In my years of working in the real estate industry, I have numerously encountered a dis-connect between sellers and buyers of properties such as land or building. Many times, the price disparity has not only created frustrations among the parties but it also often created a “mindset” among land sellers that developers are doing a fast one on them.
Let us start with some basic concepts and definitions:
Value – worth of the property to the seller or buyer;
Price – amount (to be) paid for the property;
Fair Market Value – price that both the seller and buyer agree for the property, under normal conditions, with neither party under abnormal pressures.
As defined above, the value and price are not necessarily the same.
Let us use an analogy with your cell phone. You wish to buy a second-hand iPhone 11 (64gb) from a friend who is offering it at a price of P25,950. Upon checking, you found out that a brand-new phone costs only P31,990 while numerous offers online range from P24,000 to P26,000. After a few minutes of haggling, you and your friend agreed at P24,000. Here, the original value/worth to your seller friend was P25,950 but he was willing to give it to you at the price of P24,000.
Appraising property
Theoretically, there are three approaches by which we can appraise these properties: market or sales comparison approach, cost approach, and income approach.
Market approach is the most common and widely known and used by sellers. Here, the property value is based on the latest consummated transactions. However, with minor adjustments for date/time of sale, lot size (bigger lot will lower the per sq meter price), quality of the location, availability of amenities, etc., the value will be adjusted.
Properties offered but not yet consummated/sold tend to distort the value when used in this approach because of the latent perception among sellers of that perceived price. The assessed value declared in the Real Estate Tax Declaration is significantly different and should not be used in this approach.
Meanwhile, a cost approach is used to determine the total amount spent in acquiring the said property. Such costs include purchase price, direct national and local taxes that accompany the purchase and registration, broker fees, administrative fees for securing the Certificate of Title, and yearly recurring Real Property Tax, among others. Some people would also include their cost of money while holding on to the property for years.
The last is that of the income approach, the most complicated and may need the assistance of a certified appraiser or business/finance evaluator. Here, the property is subjected to a series of financial assessment parameters that determine the net income given capitalization and operational factors such as revenues, expenses, timing of transactions and taxes.
Other factors to consider
The reality is that there are numerous factors that affect the value and price to be agreed upon in addition to these approaches. The health of the economy affects the value of your properties. Imagine selling your property during the early months of the COVID-19 pandemic and strict lockdowns, chances are you will have difficulty selling it at your initial desired value because most buyers were protective of their cash and as such, would only decide to buy a property if the price was a “steal” for them. Moreover, the location and site considerations are equally important. Properties with informal settlers will not attract a large number of buyers as not everyone will be willing to take charge of removing these settlers. In addition, buyers will have to spend money hiring lawyers or social workers to help them, not to mention the need to provide replacement homes, if so required. Such a scenario will, in all likelihood, bring down the value of your property.
The availability and completeness of your property’s documentation are vital considerations too. Selling a property with Certificate of Title under your grandparent’s name will require your buyer to do more research and due diligence, such as know how you eventually acquired the right to sell the property, as well as if there are other claimants to the property. Such additional research will entail expenses that the buyer may opt to deduct from the amount to be paid to the buyer.
Given these approaches and factors, which one should we choose or use to know the fair market value? Unfortunately, the answer is not straightforward. Depending on the financial target of the seller, or the objectives of the buyer (how the property will be used), one or multiple approaches and considerations may be used or interpolated. Ultimately, the value will be based on a compromise of all these considerations.
With the enactment of Republic Act No. 9646 or the Real Estate Service Act of the Philippines, the RESA Law had professionalized such appraisal service and made it more accessible to the public in general.
So, before you sell or buy a property, learn these concepts and considerations and make your property transaction smoother.
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Henry L. Yap is an Architect, Environmental Planner, Real Estate Practitioner and former Professorial Lecturer.
