Due Diligence In Real Estate Transactions

811-Due-Diligence-When-Buying-Real-EstateReal estate transactions involve a significant amount of money and rights of individual. The due diligence process minimizes the risks and provides safeguards against determinable issues that may affect the real estate transaction.

Making the right decisions in real estate transactions can be a challenge without complete and accurate information. A traditional legal principle is “caveat emptor” or “buyer beware.” This is from the traditional rulings that courts would make that the buyer was stuck with whatever he or she purchased and would have limited recourse. Due to this likely result, buyers had to be extra cautious when making buying decisions.

Due diligence provides for a thorough investigation into a transaction. It helps the buyer learn more about the property, the documents, environment and operational fundamentals of the deal. This process helps avoid surprises after the transaction when remedies may be limited.

The actual scope of the due diligence process depends on the buyer’s needs and the transaction itself. If the buyer is a developer, he or she may have very different needs than when the buyer is purchasing the property for lease or investment. There are individuals who have a pending court case and interested in knowing the property to determine the site and use as evidence in court.

The due diligence process begins by determining the expected use of the property and use this information as a framework. Due diligence seeks to address a number of issues and identify important information for buyers. This information includes determining the property’s owners, boundary lines, the rights that come with the sale, the expected future use of the property and highest and best use as development options. The process should identify any issues related to the property title, easements, encumbrances, liens or other hurdles to complete ownership. Additionally, the due diligence process can reveal if there are any restrictions that might affect the use of the property or its development, such as environmental issues, zoning restrictions or legal compliance matters such as abiding by Agrarian Reform Law, NIPAS Act, Agriculture and fisheries Act, road right of way act, government programs and more.

The due diligence process can also reveal information as it is uncovered. For example, the technical description plotting cannot be close may pop up after the document analysis is conducted. Additionally, it is important to determine the real estate market and demographic data to predict the future demands in the area.  Site inspection will determine the actual topography, terrain, shape, boundaries, neighbourhood and existence of any occupants or informal settlers in the property.

Last but not the least, is the environmental assessment, to uncover any daunting environmental hazards or issues of the property such as gas leak, wet lands, or use of the property as manufacturing in the past.

The due diligence process is very important. Adequate time must be reserved for this process to be conducted thoroughly and carefully. Party in a transaction should be encouraged to provide specified documents and information to ease the transaction. Be aware of all interests, liabilities, expenses and possible uses for the property.

This information will allow parties in transactions to make an informed decision.

EnP. Gus Agosto conferred Fellow status

Urban Planner  Gus Agosto, a faculty of the University of San Carlos, was conferred  with Fellow Status by Social Watch Philippines and People’s Public Finance Institute at the University of the Philippines, Lahug, Cebu City,

Social Watch Philippines is the network of hundred non-government organizations that initiated direct citizens’ participation in national and local budget processes through the Alternative Budget Initiative (ABI), while People’s Public Finance Institute is a center that educates the general public, civil society organizations and individuals on national and local public finance processes working under the framework of citizens’ participation.

Fellowship is an honor bestowed upon individuals that contribute in further strengthening citizen’s engagement in public finance. The new Fellows are drawn from academe, practitioners and graduate students across Central Visayas.

“I feel quite honored that Social Watch bestowed Fellow Status upon me,” Planner Gus said. “By doing so, they have acknowledged my teaching work in public finance and its contribution in important ways to students, professionals and the broad public. It is both gratifying and humbling at the same time.”

As a faculty, he is teaching public finance at the University of San Carlos, Cebu. “I’m very interested with the topic, being an urban planner and economist; I’ve been involved in various ways in public finance.“ Planner Gus also has a professional interest in the role that a Fellow can play in supporting and improving public involvement in government finance.

Prior to the conferment, a two-day discussion on the development of public finance and citizen’s engagement was held in collaboration with Social Watch Philippines, United Nations Development Program and University of the Philippines-Cebu.




Extending appraisal service in Australian court

legalAfter US, now in Australia.

Appraiser Agosto provided an appraisal consultancy and service to Australian court.  The respondent in a matrimonial property settlement in Federal Circuit Court of Australia acquired his services to provide an opinion of value for properties involved in a litigation.

“I was informed by the solicitors of my client that my appraisal report has been forwarded to the court and now forms part of the evidence,” Appraiser Gus said during the meeting of PAREB-Cebu South.

On August 3, 2017,  Finemore Walters & Story Solicitors of Brisbane, Australia wrote a  correspondence to Appraiser Agosto, “As part of finalizing the matrimonial property  settlement proceedings, in which under the Australian Law, it should be under oath and notarized by the Philippine solicitor to be accepted as an evidence in court.

The Finemore Walters & Story is a law firm for the respondent and specializes in family law and business.

The Federal Magistrate Court of Australia has just ruled to require valuer to sign an affidavit  making reference to the report and certify as true and correct.

Appraiser Gus says that the rules in court litigation support in Australia is quite rigorous. Appraisers interested in venturing court appraisal should read the court guidelines like the Federal rules 2001 and other guidelines. Besides notarization cited above, the court require valuer to execute and provide certification of no conflict of interest and the independence  of the appraisal.

With his experience in a range of court cases, from divorce settlement, estate taxes to appointment as court commissioner on expropriation and just compensation, Appraiser Agosto fitted in the job. Recently, he was summoned by the San Joaquin County Superior Court in Stockton California, USA to be an expert witness in a divorce settlement case.

Appraisal litigation is a challenging assignment. One of his most interesting case involved in appraising properties and title search. The client, a US Immigrant, have won the case and obtain his share in the matrimonial properties.

“In all cases, the appraiser should consider the caveat in court litigation in this line of work. The report will be scrutinized, and challenged in court. The  opposing counsel will surely hire the services of another appraiser with the objective of defending their value as more accurate, reliable and objective. The challenge is to defend your work.”

As a final advice to appraiser who are interested in this line of work, he shared that an appraiser should work hard and practice due diligence, relevance and objectivity. Always have the facts and know the property inside and out.  “Know the property, the law and the market well’,  Appraiser Gus Agosto concluded.



Using drone in appraisal

S-048395x2000Thinking outside the box is essential in the valuation profession. It only makes sense that drones would come to be in the hands of appraisers.

In recent appraisal assignments, appraisers’ uses drone in site inspections. Drones provide unique perspectives on properties, giving appraisers more information to use for a credible appraisal report.

“It allows us to get up higher, get a better view of the roof and rotate 360 degrees above the property to provide a view of the surrounding properties,” Appraiser Gus said. “We could not provide that footage without using a drone.”

There are many advantages in using  drone for appraisal. One is the ability to access hard-to-reach places. Areas considered previously unobservable such as roofings, gutters, easements and more, can now be seen using the correct equipment. Not only can these items be observed, but areas of interest can be identified for additional inspection.

Drones can be specifically useful in commercial properties,  large tracts of land where easements and prior improvements can be shown via photographs or video. This allows appraisers to observe and document a property in real-time on the date of inspection and will undoubtedly change the way many properties are viewed going forward.

These developments show that valuation profession is not afraid to innovate with new technology.  It elevated the practice of profession to a new and higher level.

” Drones provide appraisers more information to use for a credible appraisal report.”


Appraisal is market analysis

stock-photo-market-analysis-157130024Location, location, location is perhaps the age-old adage that we have learned in real estate.  Real estate market is dynamic, seldom static and always in transition, with property values either increasing or decreasing. Hence, the importance of analyzing the market is immeasurable.

Market analysis forms part of the appraisal report. It is done prior to the selection of comparables and determining the market area.  The appraiser analysis the economy, political, regional situation, real estate developments, and its impact to the present and future land value. The purpose is simple, to know the present and predict the selling price of the subject property, if exposed in the market for a reasonable time.

In a typical assignment, the appraiser is customarily called in by a client not literally to know the “worth” of the property but to asked his judgment as to what the property would bring in a given real estate market. The market value of the property in a given market.

There are bricks-and-mortar defender and worship cost method as the most powerful in appraisal.  But, the appraisers of today know that the materials of valuation flow from the real estate market. Cost approach is important but it should be anchored in the market analysis. In essence, cost approach is based in the market. The cost of materials which is used in the cost approach method is derived in the construction supplies market. The cost of gravel and sand is high in Cebu but not in Leyte. The labor cost in Metro Manila is different from that of the provinces.

What comprise the market?

Appraisal is market analysis- but what is market?  As we all know, market is a place where buyers and seller meet. It is compose of micro market and macro-externalities. The micro market is where the action is- the seller meets the buyer, in a direct and competitive interaction that eventually results to a price determination. The macro externalities are the influencing factors like the economy, business condition, flow of money, inflation and others.

The economic crisis has put the real estate in a quandary. However, in time of surging business and economic development, the real estate market also grow.

Appraisers should know how to identify the appreciating market.  Like the imbalance of supply and demand, presence of buyer and seller’s market, reduced marketing time for active and closed sales, increase in sales prices and existence or absence of seller concessions and whether property condition impacts marketability.

The presence of several factors would be a strong indication that the market is appreciating and appropriate analysis and adjustments for date of sale, time to comparable sales becomes necessary to produce credible assignment results.

Thus, the true nature of appraisal is real estate market analysis.

Key points in the appraisal report

Appraisal reportIn every appraisal assignment, the appraiser should see to it that the client understand not only the final value, but the appraisal report in its entirety.

Appraisal report is the product of the whole appraisal process. It is an important document for decision maker in deciding whether or not to accept any real estate transaction.It outlines the strength and weaknesses of a property. Thus, the conclusion in the report can make or break any real estate negotiations.

Beside market value, what are the other factors that a property owner, real estate practitioner or investor should look to in an appraisal report?

Here are some of the major factors to consider as you read over the appraisal report.

Proper identification of the property.The most important in appraisal is the proper identification of the property. Definitely, wrong property is wrong appraisal. The appraiser should indicate the correct characteristics of the property like shape, size, depth, age, topography and boundaries. Documents such as the property title and tax declaration should match with the public records in the city assessor, engineering, city planning and Bureau of Lands.

Market trends. If the market has been going up, but the report says the market is going down, that could not support the final value. The report should show if what is unfolding in the market, otherwise that could lead to erroneous adjustments in the report.

Neighborhood Boundaries. The neighborhood boundaries listed in the appraisal report should show the correct similar neighborhood on which the subject property and the comparable (comps) sales are located. It can make a big difference if the wrong comps are used from inferior or superior neighborhoods.

Selection of comparables. The comparable used are the good substitution of properties a buyer might consider purchasing instead of the subject property. It should almost identical with the property appraised. Otherwise, it is a wrong comps and questionable.

Adjustments.Some reports make an adjustment by just getting the  average of the total price of comps in the market. It does not reflect the real estate market and are not reasonable.

Measurements. In measuring the improvements, appraisal report should present  a relatively similar to official records or to what a buyer know of the property. It is important to double-check, in case of error.

Improvements. The report won’t show an adjustment for every single update, but the final value should consider improvements. Keep in mind of course that not all improvements contribute to value. For example, a swimming pool in the backyard probably won’t be a huge plus in a beach area.

Qualification of the appraiser. Appraisal report mirrors the experience and qualification of the appraiser. Property owner, investors and real estate practitioners should look for appraisers that are not only licensed but possess a certain level of experience. The report should indicate the client list and types of property appraised by the appraiser. This will show if the appraiser is qualified to do the assignment.

Now that you know the important elements of an appraisal report, its time to obtain a copy from your appraiser or bank loan officer.

Remember that your property is one of your most important lifetime investments. The money spent on a quality appraisal is well spent.

Benefits of appraisal services

Appraisal-of-HomeSome property owner downplays the importance of appraisal. In determining the price of certain properties for example, some still uses the zonal value as a benchmark in knowing the worth of the property. Other sees the appraisal as a process of comparing the listing price of properties in an area. There are price-sensitive client that bargains in lowering appraiser’s fee, while there are also reliant on the opinion of certain real estate practitioners in pricing their properties to evade in paying the appraisal fee.

There are financial implications on relying to non-expert in real estate valuation. If the practitioner missed some current comparable evidence, is weak in the technical analysis, or errs in the interpretation of data, it might result in aggregate loss in the real estate transaction or losing the whole transaction itself.

In our experience, with the help of an appraisal, a property owner was able to make a sound bank loan. An investor uses the advice of an appraiser to quantify risk and project yield; a landowner has successfully inked a joint venture deal using the appraisal; an asset manager gets advice that makes him or her wise decision maker; and a lawyer is able to rely on appraisers’ expertise in litigation and court testimony.

Appraisal is not a simple process or just a mandated evil for which a client grudgingly pays as little as possible. Appraisal is a service that, if competent and timely, brings a benefit to a client that far outweighs the fee.

Appraisal report is a living document forming the very foundation for decision making. Where else is a client going to get such a detailed investigation of his or her property and its market?  It is not just a document that the banker throws into a file and the client never sees.

In today’s changing real estate market, solving the issues is the most invaluable contribution of the appraiser.

Overcoming the learning gap

mentoringThere is a learning gap for new appraisers. Recent statistics from the Philippine Regulatory Board of Real Estate Service shows that the total number of licensed appraisers is now at 9,932 (PRBRES). But most of the newly passed appraisers need coaching and mentorship from the experienced and competent appraisers. “How do I get started?”, the common question asked by a newly passed appraiser.

The appraisal coaching that PAREB shared to its members is worthy to mention, spearheaded by Appraiser Gus Agosto, the Director-in-charge, held recently a coaching session in Cebu.” The appraisal coaching is not only a set of theories and coursework”, he said.  Appraisal is more than a body of knowledge, it comes with many requirements,  a definite set of skills that has many facets and variations. Appraisers have to know how to do many things, from measuring properties accurately, analyzing the economic condition and comps to manage schedules, billing and plan inspection trips.

But equally important to the set of skills and practical knowledge, is the observance of high ethical standards and adherence to moral standards with an emphasis on objectivity and honest exchange. A competent appraiser does not only possess a number of years in practical knowledge and experience, but also imbued with ethical standards.

In answering the question of what is our profession, the resounding answer always has to be that appraising is a profession built on the foundation of public trust. This trust can be viewed in the burgeoning demand for the service of appraisers in real estate transactions,  government agencies, court litigation and insurance.

Appraisers, in their objective opinions and judgments, are keepers and protectors of this trust. The reality is, in overcoming the learning gap, more and more appraisers should be trained and be elevated to a new and higher level of professional practice.

“In so doing, the public trust in the profession will also be elevated to a new and higher level.” Director Gus ended.