Real estate investment in the Philippines opens a lot of opportunities. There’s a possibility that the property you’ll buy now will increase in value after some time. However, it can also be possible that it would be the other way around.
Investing could be a hit or miss. However, you can reduce your risk for failure with some knowledge to back your decisions. It would be an advantage if you have a fair understanding of how real estate appraisal work or how land valuation is done.
Don’t know where to start? Here’s a guide that presents some important facts that can guide you in making the right real estate investment decision.
Land Value and Real Estate Appraisal: The Facts You Need to Know
How is Property Valuation Done?
Whether you are selling or buying a property in the Philippines, you should know how much a property is really worth. And when it comes to your property’s value, the “date of valuation” is a factor that comes into play. Basically, the value of a property is always based on its current market value. It can be valued differently depending on how much it’s worth during a particular time.
To quote The Philippine Valuation Standards:
“(market value is) the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arms-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion.”
3 Factors that Affect Real Estate Value
As mentioned above, a property’s value can appreciate or depreciate. There are a number of factors that lead to these changes and among these are as follows:
- Location – In real estate, location matters. Properties in a good neighborhood and near areas with high foot traffic usually have greater chances to appreciate in value.
- Accessibility – Properties that are more accessible or those that can be reached using various modes of transportation may be given a higher value.
- Development – A property that is within the vicinity of areas being developed is more likely to increase in value. This is due to the fact that developments can attract more demand for properties within a specific location.
Real Estate Appraisal: 3 Approaches that Determine Property Value
1. The Cost Approach
In this approach to real estate appraisal, a property’s value is estimated by adding land value and the depreciated value of the improvements. Here, the land value depends on the prevailing market value in a specific area which is distinct from zonal value.
House and lot properties usually separate the land value from the building or the improvements done in the land to determine their individual values.
In such a case, land value is estimated based on the prevailing selling price of similar properties in the area. Once value per square meter is determined, it is then multiplied to the lot area. The result would equate to your land’s value.
On the other hand, in determining the value of the building or the improvements, the value of a house is estimated based on the price range per square meter of a house in your location.
For example, real estate developers in Cebu refer to the following ranges in determining the value of a house:
- Low-Cost Housing: P16,000.00 to P25,000 per square meter
- Middle-End Housing: P26,000.00 to P35,000 per square meter
- High-End Housing: P36,000.00 to P45,000 per square meter
Once housing cost is determined, multiply the average house value to the lot area or square meters.
Afterwards, add the actual land value you have computed earlier.
For example, high-end housing in Cebu valued at Php36,000.00 and has a lot area of 60 square meters will have P2,160,000.00 as the computed value of the improvements.
Add the land value you’ve computed to arrive at the estimated value of a house and lot. (Exclusive of 12% tax).
IMPORTANT: Depreciation value has to be deducted depending on the age of the property. In computing for this, the value of the property is divided by 50 years. The result will then be multiplied by the age of the property.
The result will be the actual depreciation value which will be deducted to your property’s appraised value.
2. Sales Comparison Approach
For this second approach to real estate approach, value is determined by comparing the prices of properties within a specific location. There are various ways to know the actual property value in a specific area. This may be obtained through public records and information from buyers, sellers, brokers, agents and real estate appraisers.
However, as there are differences in properties, adjustments may be made on the property value which was determined through the sales comparison approach. Some of the differences that may create changes in appraised value include:
- Date of Sale
- Location
- Type of Property
- Number of Rooms
- Lot Area
- Site Size
The appraised value may increase or decrease depending on the superiority or inferiority of property being compared.
3. Income Capitalization Approach
The 3rd approach is specific in the valuation of commercial and investment properties. This approach is most ideal for income-generating properties.
In this computation, revenue multipliers or capitalization rates applied to the first-year Net Operating Income are used. Here, the NOI (Net Operating Income) is the GPI or gross potential income. From that, vacancy and collection loss are deducted which will lead to Effective Gross Income (EGI). Operating expenses are also deducted but will not include debt service, income taxes, and/or depreciation values applied by accountants.
ALSO READ: The Better Ultimate Guide to Real Estate Investing in the Philippines
Whether you are a seller or a buyer who is interested in real estate investment, you can have the peace of mind that a property is valued based on its actual worth and in the end, you will receive what you really deserve.
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