BASIC FAIR MARKET VALUES FOR REAL ESTATE MORONS

A SUPER EASY LAYMAN’S GUIDE TO REAL ESTATE PROPERTY APPRAISAL FOR NON-REAL ESTATE APPRAISERS IN THE PHILIPPINES

 

Any seller can dictate as high of a  price as he/she wants but it doesn’t mean that the property will sell at that price.

If a property seller is really motivated in selling his/her piece of real estate, then the selling price must be competitive with what are currently being offered in the real estate market. Therefore a seller needs to know what is the FAIR MARKET VALUE for his property.

In the same thought, the BUYER on the other hand, should also know what kind of property has the FAIR MARKET VALUE his/her budget can buy.

Property Pricing

WHAT IS FAIR MARKET VALUE?

By definition fair market value is simply this…

It is the value that a knowledgeable seller is willing to sell, and a knowledgeable buyer is willing to buy, a piece of real property, without undue pressure on either side.”

 

And that value/price shall largely be dictate by the LAW OF SUPPLY AND DEMAND just like everything else in this world.

And the law of supply and demand are affected by many complex factors, such as emotions, trend, fashion, politics, weather, etcetera, etcetera, etcetera.

I could delve much deeper on the intricacies of economics and the law of supply and demand but that would take another long article. Let’s just talk about that in another post. For now let’s get down to how do we know the Fair Market Value of a certain property?

 

MARKET ANALYSIS:

 

What is Real Estate Market Analysis?

Well, it is the study, survey and research of what’s going on in the area. It is the gathering of data that aim to answer these questions: Which properties are for sale? How much are the price of the properties for sale? How long have the properties been in the market? For those properties that are not yet selling, why aren’t they selling? For those properties that were sold recently, why were they selling? What is the trend in prices of properties in a particular area? How does their prices and quality compare with the property being appraised?

SHOULD YOU WISH TO INQUIRE ABOUT CURRENT MARKET PRICES OF PROPERTIES IN ANGELES CITY, PLEASE CONTACT US.

Simple Exercise for Market Analysis:

Let’s say there are 4 properties A, B, C, and D, in the same, area, same size, same built, same features, same amenities, all things about these four properties are exactly the same.

Property A – Is offered in the market for 4years now at P3.5M and still not selling.

Property B – The owner of this property has been ill and needed medication. He mortgaged the property last year for P500K to a private lender at 60% per year and used the money for his medical expenses. Then the property was due for foreclosure because the debt has risen in excess of P1.5M and there’s no way the owner can come up with that kind of money. So the owner decided to sell it P1.9M so he can still have a bit of money from the proceeds rather than just watch his property be foreclosed and get nothing. The property was sold at P1.8M after 2days.

Property C – The property was up on the market at P2.8M for more than 6months and it was still not selling. The seller dropped the price down at P2.7M, and still, he’s not getting any inquiries for his house even after 2months later. After that, he dropped the price to P2.6M and that’s the time he’s starting to get inquiries about the house. After three weeks the there was an offer to buy it at P2.5M and it was sold at that price.

What is the fair market value of Property D?

Market Analysis

THE ANSWER:

If all four properties are very similar, then we’d expect that the fair market value for all four should be similar also.

The fair market value would not be P3.5M because Property A was offered to sell at that price and for more than four years it still not selling.

FMV is also not P1.8M because it is not a “fair” market value, for the reason being that the seller is under undue pressure to sell the property at a much lower price. Hence P1.8M is NOT THE FAIR MARKET VALUE.

Now assuming that the buyer for Property C is knowledgeable and counter-offered the asking price of P2.6M with his P2.5M offer; and the seller is assumed to be knowledgeable, accepted that offer and sold that said property at P2.5M. Since there were no undue pressure on either the buyer and the seller, the buyer agreed to buy the said property at P2.5M and the seller agreed to sell the property at P2.5M, then the Fair Market Value would be P2.5M!

Hence, the owner of Property D should offer his property for sale close to the price range of P2.5M to be competitive in the market!

 

SUBSTITUTION PRINCIPLE:

 

I’d like to explain substitution principle like this…

For example, there’s a house being offered at P5M in a certain location. Now the substitution principle would ask the question “Are there other more desirable properties, in a better location, with better features and amenities and better quality than this property being offered at the same price?” If the answer is “Yes! There are many other properties more desireable, better location, better features and amenities, and better quality being offered in the market for P5M.” then the price of the property being offered would be higher than the property’s actual Fair Market Value. If the answer is “There’s not much property in the market with better location, quality, features, amenities, quality and level of desirability at P5M”, then the property could be at its’ Fair Market Value. If the answer is “No, I can’t find any other property which has better features and amenities for P5M than the property being offered.” then the price could be lower than the property’s actual fair market value.

 

COST ANALYSIS:

 

Cost Analysis would try to answer these following questions: How much it would cost to acquire and build a similar property? How much has the property had depreciated? How much will it cost to have it repaired/renovated? Is the cost of acquiring the land and building the structure, minus the depreciation rate, minus cost of renovation/repairs, equal to the price of the property being offered for sale?

Appraisal Cost Analysis

I’m not much of a mathematician but I’ll try my best to come up with a mathematical equation for this one…

Cost of land at present + Cost of building the improvements in the past – Depreciation + value of repairs in the past if any – depreciation of building after it has been repaired up until present – Cost of more repairs at present = Fair Market Value

For this you might need a Professional builder to survey the property.

 

PRINCIPLE OF ANTICIPATION/SPECULATION

 

Let’s try to give an analogy…

 

There has been rumors in town that there will be a railway system that will connect different towns and cities in the country, and the biggest train station will be built nearby where Mr. Pedro’s house is located. But since there were no development happening regarding the railway system, the price of properties in the area was not really affected. Hence Mr. Pedro is still selling is house for P2.5M, same is true with his neighbor, Mr. Juan, has a similar property also selling at P2.5M. Then one day, the project manager for the railway needed to buy a house nearby their proposed construction site, so he bought Mr.Pedro’s house for P2.5M without even haggling for a lower bargain. After one week, the senior project manager for the railway also came to the area looking for a house and offered to buy Mr. Juan’s house for P2.5M, but Mr.Juan increased his price to P2.6M and the senior project manager didn’t negotiated for a lower price and bought the house for P2.6M. When the neighborhood heard about the project manager and the senior project managers bought houses to prepare for the construction of the train station, similar properties that are for sale in the area had increased their price to P3M. After two years the construction was done and the railway became operational which prompted the development of new commercial facilities in the nearby areas. The population of the area has increased because many people from outside of town moved in the area in search for opportunities, hence there has been an increase in demand for residential houses. After 5years, the railways and the train system was complete. So the project manager and the senior project manager had to leave town to move-on to the next project in another construction site. Hence, both offered their properties for sale. The project manager offer to sell his house for P5.5M and was sold after 1month for P5.4M. The senior project manager tried to offer his house for sale at P6.1M, but after 1year it was still not selling. The senior project manager then offered the house in the market for P5.6M, after 2months it was sold for P5.5M. After some time, Geologist found out that there’s a geological fault line in the nearby area and a possibility of a massive earthquake is possible any time in the future. When this news broke out, the people who bought the houses at P5.5M and P5.6M are now selling their properties at P1.5M and P1.3M!

Property Appraisal Principle of Anticipation

In this story, you’ll notice that the Fair Market Values of the properties increased and decreased because of the anticipation of what will happen in the future.

 

PROPERTY ANALYSIS:

 

This is a system wherein you audit a certain property based on its’ desirable features and give it a corresponding score; in that same thought you point out the undesirable characteristics of that same property and deduct those corresponding score.

Then these scores would have a monetary equivalent which would be the basis of the Fair Market Value.

Appraisal Property Analysis

Example:

STRUCTURE:

Good and stable up to the standard +3

Well maintained good as new +2

Low ceiling -1

TOTAL : 4points

 

HOUSE FEATURES

Has 3 bedrooms +2

Additional servants’ quarters +1

Has no dirty kitchen -2

Has big living room +3

parking for only 1 compact car -1

TOTAL: 3points

 

COMMUNITY FEATURES

Security services +1

Well maintained neighborhood +2

With recreational facilities +2

Corner Lot +3

Flooding -3

Brownout -2

Accessible to public transportation +2

TOTAL: 5points

 

POINTS TO PESOS SCALE

STRUCTURAL

1 point = P500K

2points = P600K

3points =P700K

4points = P800K

5points = P900K

6points = P1M

7points = P1.1M

 

TOTAL POINTS IN SCRUTURAL –> 4POINTS = P800K

 

HOUSE FEATURES

1 pt = P100K

2pts = P300K

3pts = P500K

4pts = P600K

5pts = P650K

6pts = P750K

7pts = P800K

 

TOTAL SCORE IN HOUSE FEATURES –> 3POINTS = P500K

 

COMMUNITY FEATURES

1pt = P200K

2pts = P250K

3pts = P350K

4pts = P600K

5pts =P750K

6pts = P800K

7pts = P825K

 

TOTAL SCORE IN COMMUNITY FEATURES –> 5POINTS = P750K

 

TOTAL: P800K + P500K + P750K = P 2,050,000 FAIR MARKET VALUE

Note: All the figures and scales and criteria are all hypothetical examples and are not actual definite formulas. Figures, scales and criteria may vary.

 

RETURN OF INCOME INVESTMENT

 

This principle is being used to determine the fair market value of income-generating properties such as apartments, hotels, motels, apartelles, leased land, etc.

 

Basically, investors would like the best earnings for their money with as little risk and hassle as possible.

Investors can place their money in many different investment vehicles such as stocks, bonds, treasury bills, foreign exchange, precious metals, savings, time deposits, mutual funds and ofcourse real estate.

Time deposits could give an investor earnings anywhere from 3% to as high as 8.5% per year with their money insured up to P500K by the PDIC.

Balanced Mutual Funds, Bonds, and Treasury Bills offers even more earnings but investment would have to be exposed in a little bit higher risks.

Foreign Exchange, Stocks, Precious Metals are the highest earning potential yet these are also the highest degree of risk.

Basically if an investor purchase a certain income-generating property, he would want the return of his investment at the shortest possible time so he can start making profits right afterwards.

If the investor could not realize at least 10% return of investment per year, why would the investor bother purchasing and maintaining the said property; have more headaches in marketing the property for rent and dealing with difficult tenants; and even more headaches collecting rent; when he can just put his money in other investment vehicles like time deposit or mutual fund, then he can just relax, do nothing and earn 8.5% per year or more!!!???!!!!

In my opinion return of investment based on income-generated by a particular property, disregarding the capital gains the said property might accrue, should not be less than 10% per annum. If the return of investment is less than 10% per annum, then the price of the property could be higher than the property’s actual Fair Market Value. If the return of investment of the property is more than 35% per annum, then the price of the property could be much lower than its’ Fair Market Value.

Example:

A certain apartment complex has 6units with 1bedroom and 1 bathroom each. Every month each unit is earning a monthly rent of P4500 per unit, net of expenses for the maintenance. In a year, the occupancy rate is about 85%. This property is being offered for sale in the market at P4.5M. Is the price close to its’ actual Fair Market Value based on Return of Investment?

 

If the property should at least earn 10% return of investment per year for the selling price of P4.5M…

P4,500,000 x 0.10 = P450,000 per year / 12 months = P37,500 per month

 

…then that particular property should be earning at least P37,500 per month net profit.

 

OK, let’s compute…

6units x 4500 per month x 12 months = P324,000 yearly gross income at full occupancy x 85% yearly occupancy = P275,400 / 12months = P 22,950 per month income.

P22,950 per month income is way much lower than the minimum expected 10% per annum return of investment based on P4.5M selling price, which is P37,000 per month.

Therefore, at P4.5M, the price of the property is higher than the Fair Market Value.

Appraisal based on income

For this hypothetical example, the fair market value should be around…

P275,400 x 10 years return of investment = P2,754,000 FAIR MARKET VALUE to attain at least 10% return of investment per year.

 

 

Again I’d like to reiterate that all the figures that are mentioned in this article are hypothetical examples only and should not be taken as a definitive formula for appraising properties.

 

If you’d like a thorough and objective appraisal of your property, please do avail of our real estate appraisal services, top-quality service for a very reasonable price.

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Cheers,

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Real Estate Broker License No. 0003469

VP for Marketing KingDavid Realty Co.


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