Real estate is commonly one of the major assets held by individuals or business entities. Like any asset, real estate has a value which is used by stakeholders, whether they’re owners, sellers, potential buyers, developers, investors, or government entities.
This value is determined through valuation.
Valuation or appraisal is the process of getting the value of a property as of a specific date for a specific purpose. The common basis of value is market value, which is defined by the International Valuation Standards (2020) as “the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.”
In simple terms, it is an estimate of the price that the property can likely be sold for, wherein the buyer and seller are in the transaction of their own free will and they are both well-informed about all aspects of the transaction and the property. Of course, anyone can assume a price on their property as they see fit, whether it’s based on their initial purchase price, additional costs on construction, renovations, or they can attribute some additional perceived special value. However, that will not necessarily be equal to market value since it will likely not be a balanced or unbiased view of the property value. Property valuation should be conducted by a qualified and licensed valuer to make sure that the market value is determined objectively and competently.
Valuers or appraisers in the Philippines are duly licensed by the Philippine Regulatory Commission (PRC), and they undergo continuous education to keep them abreast with the methods and standards of valuation.
Valuers prepare valuation reports for different purposes, generally for sales, financing, recording/reporting or regulatory compliance, investment, insurance, or expropriation reference purposes.
Sales: Since real estate involves a significant value, buyers and sellers alike want to make sure that they’re getting a fair price for a property. A valuation report is prepared to establish an objective value for a property, which can then be the basis for negotiation in the transaction. For buyers, they can choose property options that align with their budget.
Investment: To formulate informed business decisions, investors need a valuation report which will help them understand the dynamics of the property, highlight any potential risks, and help them determine their business strategies.
Financing: Financial institutions need an official report that determines the value of a property which will be the collateral for a loan. The valuation report will be a key input for them to mitigate the risks associated with lending.
Recording/reporting or regulatory compliance: Valuation reports are prepared for financial reporting purposes or regulatory compliance. The regulatory body requires the owner to secure a valuation report as a basis for their submission.
Insurance: Valuation reports are crucial for insurance companies to estimate the insurance coverage and premiums of properties. The replacement cost of a property is assessed so the insurance company can ensure the policyholder has adequate coverage for unforeseen damages or losses.
Expropriation: The state has the power of eminent domain where they take private property for public use, and in exchange give the owner just compensation. The basis of just compensation is an official valuation report.
Property valuation is a vital process that needs to be undertaken to empower decision-makers in making informed decisions covering real estate. When you need a valuation report, you want to be sure that the valuer is qualified, competent, and has an unbiased view to deliver your property’s real value. While you can engage the services of any licensed appraiser, the more prudent choice would be to go with licensed appraisers in a company with a proven third-party stamp of approval.