BASIC APPRAISAL

COST vs. PRICE vs. VALUE

The amount What is paid in the The worth of the

required to produce market property in the
or build something market.

What are the types of value in REAL ESTATE APPRAISAL?

Type of Value Definition Primary Use Key Assumption/Note
Most probable sale price in
Sales, loans, legal matters, Assumes a willing buyer and
Market Value an open, competitive
taxation. seller.
market.

Cost to rebuild or replace

Includes replacement or
Cost Value the property with current Insurance, cost approach.
reproduction cost.
materials and labor.

Value to a specific investor

Investor decisions, private May differ significantly from
Investment Value based on their goals and
equity deals. market value.
expected return.

Value assigned by tax

Often a percentage of
Assessed Value authorities for property Property tax calculation.
market value.
taxation.

Value of property
Insurance coverage
Insurable Value components that can be Excludes land value.
estimates.
insured (structure only).

Estimated price under

Foreclosures, bankruptcy, Assumes time pressure and
Liquidation Value forced or quick sale
distressed sales. less-than-ideal conditions.
conditions.

Value of reusable materials

Demolition planning, asset
Salvage Value or parts after property is no Usually very low.
recovery.
longer usable.

Total value of real estate,

Appraising operational Includes more than just
Going Concern Value business, and intangible
businesses (e.g. hotels). physical property.
assets of an ongoing entity.

Book value: original cost

Financial reporting, May not reflect true market
Depreciated Value minus accounting
company records. value.
depreciation.
 Characteristics/Determinants of Value (D-U-S-T)
🔑 1. Demand
Definition: The desire for a property combined with the financial ability to purchase it.
Key factors:
• Population growth
• Income levels
• Employment opportunities
• Interest rates and mortgage availability
📌 Without effective demand (desire + ability), a property will struggle to sell at a high price.

🔑 2. Utility
Definition: The property's ability to satisfy a specific need or use.
Examples:
• A house provides shelter.
• A warehouse serves storage or distribution needs.
• Zoning allows the intended use.
📌 Utility must meet the needs of potential users or buyers—if it can’t be used as intended, it
loses value.

🔑 3. Scarcity
Definition: The availability of properties of a similar type in a given market.
• Key idea:
• Value increases when supply is limited relative to demand.
• Too many similar properties on the market = lower value.
• Limited land in urban areas or restrictive zoning increases scarcity.
📌 Not just about rarity—it must also be in demand to create value.

🔑 4. Transferability
Definition: The ability to transfer ownership rights from one party to another.
Affected by:
• Clear title
• Legal encumbrances (liens, easements, disputes)
• Property condition
• Government regulations
📌 If ownership cannot be transferred cleanly, the property's value drops—buyers avoid
complicated or high-risk transactions.

VALUE IN EXCHANGE VS. VALUE IN USE

Feature Value in Exchange Value in Use
Based on Open market conditions Utility to a specific user
How useful the property is to
Reflects What most buyers would pay
one user
May be above or below
Often equals Market value
market value
Used for Buying, selling, lending Business operations, tax, legal
What are the forces affecting/influencing value? (P-E-P-S)
1. Physical and Environmental Forces
These involve the natural and built environment affecting the property:
 Topography and soil conditions
 Climate and weather patterns
 Natural hazards (e.g., flood zones, earthquakes, hurricanes)
 Availability of utilities and infrastructure (e.g., water, sewage, roads)
 Environmental contamination or pollution
 Quality and age of improvements (buildings, landscaping, etc.)

2. Economic Forces
These relate to the broader economic environment that impacts demand, supply, and
investment in real estate:
 Employment trends and income levels
 Interest rates and mortgage availability
 Inflation and purchasing power
 Supply and demand for property types
 Cost of construction materials and labor
 Market cycles (e.g., boom, recession)

3. Political Forces
These include public policies, laws, and regulations that can enable or restrict property
use:
 Zoning laws and land use regulations
 Building codes and safety standards
 Tax policies (property taxes, capital gains, etc.)
 Rent control laws
 Eminent domain and land acquisition
 Environmental regulations
 Permitting and planning requirements

4. Social Forces
These refer to demographic and societal trends that influence how and where people
want to live or work:
 Population growth or decline
 Age distribution and family structures
 Lifestyle preferences (e.g., preference for urban vs. suburban living)
 Cultural and ethnic composition
 Crime rates and public safety
 Education quality and public services
 PRINCIPLES IN REAL ESTATE APPRAISER
Principle Explanation Effect on Value
Buyers choose the lowest-priced
Substitution similar option.
Sets an upper limit on value.

Value rises with high demand

Supply and Demand and low supply; falls with high Drives market fluctuations.
supply.
The most profitable legal use of Determines how property should
Highest and Best Use the property. be valued.
Value is maximized when
Conformity property matches neighborhood Increases stability and value.
standards.
Value of an improvement is
Contribution based on its contribution, not its Prevents over-improvement.
cost.
Better properties lose value next Negative impact on superior
Regression to inferior ones. property.
Inferior properties gain value Positive impact on inferior
Progression near superior ones. property.
Future benefits or problems
Anticipation affect current value.
Reflects investor expectations.

Market, environmental, or social Requires appraisers to consider

Change changes impact property value. trends and cycles.
Too much competition reduces
Affects income-producing
Competition profit/value; limited competition
property especially.
boosts it.
Optimal resource allocation Prevents inefficiency from over-
Balance maximizes property value. or under-investment.

FOUR (4) FACTORS OF PRODUCTIONS (L-L-C-E)

Agent Definition Role in Real Estate
The raw, undeveloped surface of the Foundation for all real estate—
Land earth, including its location and natural location, topography, access, and
features. zoning matter.
Human effort (physical and mental) Includes construction workers,
Labor used in the development and architects, engineers, and
improvement of property. managers.
Money and tools used to build and
Funds for construction, technology,
Capital improve the property (not just cash,
infrastructure, and materials.
but also equipment and materials).

Entrepreneurship / The skill, initiative, and risk-taking

ability to organize and combine the
Real estate developers, investors,
or project managers who bring it all
Coordination other three agents. together.
 REPLACEMENT COST VS. REPRODUCTION COST
Feature Replacement Cost Reproduction Cost
Functional equivalence
Goal EXACT duplication
(SIMILAR)
Materials Modern Original (historical)
Construction Methods Current standards Historical techniques
Cost Level Usually lower Usually higher
Historical preservation,
Use Case Insurance, practical rebuilds
restoration

When to Use Each:

• Insurance Valuation: Often uses replacement cost because it’s more practical and
affordable.

• Historic Building Appraisal or Restoration: Reproduction cost is used to

maintain historical integrity.

THREE (3) METHODS OF ESTIMATING

REPRODUCTION COST OR BUILDING COST
 THREE (3) METHODS OF ESTIMATING
REPRODUCTION COST OR BUILDING COST
What is DEPRECIATION?
 refers to the loss in value of a property over time due to various factors.
While land itself typically does not depreciate, improvements to land (such
as buildings or structures) do depreciate because of wear and tear, age, or
external factors.

TYPES OF DEPRECIATION IN REAL ESTATE?

1. Physical Depreciation
Loss in value due to natural aging, wear and tear, and deterioration of
materials.
Examples:
Cracked walls Leaky roof
Rusting plumbing  Faded Paint

2. Functional Obsolescence
Loss in value due to outdated design or features, which reduce a building's
usefulness or desirability.
Examples:
Lack of elevators in a multi-storey building Outmoded electrical
systems
Poor layout (e.g., no parking, small windows)

3. External or Economic Obsolescence

Loss in value caused by factors outside the property that negatively affect its
desirability or value.
Examples:
Nearby slum areas
High crime rate
Construction of a highway that diverts traffic away from a business
New zoning laws that limit property use
 Methods in Estimating Depreciation

1. Straight-Line Depreciation
• Method: Straight-line depreciation allocates a fixed asset's cost over its useful life. It
is a simple and widely used depreciation method, often used for financial reporting
purposes.

• Formula: Depreciation Expense = (Cost of Asset - Salvage Value) ÷ Useful Life

• Example: If a machine costs $50,000, has a useful life of 5 years, and has no
salvage value, the annual depreciation expense is $10,000.

2. Double-Declining Balance Depreciation

• Method: It is an accelerated depreciation method with higher depreciation in the
early years and decreasing amounts in subsequent years.

• Formula: Double Declining Balance Method = 2 x Cost of the asset x Depreciation

rate

• Example: For a $50,000 asset with a 5-year useful life, the first-year depreciation is
$20,000, decreasing yearly.

3. Units-of-Production Depreciation
• Method: Depreciation is based on the asset's usage or output rather than time. The
cost per unit is determined, and depreciation is calculated based on the actual
production or usage.

• Formula: Depreciation Expense = (Cost of Asset - Salvage Value) x (Units

Produced or Used / Total Expected Units)

• Example: If a machine costs $100,000, is expected to produce 100,000 units, and

produces 20,000 units in a year, the depreciation expense is based on 20% of the
asset's cost.

4. Sum-of-the-Years'-Digits Depreciation
• Method: Accelerated depreciation method where the depreciation expense
decreases each year. Sum-of-the-years' digits depreciation method determines an
asset's expected depreciation over time.

• Formula: Depreciation Expense = (Remaining Useful Life / Sum of the Years' Digits)
x (Cost of Asset - Accumulated Depreciation)

• Example: For a $60,000 asset with a 5-year useful life, the depreciation expense in
the first year is $24,000.
 FORMULAS
Depreciation using Age-life Method

Example

📌 Quick Notes:
 Land is never depreciated — only buildings/improvements are.
 The BIR in the Philippines typically uses straight-line
depreciation for buildings.
 Use replacement cost for modern equivalents, reproduction
cost for heritage appraisals.
 Effective age is based on actual condition, not construction date.
 FORMULAS
Depreciation Formulas

Replacement Cost Formula

Reproduction Cost Formula

REAL ESTATE APPRAISAL WORKFLOW
Three (3) Approaches to RE Valuation
Market Data Approach a.k.a, Sales Comparison Approach

Cost Approach
Three (3) Approaches to RE Valuation
Income Approach

SUMMARY
 Valuation Approach Key Principles
Substitution, Contribution, Supply
Sales Comparison & Demand, Competition,
Conformity
Substitution, Contribution,
Cost
Externalities, Depreciation
Anticipation, Substitution, Balance,
Income Capitalization
Change

METHODS OF CAPITALIZATION IN REAL ESTATE

MARKET DATA APPROACH PROCESS