The income capitalization strategy is a common name for it. The income
approach usually sets the lower limit of value. The weakness of this approach lies
in the proper selection of the capitalization rate.
 Addendum:

One method for determining a property's worth when examining a sale is

the income approach to assessment. Investors trying to ascertain quick cash flow
can better comprehend the value a property might provide to their portfolio
because it is dependent on the income it produces (Carrigan, 2022).

Direct Capitalization Method

The direct capitalization approach uses income over a one-year period to

calculate a property's worth. It makes the assumption that costs and income will
be constant over time. This presumption makes it most appropriate for assets that
produce reliable revenue from year to year. As you continue to compare properties
using the direct capitalization method, be sure to remain consistent with
assumptions factored into the Net operating income calculation.

Yield Capitalization Method

The income approach to appraisal's yield capitalization technique takes a

variety of elements and objectives into account. The yield capitalization technique
recognizes that many investors buy real estate with the intention of long-term gains
in a dynamic, constantly shifting market rather than determining the property's
value primarily on a single year of revenue. This is why it takes into account
changes in expenditures from year to year, such as maintenance and development
costs, vacancy rates, and rent. In the end, investors attempt to ascertain the
anticipated value at the moment of sale by taking these factors into account.
Therefore, for assets with a larger potential for volatile changes, the yield
capitalization strategy is the best income approach.
Addendum:

Income Approach Example

Using the direct capitalization method. assuming the property generates stable
cash flow with the following values:

Revenue: 300,000

Operating costs: 75,000

Market cap rate: 5.5%

Property Value = NOI / Cap. Rate

Where;

NOI is Net Operating Income and,

Cap Rate is Capitalization Rate

● The term "capitalization rate," also known as "cap rate," is frequently

used in the real estate industry to describe the rate of return on an
investment based on the net operating income (NOI) that the asset
produces. To put it another way, capitalization rate is a measure of
return that is used to estimate the prospective return on investment
or capital payback.

Subtract operating expenses from revenue to arrive at net operating income:

300,000-75,000=225,000
Based on this information, the net operating income is 225,000.

Then, convert the market standard cap rate for similar properties of 5.5% to a
decimal: 0.055.

Lastly, divide the net operating income by the cap rate:

225,000/0.055= 4,090,909

Based on this direct capitalization example, the property’s value is 4.09 million.

3.nnMarket Data Approach

The market data approach, sometimes referred to as the sales comparison

approach, compares a property to other recently sold homes that were the same
size and condition and were located in the same neighborhood.

The market data approach is often recognized as the most accurate

comparison approach for residential real estate. The market data approach is
particularly perfect for new or underused lots because there aren't many variables
on the properties, making it simpler to compare the properties directly.

Addendum:

Steps in the Sales Comparison Approach

The sales comparison approach for the method of the market approach has
five phases, which are as follows:

· Study the market

· Collect and verify the data

· Analyze and compare the properties

 · Adjusting the price of the comparable, also referred to as “comps”

· Reconcile the newly adjusted prices.

A typical comparative market analysis examines the selling prices of homes

that have just closed in the same region. The tactic typically entails looking at
neighbouring properties to see what characteristics they have. The worth of a
property can then be determined by appraisers based on its features.

Addendum:

Market Data Approach Example

Here is another example. Let’s say that the home you are looking to
purchase lists at 330,000, a similar home with the same three bedroom two-
bathroom floorplan sold for 380,000 around the corner a few months prior. The
market data approach might result in a rise in your assessed value because the
home sold for more money. Even if it's a reduced form, that's how the strategy
appears to operate on paper.

Important characteristics to compare include:

● Building's age and state.

● The date of sale is used if there are any economic changes between the
date of sale of a comparable and the date of the appraisal.
● Location matters since the cost of comparable homes may differ from one
community to the next.
● Terms and conditions of the transaction, such as whether the seller was
forced to sell the property or whether it was traded at a bargain amongst
relatives.
● Lot size, landscaping, building kind and quality, quantity and type of rooms,
square footage of living area, hardwood floors, a garage, kitchen upgrades,
a fireplace, a pool, central air, and other physical features.
LECTURER: Diaz, Kate

Guidelines in Conducting Actual Appraisal

In conducting an actual appraisal, Before the appraiser performs an ocular

inspection, the credit files should be checked first to see if there have been any
reports on the title in the past or present as well as to see if it is on the bank's list
of titles that have been blacklisted. After that the appraiser will then attempt to plot
the property by paying close attention to its area, location, distance from landmarks
or major centers, as well as the identification of neighboring properties. So, if this
cannot be determined from the studies described above, it is much better to
conduct some initial inquiries with the Land Registration Commission or the Bureau
of Lands. The appraiser should not neglect to record whether the subject property
is agricultural, commercial, industrial, residential, or raw land.

Agricultural property

- This should always be appraised by the hectares

- When appraising agricultural property, the appraiser should consider factors

such as productivity, proximity to highways, mills, and central locations, number of
harvest seasons, type of crops planted, soil analysis, and any existing agricultural
facilities, if any.

Commercial, industrial, and residential properties

- should always be appraised in square meters

Raw Land

- The appraiser should investigate if the property may become subject to a

subdivision or agricultural land. So, if there are any neighboring agricultural lands
or subdivisions, those should also be investigated and noted appropriately.
Real estate

- The improvements in Real Estate like the houses, factories, and other structures,
are being valued based on their reproduction cost less depreciation for the number
of years remaining in their expected economic life. Additionally, other factors
including insurance risks, construction type, and method of materials, purposes,
floor space, etc., must be properly taken into account when characterizing and
appraising the value of the property. It is also a good practice to appraise and value
both land and improvements independently, even if the duties of inspection and
appraisal are related to one another

So, the borrower must provide a list of the chattels to be inspected wherein the
appraiser will be reviewing this list prior to the inspection and study them so that
he or she will be aware of the unique considerations beforehand and be on the
lookout for them.

1. Determine the purpose and scope of the appraisal, clarifying the

nature of the value to be estimated. Define the value. Fix appraisal
date.
● Purpose of Appraisal
- The purpose of an appraisal is the stated reason and scope of an
appraisal assignment. That is, to determine a specific value for any
real property interest or to carry out research or advisory work related
to real estate decisions. The client determines the objective of an
appraisal. The utility of an appraisal depends on the decision the client
desires to make regarding real property because it serves as the
foundation for such a decision. Additionally, it directs the customer to
the real property information they require.
● Determine the scope of work
- The scope should describe the extent of the procedure for gathering,
verifying, and reporting the data. The scope of the appraisal must abide
by Professional Appraisal Practice guidelines. The definition of the
 scope of work specifies the kind and purpose of the research and
analysis that an appraiser must conduct in order to produce reliable
appraisal assignment results. This includes, but is not limited to:
⮚ the extent to which the property is identified
⮚ the extent to which tangible property is inspected
⮚ the type and extent of data researched
⮚ the type and extent of analyses applied to arrive at opinions or
conclusions.

Addendum:

Scope Item 1. Client

⮚ The clients are those people or people who hire an appraiser for
a specific job which is either via employment or contract. It is
irrelevant who pays the appraiser whether the client or another
party. For instance, a lender might employ an appraiser, but the
borrower might be responsible for paying them. The borrower
does not thereby become the client. The client is the main point
of contact from a business perspective. You learn everything you
need to know about the task from the client, so the confidentiality
is owed to the client.

Addendum:

Scope Item 2. Intended Users

⮚ The intended users are the clients and any other parties the
appraiser has communicated with on the assignment who have
been recognized as users of the appraisal, appraisal review, or
appraisal consulting report by name or type. The appraiser needs
to be aware of the intended users because it is up to them to
make the most use of his value estimate. They are the parties
who need to be capable of comprehending the conclusions fully.
But not every party who obtains a copy of the report is
 necessarily one of the intended users, it is only when the
appraiser intends for a party to use the report which makes him
or her an intended user.

Addendum:

Scope Item 3. Intended Use

⮚ Intended Use is the most crucial aspect of the scope items, this
refers to the appraiser's comprehension of the client's and
intended users' needs for the service. The use or uses of an
appraiser's reported opinions and findings from an appraisal, an
appraisal review, or an appraisal consulting assignment, as
determined by the appraiser, is based on contact with the client
during the assignment. When asked to provide an appraisal,
appraisers are required to inquire about this. The appraiser
cannot begin to determine the proper scope of service without
knowing the client's intended usage. The appraisal process and
procedures may be determined by the intended usage.
⮚ Some of the possible intended use of appraisal are Financing,
Litigation, Condemnation, Divorce settlement, Buy/Sell decision,
Tax reporting, Portfolio evaluation, Arbitration, Partnership value,
Estate value, Charitable donation, Valuation for financial
reporting purposes (market-to-market) and others.

Addendum:

Scope Item 4. Type of Opinion

⮚ An assignment will provide some sort of value as a result. There are
many distinct sorts of value, even though the majority of assignments
ask for assessments of "market value." It is crucial that the appraiser
and customer will agree up front on which ones will apply. the
appraiser will not be the one who will decide which type of value will
apply, instead the appraiser will just determine the type of value
 required in the given nature of the client's situation. An assignment
may define more than one sort of value depending on what the
intended users need.
⮚ The kind of value sought must be specified at the start of an appraisal
when an estimate of value is necessary. Market value often
corresponds to the defined value. A suitable exposure time must be
one of the requirements implied by the market value concept. The
effective date of the value estimate must be stated in the report.
Addendum:

Scope Item 5. Effective Date

⮚ The appraiser's conclusions are reflected as of that date, and only
that date, so the effective date is crucial. The effective date may be
the present day, a date in the future, or a date in the past. The
effective date of appraisal must be within five years. Again, the
appraiser is not the one who decide the effective rather it is the
nature of the client's situation.

2. Determine the nature of the interest or property rights on the property

to be appraised.

- It is necessary to identify the rights to the subject property that are the
topic of the appraisal. Assuming there are no mortgages or other
obligations, these rights will be for fee simple ownership, levy on assets
or property.

3. Identify the property by description including

- Property type and location

- Street address, legal description, and any other method of description
so that the subject property is fully identified
- Owner and ownership type
 - Front, rear, and side color photographs of the subject property in this
section will help the reader visualize the appraisal problem.

4. Determine the “highest and best use” to which the property may be
put.

Addendum:
- Highest and Best use is one of the most important steps in the creation
of an opinion on market value. There are two important assumptions that
the appraiser must take into account in the highest and best use analysis
which are:

⮚ That the land is as if vacant.

⮚ That the land can accept improvements (buildings, structures,
crops, etc.)

- For it to be highest and best use it must fulfill four requirements:

⮚ Legally Permissible
Which uses are permitted by law should be determined. It is
important to look into zoning, private restrictions, building codes,
controls for historic districts, and environmental laws because they
can forbid many possible uses.

For example, if an area is zoned as residential, it would be hard for

an appraiser to state that the highest and best use of that real estate
would be as a commercial building.

⮚ 2. Physically possible
There must be a consideration and an analysis of all the physical
characteristics like the size, the possible uses for a piece of land
 depend on its shape, area, topography, accessibility, and risk of
natural disasters like earthquakes or floods since not all properties
can be developed to all uses.

For instance, a 50,000-square-foot single-story warehouse would not

fit on a 15,000-square-foot site; therefore, that use would not be
physically possible.

⮚ 3. Economically feasible
Economically viable means any application that is anticipated to
generate a profit. Here, the remaining uses are examined to
determine whether uses are economically possible after excluding
the uses that are not technically or physically feasible. This
procedure identifies the uses that are most likely to generate an
income, or return, that is at least sufficient to cover operational costs,
debt obligations, and capital amortization.

⮚ 4. Maximally productive.

Maximally Productive is the highest and best use of the property,

among the economically possible uses. To determine which use will
generate the greatest profit, all remaining uses that are physically,
legally, and economically feasible must be put to the test. Classify
the type of property.

5. Classify the type of property

- The type will typically dictate which approach(es) to value is/are

appropriate to value.

6. Outline the data applicable to the problem, inspect the property and
gather the needed.
 - The preliminary inspection entails a quick survey of the surrounding area
and the subject site to gauge the scope of the issue at hand and
precisely estimate the amount of work required. This will need
determining the type and amount of data that will be needed to solve the
issue, whether outside assistance will be needed, and the most likely
method to be applied. An organized appraiser then creates an overview
of the appraisal report that will be given before getting to work.

7. Relate the data to the approaches to value, and calculate value by each
approach, as follows.

- Cost Approach:

⮚ The necessary steps in the Cost Approach are as follows:

o Estimate and justify the value of the land by any or a

combination of the four methods of site evaluation

o Estimate the reproduction cost of the building and other

improvements

Reproduction costs are an estimate of what it would

cost to repair or replace a damaged or lost asset or
piece of property to its precise specifications. The price
of making an exact copy is what it is.

o Estimate loss in value from depreciation such as

economic obsolescence, functional obsolescence, and
physical deterioration that are either curable or
incurable.

Deterioration
Deterioration is only the result of an asset's
depreciation as a result of physical means excluding
functional or economic obsolescence. Take the asset's
expected physical life (how long it should live) and
divide it by the asset's effective age to determine the
deterioration.

Let's use an asset as an example with a physical life of

10 years and an 5 years old as of today. According to
these hypotheses, 50% would be the apparent
degradation of the body This is referred to as the
age/life ratio in the appraisal industry.

Functional Obsolescence

A decrease in an item's utility or appeal as a result of

being outdated a difficult-to-change design element. It
is a term used in real estate to describe the decline in
property value brought on by a feature that is no longer
functional, such as an old house with just one bedroom
in a neighborhood full of brand-new houses with at
least three bedrooms.

Economic Obsolescence

Economic obsolescence causes a decrease in a

property's value, where the owners of the properties
have no control over the causal causes.

Example: The majority of property owners worry about

the safety of their community when choosing a location
for a property to purchase. High crime areas are
typically less appealing to potential investors who
 prefer to invest in more relaxing places. How a
community is safe affects how individuals live from
comfort to the potential safety measures they might
take. Property values are immediately impacted when
a community has a higher crime rate because most
investors will avoid such locations. Consequently, It will
be challenging for owners to locate qualified
purchasers for their houses.

Loss of Job

Real estate markets in some areas are boosted by the

presence of important sectors that provide jobs for
thousands of people. The majority of the staff are the
majority of tenants in surrounding houses are
employed in these sectors. If one of the major
companies goes out of business, thousands of people
will lose their jobs and the value of the local real estate
would drop as a result of the inability of residents to
make their mortgage or rent payments on time. Low
occupancy rates will harm the properties, which are out
of the owners' control.

o Deduct the cost of depreciation from the cost of the

improvements and then an estimate of the depreciated
cost of the improvements is produced as a result.
o Sum up value estimates to arrive at an indication “cost
of value”
- Income Approach:

⮚ Analyze the gross income as to:

o Quantity: sufficient to meet the monthly payment in

addition to all other expenses
o Quality: sources or dependability of income (rents)
o Durability: probability of continuance in the future

⮚ Prepare a forecast of gross income

o Gross revenue is the amount of income a property brings

in. Rental units are a property's primary source of revenue.
Other options include selling parking spaces and
assessing maintenance costs for amenities like vending
machines and laundry. Simply add the rental income to the
additional totals from other sources of income to obtain this
amount.

⮚ Analyze past and current operating costs

o This sum comprises all expenses related to maintaining

the property on a daily basis, such as:

- Maintenance and repairs

- Legal fees
- Insurance
- Utilities not covered by the tenants
- Property taxes
- General/administrative expenses
- Sales and marketing expenses

⮚ Prepare a forecast of operating costs

 o You can create operational and strategic plans by
using accurate financial forecasts of expenses which is
a personnel strategy that will help your property
succeed. Make your projection based on market
research and industry standards if you are launching a
new firm. You can help yourself if you already run a firm
by using the records from prior years. Be sure to
account for any potential adjustments, such as cost
increases or the hiring of more personnel. In parking
lots, for instance, from a human teller to a machine.

⮚ Compute net income before capital recapture

o Capital recapture - The return of the principal invested in a

property is known as capital recapture. Since it allows a
seller the choice to repurchase their assets at a later date
after the occurrence of an event, it is comparable to a
repurchase agreement.

Example: leasing arrangement wherein the lessee

commits to giving the lessor a set portion of its revenues.
The lessor may decide to end the lease agreement and
regain full control of the property until a more profitable
tenant is found if the lessee is unable to bring in enough
revenue to make the lease contract advantageous to the
lessor.

⮚ Select or justify a capitalization rate

o A capitalization rate is an estimate of the prospective

return on an investor's real estate investment. calculated
by dividing the net operating income of a property by its
current market value. The annual money generated by the
 property (such as rents), known as net operating income,
is determined by subtracting all management costs. These
costs include the price paid for the facility's routine
maintenance as well as the property taxes. The asset's
present worth determined by the going market rates is its
current market value.

⮚ Analyze probable future behavior of income stream

Example: Lockdown may result in a reduction in rental

income. Improvements in location may lead to an increase
in demand for homes, particularly if a project for a mall,
school, or place of employment.

⮚ Select the appropriate method of capitalization and provisions

for capital recapture Capitalization: any method used to convert
an income stream into value.

o Methods:

Direct Capitalization is a method used to convert an

estimate of a single year's income expectancy into an
indication of value in one direct step. Direct capitalization
is a technique for quickly converting an estimate of one
year's expected income into a value signal. The income
stream is transformed into an estimate of value by dividing
the income estimate by a suitable rate or by multiplying the
income estimate by a suitable factor. In essence, direct
capitalization communicates value as a correlation
between income and a rate or multiplier. The capitalization
rates and multipliers used in the direct capitalization
method are taken from comparable sales.
 By discounting each future benefit at the proper yield rate,
yield capitalization turns future benefits into present
value. By creating an overall capitalization rate that
expressly incorporates the investment's income pattern,
value change, and yield rate, the future advantages may
also be discounted. The Internal Revenue enforces a
process known as depreciation recapture when a taxpayer
makes a profit on an item, effectively taxing the taxpayer's
gains from selling this asset.

⮚ Carry through the capitalization computations to arrive at an

indication of “economic or investment value”

- Market Data Approach

⮚ Survey the area to locate comparable properties

• that have sold recently

• that are offered for sale

• on which offers have been made

• that are rented

• that are offered for rent

⮚ Also referred to as comparable sales, the market data technique.

Here, recent sales of homes with similar characteristics are
examined to reach a conclusion. You are likely to receive a
higher appraised value if prices of previously sold homes that
typically meet the same criteria as your own (in terms of size,
number of rooms, amenities, etc.) are high. Keep in mind that
 the real sale price in the market can end up being very different
from the appraised value.
⮚ Gather and validate pertinent information about each
comparable property

o Check to see if the properties are being priced fairly or

appropriately in light of the requirements and
circumstances.

⮚ Analyze sales and leases with regard to

• Date of sale

• Length of time property was offered

• Advertising and sales effort involved

• Terms of sale

• Motives of buyer and seller

⮚ Sales analysis to assess how well your sales force is doing in

relation to its objectives. It offers information on the best- and
worst-performing goods and services, as well as market
prospects, challenges with selling, sales forecasting, and
revenue-generating sales activities.

In order to generate and understand financial data for the

lessee (renter) or the lessor, a lease analysis involves a
variety of tools and techniques (who receives payment).

Keep in mind that when you "sell" something to a "customer,"

the buyer now owns the item. Leasing anything to a "buyer" is
more like a long-term renting than a sale of ownership.
 ⮚ Compare subject property in detail with comparable
properties, applying plus and minus adjustments to arrive at
an indication of “comparative value”

o To do this, examine nearby houses to discover their

commonalities. From there, based on the attributes of the
property, appraisers can establish its worth.

8. Reconciliation of Value Indications and Final Value Estimate

Addendum:
- The appraiser chooses a final opinion of value from among two or more
indications of value after analyzing alternative conclusions in reconciliation
to reach a final value estimate. Reconciliation may be followed by a detailed
examination of the entire valuation procedure.
- The immediate goal of the valuation process is completed once a definitive
opinion of worth has been arrived at. However, a project for an appraisal is
not finished until the customer has been informed of the report's conclusions
and results.

A. Note to range or bracket set by the indicated values developed by the

three approaches.

B. Attempt to narrow the range or bracket by a thorough review of work

done in each of the approaches. Look for

- Errors in computation
- Items given too much weight
- Items given too little weight
- Insignificant items omitted
- Re-examine methods employed in estimating depreciation and in selecting
and justifying the capitalization rate
 C. Note which one of the three preliminary value estimates is more reliable
and should have more weight in the light of—

- i. Type and class of property being appraised

- ii. Purpose of the appraisal
- iii. Prevailing market conditions and probable market reaction

9. Decide on the final conclusion of value by applying judgment

10. Prepare the Appraisal Report
The creation of the appraisal report is the final step in the appraisal
process.

Prepare the appraisal report:

a. Title page
b. Letter of transmittal
c. Summary of important facts and conclusions
d. Purpose of report
e. Identification of property
f. Location and neighborhood data
g. Zoning, utilities, taxes
h. Site description
i. Description of building and improvements
j. Analysis and interpretation
k. Approaches to value
l. Reconciliation and final value estimate
m. Limiting conditions and qualifications of appraisers
n. Addenda (maps, pictures, technical description, etc.)

APPRAISAL OF CHATTELS
 Lecturers: Arizala, Nathaniel D. and Bugayong, Donna Marie

1. Motor Vehicles

Vehicles are appraised and inspected in a similar way to other types

of chattels, i.e., the appraiser makes a note of the property's location and
inspects the item itself to determine its nature, condition, etc. However,
because motor vehicles have so many more important component parts
than other chattels, it is harder to pinpoint the precise elements that
influence their worth.

Road testing is a necessary part of vehicle inspection. Therefore, it is

advised that the appraiser be accompanied by a helper so that, while one
drives the automobile during road tests, the other focuses on how the car
responds to the road tests.

The vehicle should be driven on both good and bad roads during road
testing. Bad roads will highlight the rattles and other flaws in the vehicle, but
good roads will allow it to be driven quickly, exposing any problems with the
steering wheel, shock absorber strength, brakes, and engine.

The appraiser should take additional care to record all relevant information
about the vehicle under appraisal. Any observation regarding a flaw or fault
that he may notice in the car should be noted on the evaluation report. The
LTC registration certificate will indicate on the car's registration whether it
was locally or abroad assembled or not using an IE (informal entry) number
that is displayed on the registration certificate. The appraiser must confirm
that all tariffs and other levies on foreign-assembled vehicles have been
duly paid.

2. Heavy Equipment
 Appraising machinery and equipment is similar to appraising motor
vehicles, with a concentration on:

A. Model/Type. FUSO, International Harvester, etc. are examples of

equipment made. Familiarity with the model can help the appraiser
value its features objectively, regardless of whether dealers,
consumers, or end-users rate it well.

B. Identify. The appraiser must then verify the equipment's identity by

comparing the following to the applicant's Certificate of Ownership
(which must contain the full equipment specification):

i. Brand of equipment

ii. Motor number/Chassis number

iii. Serial number

iv. Horsepower

The appraiser must also seek the application should submit the whole
equipment specification to check for missing parts/accessories during inspection.

C. Documents. These documents verify the equipment's existence,

ownership, and possession. An appraiser should verify these
documents:

i. Sales invoice. This paperwork lets the appraiser verify the

equipment's lawful owner and seller. The appraiser will determine if
the equipment is new, used, or fabricated.
ii. Letter of credit/Consular invoice. The letter of credit and consular
invoice can be used to calculate the equipment's landed cost value.

iii. Deed of assignment. Collateral includes third-party equipment.

The appraiser must authenticate this paper. Consider legal
implications.

iv. Condition. Condition means equipment performance when used.

The appraiser must request full operation of the device and inspect
all visible parts for malfunctions and deterioration.

v. Usage. The appraiser should assess the machine's condition and

its purpose, such as xerox equipment's ability to make duplicates of
the original.

vi. Valuation. Valuation may depend on:

• Appraised value is firsthand value minus depreciation, and loan

value is 50% of appraised value.

• Second value is immediately evaluated and 50% is loan value.

 BSP Circular No. 855 Guidelines on Sound Credit Risk Management
Practices Amendments to the Manual of Regulations for Banks and Non-
Bank Financial Institutions (2014, October 29)

FAQs on Circular No. 85

To facilitate the implementation of Circular No. 855 dated 29 October 2014 on the
Guidelines on Sound Credit Risk Management Practices (Amendments to the
Manual of Regulations for Banks and Non-Bank Financial Institutions) and to
address various concerns related to the new Circular, the following answers to
Frequently Asked Questions are hereby issued:

BACKGROUND:

By providing a minimum set of operational criteria that are compliant with BSP
rules and the Basel Core Principles for efficient bank supervision, the
amended/enhanced guidelines aim to fundamentally strengthen the credit risk
management procedures of financial institutions1 (FIs). BSP anticipates FIs to
adopt good policies and practices in at least the following areas as part of their
internal framework for credit risk management:

a. creating a suitable credit risk environment

b. utilizing a reliable credit-granting method c. ensuring proper credit management,

process of measurement and observation d. keeping a suitable control process in

place

CREDIT EVALUATION

1. Subsection X178.7/4178Q.7/4197N.7 on credit granting, loan

evaluation/analysis, and underwriting criteria states that “FIs may elect to
use financial information/data from other sources”. Does this indicate banks
can evaluate credit using in-house or non-audited financial statements?
Yes. FIs may utilize other financial information to support their judgment as long
as suitable protections are in place and their internal policy clearly states how
much reliance or value was attached to the unaudited financial statements used.

2. Can FIs choose not to get BIR-stamped AFS/ITRs under Subsection

X304.1/4304Q/4312N.1 of the Manual of Regulations?

No. FIs must still collect from borrowers and keep current Income Tax Returns
(ITRs) stamped by the Bureau of Internal Revenue (BIR). AFS use in credit
decisions is up to FIs.

SECURED LENDING

3. 60% of the property's appraised value was collateralized. Will the

remaining balance of loans with 70% to 80% collateral values be categorized
and provisioned?

No, as long as the FI has verified that the borrower can and will pay. Loan
performance, not collateral, determines classification. The loan won't be classified
if it's performing and doesn't fit the FI's internal credit categorization scheme.

Even a fully secured non-performing debt will be classified. Provisioning considers

collateral quality and realizable value. Provisions cover any difference between the
loan's book value and its estimated realizable value, net of collateral. Thus,
capping collateral value at 60% may increase provisioning if loan performs poorly.
4. Who decides if an appraiser is BSP-acceptable? Does BSP accredit
appraisers?

The FI must adopt sound internal appraisal policies (e.g., acceptance criteria for
independent appraisers, when to use internal appraisers, under what conditions
and for what purposes, what properties are acceptable, etc.) based on industry
conventions and best practices. BSP will assess FI's internal policy and
compliance. BSP respects FI's business choice if both conditions are met.

5. Can FIs allocate collateral value to non-real estate collateral under the new
Section X311?

FIs can value non-real estate collateral. However, FIs should have appropriate
internal procedures based on responsible standards to cover Section X311's
requirements: the collateral has (1) an established market and (2) a sound
valuation technique (i.e., the collateral can be quickly disposed of or converted into
cash).

6. Merchandise inventory was accepted collateral up until Circular No. 855.

Should previous loans be categorized as unsecured or will this form of
collateral continue to be accepted?

Yes, provided that the FI has suitable internal policies in place that address the
acceptance of merchandise inventory as collateral. Reasonable policies on having
an established market and soundness of valuation should be used to cover the
requirements of the acceptance of merchandise inventory as collateral.

7. Would the bank be obligated to insure the improvement if the land subject
to the REM is valued at P1 million (land only) but the loan amount is much
lower, say P100,000.

It is not required to need insurance on the improvement if the realizable collateral

value of the lot is already enough to cover the entire loan amount in the case of
default. This choice is solely commercial. PROVISIONING FOR LOAN LOSSES
AND APPENDIX 18 OF MORB/MORNBFI2

8. Which FI might be eligible to create a loan-loss methodology?

All FIs should, ideally, have or establish a loan-loss technique that is suitable for
their credit operation. Small financial institutions (FIs) may apply the simpler
method outlined in the updated Appendix 18 if they believe their credit operations
do not warrant building their own loan loss methodology. However, FIs need to be
aware that such a streamlined method can be relatively conservative.

9. Is it possible that the ACL produced by a FI using its own loan-loss

methodology (LLM) will be lower than the statistics produced using
Appendix 18?

Yes, that is the motivation for a FI investing in creating its own loan loss procedures
(LLM). The LLM must, however, be thoughtfully designed (i.e., based on facts and
backed by plausible hypotheses).

10. If a loan is guaranteed by a government agency by say, up to 85% of

outstanding balance, will it be acceptable to provide loan loss provisioning
only for the remaining 15%?

The performance of the loan will have the biggest impact on the amount of
provisions. If the loan is performing, special clauses are not necessary. If a
government agency offers a financial guarantee, it should be viewed as nothing
more than a credit risk reduction measure.

11. Will the “missed payment” guidance for aging of accounts under
Appendix 18 amend the definition of past due loans?

Missed payments are subtracted from the agreed-upon loan repayment plan. If a
loan doesn't make its scheduled installments, it becomes past due. But how a loan
is classified and provisioned for depends on the credit policy, which should be
sensible.

12. Will the grace period on loan payments be excluded in the determination
of the reckoning date for missed payment?

A grace period is a specified period of time after a due date for a loan payment.
The grace period allows the borrower to delay payment beyond the due date
without incurring a penalty.

This means there can be no extra charges or cancellations of the loan as long as
the payment due is paid before the grace period ends. The borrower’s credit report
is also unaffected by late payments as long as they are eventually paid within the
grace period.

13. For loans with missed payments but with subsequent partial payment,
would the number of days of missed payments accordingly be reduced?

No. The total amount of the outstanding amortization is used to calculate the
number of days of missed payments. The ability of the borrower to create sufficient
cash flow is the main factor in deciding whether to give a loan, and partial payment
is a sign that the borrower is having financial difficulties which could mean that
there will likely be problems in the future. In circumstances like this, the FI should
take into account potential corrective actions, or remedial management may
already be necessary.

LARGE EXPOSURES AND CONCENTRATION RISK

14. Is it considered a violation if large exposure to a borrower is greater than
five percent (5%) of the FI’s qualifying capital?

No. 5% is the benchmark by which a loan or credit exposure to a single creditor

will be deemed substantial, and as a result, should be carefully managed,
monitored, and controlled to avoid potential major losses. However, exceeding the
Single Borrower's Limit of 25% of the FI's net worth will be regarded as going
beyond the prudential limit. BSP anticipates that FIs will implement internal
procedures and policies that sensibly restrict and manage concentrated credit
exposures in order to comply with legal requirements. As a matter of good practice,
FIs are expected to generally adhere to an internal limit lower than the mandated
25%. It is wise to diversify its credit portfolio.

15. What is the extent or scope of application to FIs of the large exposures'
framework?

The need for banks to measure and limit the size of large exposures in relation to
their capital has long been recognized by the Basel Committee on Banking
Supervision. As such, large exposure regulation has been developed as a tool for
limiting the maximum loss a bank could face in the event of a sudden counterparty
failure to a level that does not endanger the bank’s solvency. The need for banks
to measure and limit the size of large exposures in relation to their capital has long
been recognized by the Basel Committee on Banking Supervision. As such, large
exposure regulation has been developed as a tool for limiting the maximum loss a
bank could face in the event of a sudden counterparty failure to a level that does
not endanger the bank’s solvency.

CREDIT GRADING SYSTEM/ CREDIT SCORING MODEL

16. For BSFIs that will implement a credit risk rating system, is there a
minimum number of risk ratings?
No, but there should be enough credit grades to distinguish the credit risk of all
loans, including pass loans, in a meaningful way. The loan data should be properly
maintained and provide strong support for the credit ratings.

17. Who should be responsible for rating/grading a loan account?

A loan may be graded by a credit analyst or relationship manager/loan officer in

accordance with the BSFI's policies, subject to examination and validation by the
independent review unit for complicated BSFIs or internal auditor for simple BSFIs.

18. What should be the criteria in determining what loans will be subject to
credit rating or credit scoring?

All credit risks that are thought to be significant must be graded according to a
credit rating system. Using a credit scoring model that accurately predicts the credit
behavior is possible for small-denominated (retail) loans. The choice to choose the
materiality threshold is left up to the BSFIs. The data used to support all ratings
and credit scores must be accurate and up to date.

19. What are BSP’s expectations? What should FIs need to undertake and
submit during the transitory period?

A. All FIs must assess the suitability of their Loan Loss Methodology (LLM)
and evaluate whether it complies with the BSP's requirements as outlined
in Circular No. 855. If the FIs' present LLM does not meet the
aforementioned standards, they should improve it.
B. It is recommended that FIs without LLM create their own LLM. Small FIs,
however, who may not have sufficient credit operations to support the
creation of their loan loss methodology, may apply the updated Appendix
18. For such a decision, BSP approval should be obtained.
C. It is expected that each Universal, Commercial, and Foreign Bank (UB/KB)
will have its own LLM. They should make sure that the LLMs they currently
 have adhere to the guidelines outlined in Circular No. 855. They are not
permitted to rely on Appendix 18, which the larger banks deem to be overly
simple. In the meanwhile, the UBs/KBs may continue to utilize their current
LLM during the transitional era, improving it.
D. All thrift, rural, and cooperative banks (TBs/RBs/Coop Banks) may adopt
the updated Appendix 18 if they are unable to create their own LLMs. For
its full execution, such banks must submit action plans; and e. Subject to
Monetary Board permission, FIs may request conditional regulatory relief,
particularly with regard to the staggered booking of Allowance for Credit
Losses (ACL).

20. . Does the transitory period of 2 years include the deferment of

implementation of 60% collateral value (CV) such that FIs can continue
giving out new loans at 70% CV for REM and implement the 60% CV after the
2-year period expires?

No, Since Circular No. 855's effective date of November 19, 2014, the requisite
collateral value of 60% has been complied with. However, as long as the FI has
decided that the borrower has the ability and willingness to repay the loan
obligation, the collateral cap will not prevent FIs from granting loans with loan to
collateral value ratios higher than 60%.

21. Will the LLM developed following the provisions of the International
Financial Reporting Standards (IFRS) 9 satisfy the requirements of Circular
No. 855?

Yes, FIs that chose to improve or develop their LLM in accordance with IFRS 9's
provisions are deemed to be in compliance with Circular No. 855's requirements.

Summary:
 In a nutshell, nature of inspection to demonstrate compliance, the property
must be inspected. As an inspector, it must ensure the property is impressive and
legal. Inspectors must also check a property's materials for quality and quantity.
Nature of appraisal determines property value. An appraiser's precise and
compelling valuation based on market facts can help you decide. Purpose of
inspection, home inspections have two major aims. The examination can reassure
purchasers that the home is sound. The seller might utilize the inspection to
uncover problems or demonstrate the property's condition. Property inspections
include: Inspect the property's exterior for safety risks, check any property
problems, and inspects water and electricity. Purpose of appraisal, appraisals
evaluate property values or manage real estate decision analyses. Market value,
the price of currently supplied assets reflects market circumstances; Insurable
value - The insurance company's estimated cost to replace your property if it's a
total loss; Assessed value determines ad valorem property tax; Use value, a
property's usage value may or may not represent its greatest and best use;
Investment value—The price an investor is willing to pay for an asset or investing
depending on their investment goals and criteria. An appraisal values a property,
whereas an inspection lets a buyer weigh its pros and downsides. Unlike an
appraiser's 30-minute visit, a home inspection takes 2–3 hours. Location and crime
rate affect a home's worth, not just its condition. Most evaluations seek market
value. Market value is the highest anticipated price a property would get on the
open market, giving time to find a buyer who knows all its uses. It's the price at
which a willing buyer and seller will trade without force.

Now how can an appraiser and inspector evaluate when one’s home without a
property? That is why we have identified the Real Estate and other agricultural
lands. The residential property together with Commercial, Industrial, Mixed-use
Properties, Special Purpose, and Raw Land. To be followed by Land
Improvements where Land improvements stand entirely apart from the actual land.
Because of this, land improvements are viewed as entirely different assets than
actual land. The cost of land improvements is not included in the purchase price
of the land. It is depreciated over the course of its useful life much like other fixed
assets and is instead viewed as a wholly different asset purchase. And also
Chattels as a movable personal property. Now we have identified how can these
properties are identified as Collateral. Collateral is a type of security that lowers
the risk for lenders. It aids in ensuring that the borrower fulfills their financial
commitment. If the borrower does fall behind on the loan, the lender has the right
to seize the collateral, sell it, and use the proceeds to cover the outstanding
balance. In order to recover any outstanding balance, the lender may decide to file
a lawsuit against the borrower. Collateralization is the process of a property being
pledge, and the property being pledge is called a collateral.

Guidelines of Conducting an Actual Appraisal consist of 7 steps which are first

Identification of the problem which clarifies the assignments requirements and
removes any doubt regarding its nature. Second is determine the scope of work
which consists of client, intended users, intended use, type of opinion, effective
date, relevant characteristics about the subject of the assignment and Assignment
Conditions. Third is Preliminary Analysis and Data Selection and Collection. Fourth
is to Determine the highest and best use to which the property may be put, in order
for the property to be the highest and best use there are 4 requirements such as
Legally Permissible, Physically Possible, Economically Feasible, and Maximally
Productive. Fifth is the valuation stage where there is a need in applying the three
approaches which are the cost approach, income approach and sales approach.
And then after the valuation stage, the appraiser will now choose a final opinion
from the two or more indications of value after analyzing alternative conclusions in
reconciliation. Lastly is the report of defined value which includes three different
types such as oral, formal and narrative report.

Lastly, the market value of a property is calculated using the sales information of
comparable properties in the vicinity of the assessed property. The cost approach
technique, on the other hand, makes the assumption that potential investors
should pay a price equivalent to the cost of completely constructing the property.
The income approach assessment method, in addition, enables prospective
investors to make value judgments about the assessed property based on the
income the property produces.

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PLAGIARISM CHECKER:

NATURE OF INSPECTION AND APPRAISALS + ADDENDUM

PURPOSE OF INSPECTION AND APPRAISALS + ADDENDUM

OBJECTIVE AND FUNCTIONS OF INSPECTION AND APPRAISALS + ADDENDUM

IMPORTANCE OF INSPECTION AND APPRAISALS (ADDENDUM)

COST APPROACH

Income approach and Market data approach

GUIDELINES IN CONDUCTING ACTUAL APPRAISAL

INTRO:

Identification of the Problem:

Determine the scope of work:

Preliminary Analysis and Data Selection and Collection:

Determine the “highest and best use” to which the property may be put:
Valuation Stage: Applying the 3 Approaches:

Reconciliation of Value Indications and Final Value Estimate and Report of defined
value – Oral, Form, Narrative
Type of Properties