How to Estimate the Value of Real Estate Properties in the Philippines

Knowing how to appraise the value of real estate properties here in the Philippines is very important. Many foreigners are used to have known the value of a "house" by the average value that exists in a particular neighbourhood or subdivision. That is usually NOT so in the Philippines. So, foreign buyers, BE AWARE!

It's a whole other ball game here as to determine the value of a house. They break the "property" into two: "the Lot and House".

Most people in North America or Europe just buy the property as a whole and the real estate agent don't mention too much about the lot. We just buy it as a package.

Here in the Philippines, they are very precise on what they buy, so there goes the paperwork again.

There are three different approaches for determining the value:

1. The Cost approach
2. Sales Comparison approach
3. Income Capitalization approach

In Cost apprach, the value of a property can be estimated by summing the land (lot) value and the depreciated value of improvement (house) The land value is usually based on the prevailing market value in the area distinct from the zonal value set by the government.

For house and lot properties, it is best to separate the land from the building/improvement and add them together after knowing its individual values.

For example, you want to know the value of a house and lot in a subdivision in Las Pinas, a 3 bedroom house, 5 years old, with a floor area of 80 sq/m and a lot area of 120 sq/m. First, you will have to estimate the prevailing selling price of the middle end subdivision in the area. Assuming the average is P6,000 sq/m, the value of the land would be 120 x 6,000 = P720,000. Then, estimate the value of the house. The acceptable prices ranges are as follows:

Low Cost housing: P16,000 to P25,000 sq/m
Middle End housing: P26,000 to P35,000 sq/m
High End housing: P36,000 to P45,000 sq/m

So, for the house area of 80 sq/m x P30,500 average price per sq/m = P2,440,000
Then add the value of the lot = P720,000
Selling price = 3,160,000 (excluding VAT which is 12%).

Since the example above states that the property is already 5 years old, depreciation value shall then deducted as follows:

Depreciation = P3,160,000 (house & lot) / 50 years = P63,200 cost of depreciation per year.
Depreciation cost for 5 years = P63,200 x 5 = P316,000

Therefore the appraised value of the property in this example shall be P3,160,000 less P316,000 depreciation = PP2,884,000.

The Sales Comparison approach recognizes that a typical buyer will always compare by asking prices and seek to purchase the property that meets his or her wants and needs for the lowest cost possible. The actual selling prices happening in the same local area can be obtained from public records, buyers, sellers, real estate brokers and/or agents, appraisers, and others. Important details of each comparable sale are described in the appraised report by licenced real estate appraisers.

Since comparable sales are not always identical to the subject property, adjustments are sometimes made for date of sale, location, style, bathrooms, square foot, site size, etc... The main idea is to simulate the price that would have been paid if each comparable sale were identical to the subject property. If adjustment to the comparable is superior to the subject, a downward adjustment is necessary. Likewise, if the adjustment to the comparable is inferior to the subject, an upward adjustment is necessary.

For example, the subject property in comparison has a bigger lot area, then compute the difference and deduct from the price to make an upward adjustment. If the subject property has a smaller floor area, then compute the difference from the price to make a downward adjustment. You will also have to compare the basic facilities, amenties, and other features of the property that make it more valuable than the other properties. A careful balancing of all the variables is important in arriving at the good appraisal value based on sales comparison approach.

The Income Capitalization approach is used to value commercial and investment properties. Because it is intended to directly reflect or model the expectations and behaviors of typical market participants, this approach is generally considered the most applicable valuation technique for income-producing properties, where sufficient market data exists to supply the necessary inputs and parameters for this approach.

In a commercial income-producing property this approach capitalizes an income stream into a value indication. This can be done using revenue mulitpliers or capitalization rates applied to the first-year Net Operating Income. The Net Operation Income is gross potential income, less vacancy and collection loss (=Effective Gross Income) less operating expenses (but excluding debt service, income taxes, and/or depreciation charges applied by accountants).