A Closer Look at Cost Approach Valuation

Cost approach is one of the valuation approach that is commonly used in valuing man-made improvements and machinery. In the Philippine context, cost approach is being used to value improvements separate from the valuation of land. This method can be trace back to our long history of housing assessment in the Philippines. It is revered yet poorly understood.

In a nutshell, cost approach is a breakdown of what it would cost to reconstruct the property, as if it were destroyed less depreciation. Cost approach is highly reliable if the property subject for appraisal is new, and might have little or no depreciation at all.

But it’s not a walk in the park approach. There are a lot of misconception and need to polish. In cost approach method, an appraiser should master the building construction estimation, the difference between the reproduction and replacement method, types of depreciation, its application and whether it is curable and incurable, and the supply and demand that shape the economic situation.

Economic obsolescence is seldom used by practitioners. Analyzing the location of the property and its role in the supply and demand is at the core of this type. Example, an older warehouse that is not suited to containerized freight and as such not as valuable as the other one. Another example is a building designed for processing of local agricultural products which through the period of time, the community no longer produces these products. These buildings substantially depreciated due to economic obsolescence.

The crucial portion in the cost approach is the determination of the cost new and depreciation of the property subject for appraisal and breaking down the building cost into direct and indirect cost. It’s not just a list of materials and labor needed to construct a building, but should also include the developer’s and entrepreneurs’ profit. This is a reward for the role they played in ensuring the completion of the project and bring it to the consumers.

Defining the different part of depreciation is also an important one. The economic life of the improvement has bearing on its contribution to the market value of the property. However, there are confusion on the interrelation of remaining economic life, effective age and actual age. The economic life of a building can be as short as thirty five years, or its effective age is longer than the actual life. Thus the maintenance, renovation and repair plays an important role in prolonging the remaining economic life of the property.

Here is an example of how to solve the problem  on actual age versus effective age:

  Years Percentage Contribution    
Portion of the House with 10 years old 20 70% 20 x 70% 14
Portion of the House with 5 years old 5 30 % 5 x 30% 1.5
Effective Age of Building 15.5 years

The house appraised which has a portion undergone renovation (30%) while others remain in its normal course of wear and tear and utility. The result will show that the effective age of the building is 15.5 years even if the actual life of the building is 20 years.

Simplistic analysis of cost approach will open the appraisal process and value conclusion to scrutiny and questions. At the end of the day, the appraiser’s experience and knowledge will play crucial in making sound judgment.#

 

 

 

 

Consultant Gus Agosto Speaks in Bangkok

The Thailand Real Estate and Business School has invited Consultant Agosto to lecture in the Complex Properties Valuation Seminar held in Bangkok, Thailand last Feb.3-5, 2019.

Consultant Agosto discussed the topics “Market Study and Highest and Best Use” and “Township Development Feasibility Study”, which has contributed to the learning of the participants. The seminar attended by valuers and academe from Maldives, Malaysia, Bangladesh, Kenya, Philippines and Thailand.

The topics were discussed with case studies in various part of the Philippines which makes the seminar a lively and actual demonstration of fundamental concepts in complex properties valuation. “This seminar add value to the knowledge and confidence of the participants”, Consultant Agosto ended.

 

Cebu Province acquires AA+ Appraisal services

Cebu Provincial Government has acquired the services of AA+ Appraisal & Consultancy, Inc. to appraise the properties owned by the Cebu Province.

Earlier, Gov. Gwendolyn Garcia said in an interview that she wanted Province-owned real properties reappraised to conform with the present fair market value.

Consultant Agosto said that “It was the biggest assignment that the company had for a local government. Nonetheless, it was not our first time doing appraisal of properties for the government. We already had previous appraisal of properties owned by the Power Sector Assets and Liabilities Management (PSALM) in La Union.”

Prior to this assignment, AA+ Appraisal & Consulting was also been tapped to help in the revision of the Schedule of Market Value of the Province. “Our company is always  ready to render service to our government as part of our obligation to the community, and also to the people of Cebu.” Consultant Gus Agosto reiterates in a message sent during the submission of the report on January 6,2020.

This is only to show that local governments and other government agencies started to grasp the importance of having a fair market value that is reflected to the present times and done by the experts in the field.#

Valuing the Valuation Reform Act

The Real Property Valuation Bill (HB 4664), which has been passed recently in the House of Representatives and will soon be deliberated in the Senate, is an important concern in the appraisal profession. There are two vital questions of the bill that need to be emphasised and clarified before arriving in a conclusion. These include question on how it will help the appraisal profession and how it will help the real estate industry.

First, how it will help the profession?

One of the major component of the bill is the establishment of a comprehensive database on land values. It will  centralize actual sold property data from the Register of Deeds, Assessor, Geodetic Engineers, and Local Government Units and will be shared to private entities through subscription.This will help in fostering transparency in land transactions and will also give more credibility on appraiser’s comparable data that is vital  in arriving at an opinion of value.

Investors will be more confident in the land market and real estate industry. They will be assured that what they have invested in, is the amount or value of the property in the market, through the use of appraisal methodology which is in line with the international standards adopted by the appraisers, both government and private.

Other Salient Features :

  1. It will establish a single and uniform standard of valuation which is based on international standards. The valuation standard that will be followed is the internationally accepted valuation standard and which requires higher degree of professionalisation in the industry.
  1. It will ensure that the appointment of assessor and assistant assessor should be a registered and licensed appraiser and from the local area.
  2. Creation of Central and Regional Consultative Committee that will ensure the representation from private national organization of appraisers, and regional organization of appraisers.
  3. Regular Updating of Schedule of Market Values. The bill also directs the local assessors to come up with a regular updated Schedule of Market Values, within 2 years from the effectivity of the act, and also once every three (3) years from the date of the last revision. However, instead of the local council, the Secretary of Finance will approve the draft.

Second, how it will help the real estate industry? 

The revenue generated from the valuation reform act will help fund government projects such as the ‘Build, build, build” of the Duterte Administration which in turn facilitates the faster movement of goods and people in different part of the country. The provision of infrastructures in regions will unlock new markets in various part of the country, and help stimulates the real estate market. Also, the additional revenue generated by the local government units will help in funding local economic enterprises and services to the people.

In conclusion, appraisers and the people have more reasons to support the valuation reform act. It will not only raise the standard of the profession and the industry and will elevate the profession to international level, but in the broader aspect, will stimulate the real estate market and spur economic growth.

 

Market Rent Determination in Property Management

Pricing a rental property is an important part in investing in real estate. Setting the price too high can mean your property will sits vacant and more vacancy losses in the spreadsheet. Or you could undercut your potential rental income, leaving money on the table.

Whether you currently own rental real estate or aspire to invest in rental properties, you need to have knowledge on how to determine the fair market rent for a rental property and how valuation helps.

In the Philippines, there is a Rental Act that serve as guide in the rental transactions, however it covers only the P10,000 monthly rental property and below. Thus, the rental transaction between parties are important.

Based on the definition of the Philippine Valuation Standard, market rent is the estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and a willing lessee on appropriate lessee terms in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.

In the nutshell, market rents are determined by the property’s size, type, and location. For example, a two-bedroom fair market rent in a Cebu City subdivision could be P60,000, while it could be P20,000 in a less expensive district area. Market rent differs from contract rent which is the stated amount in a contract between parties. Market rent always play higher than the contract rent, however it is not always be the case.

How is market rent determined? There are different factors such as property type, unit size, location of the property and the condition of the property. There are secondary data that can be used online to compare rental listings based on size and locations such as Carousel, Property24, Lamudi and other websites.

Using the lenses of a property manager, market rent determination can also be aligned with the goal of the property owner for profitability and be on top of the competition. Thus, the need for the regular valuation of the property is a must in decision making of the top management.

Fair Market rent can also be raised through renovation or total reconstruction of the property based on its highest and based use. Renovation of the building is the common method to achieve competitive and modern status. Determining the current status of different component of the building is the first step in conducting renovation and repair of a building. A rehabilitated and modernized structures is a passport to any proposal for price increases and profitability.

More so, renovation will bring additional value to the property. The life span will be extended and will result in a higher valuation due to introduction of additional improvements.

Appraisers should learn to master the numbers in providing assistance to the building owners, property managers and tenants. Anyway, numbers is the appraisers tool in reaching a credible and knowledgeable appraisal.

 

Gus Agosto Speaks at Real Estate International Conference

Philippine Association of Real Estate Board Vice President for the Visayas, Gus Agosto, served as one of the panelists in a forum during the recently concluded ASEAN Real Estate Networking Alliance Annual Convention and Exhibition 2019 held at Novotel Hotel, Yangon, Myanmar from 23-24 August, 2019.

Together with other resource speakers, Gus Agosto shared his thoughts on the topic entitled “What I want from ARENA?”

The Asian Development Consultant stresses on the aspect of organization that “ARENA could explore more in providing business opportunities to the members and by institutionalizing it through formation of committees and mechanisms. The said body will explore various opportunities in member association countries, provide privileges and incentives to ARENA members. This will foster cooperation and stronger ties among individuals in the alliance.”

The panel forum was headed by ARENA Co-founder Atty. Moby Arquiza 
and includes speakers from Malaysia, Singapore and Myanmar.

The theme of this year ARENA Annual Convention and Exhibition was “Embracing technology and networking”, and featured discussions on real estate, investment, digital technology and best practices in real estate. The participants of the convention include real estate practitioners from Cambodia, Thailand, Vietnam, Indonesia, Singapore, Malaysia, Philippines, Myanmar, Mongolia, and United States of America.

 

Attended by more than 800 delegates, the ARENA Annual Convention and Exhibition 2019 served as a platform where international and Myanmar’s real estate entrepreneurs, investors, policy makers, and stakeholders met, connected and discussed updates, issues and opportunities in the real estate sector. The exhibition was also expected to provide benefits in developing a strong real estate sector in the ASEAN economic zone through cooperation with government agencies, real estate practitioners, developers and construction contractors.

 

Video credit to Dr. Sopon Pornchochai

Valuing Our Story: The history of AA RealtyPro Solutions

AA RealtyPro Solutions was established on August 2, 2012.  Its founder Augusto B. Agosto, has led the organization from its humble beginning to the present.

AA RealtyPro Solutions started as full real estate service firm. It was an endeavor initiated by the founder as a testament for his many years of experience in real estate. Upon his passing the Professional Regulation Commission (PRC) Licensure Examination, Mr. Agosto served as the Managing Partner of a national appraisal company for its Cebu Branch and then attempted to form a branch of another Manila based appraisal company serving banks and private companies which did not last long.

On July 2014, it expanded its services to include real estate appraisal. The first corporate clients were General Milling Corporation and Classical Geometry Export Corporation. Its historical leap started when the biggest cooperative in the Visayas and Mindanao, Cebu CFI Community Cooperative, acquired its services.

On November 2014, it started in court litigation appraisal when Mr. Agosto was appointed by the Regional Trial Court of Lapu-Lapu City as Appraisal Commissioner. Then, it rendered appraisal services to different schools and universities in the Province of Cebu such as University of the Philippines-Cebu Campus, Southwestern University, Cleaverlearn Inc., University of Southern Philippines, and Bantayan Southern Institute.

On September 2017, AA RealtyPro Solutions has been hired to appraise an apartment building in Sampaloc, Manila by GSE Law Firm, a respected law firm in the country. Then on February 2018, AA RealtyPro Solutions was commissioned by Vivant Power Corporation to appraise a power plant in La Union. Since then it has appraised commercial, residential, and industrial properties in Luzon and the National Capital Region (NCR).

AA RealtyPro is recognized as one of the growing appraisal business firms in the country today. It has achieved this unrivaled growth and reputation for excellence due to its successful completion of a thousand or more valuation and other related services.

In addition to leading what is now one of the country’s respected real estate appraisal firms, Mr. Agosto was known for his training courses, which helped to establish him as one of the leading industry experts in appraisal business.  He also continues to learn and upgrade knowledge from various institution here in the country and abroad. Last August 2018, the Complex Properties Real Estate Valuation seminar in Bangkok, Thailand helped to widen his knowledge on the different approaches in valuation.

AA RealtyPro Solutions is proud of its rich history in providing excellent appraisal services and will continue to contribute its knowledge and skills to the industry and the general public in the years to come.

ADB hires Agosto as Consultant

ADB-logo-1543342036The Asian Development Bank has recruited AB Agosto as a Consultant Housing Market Specialist. The objective of the consultancy is to assist ADB in developing a framework to expand credit availability to the socialised and economic housing segments in the Philippines.

The Innovative Housing Project which is part of the support to the Association of Southeast Asian Nation Economic Community. It started last April 15, 2019 and will end in June 30, 2019.

ADB, based in Manila, is dedicated to reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth, and regional integration. Established in 1966, it is owned by 67 members—48 from the region.

Agosto speaks in Iloilo

“You should know the relation of selling and ethics. The former will provide you the livelihood that is well-rewarded, the latter will separate the chaff from the grain.”

Gus Agosto lectures in Iloilo to equip practitioners with the knowledge on the fundamentals of real estate and the role of ethics in the profession.  It was held in Regatta Hotel, Iloilo and hosted by the Iloilo City Real Estate Board.

Agosto has been teaching and lecturing real estate both in the academe and in the profession. With almost 100 participants in the seminar, the discussions were lively and based on actual experiences of the participants.

Besides Iloilo, the seminar participants came from different provinces in Panay Island. It includes participants from Aklan, Antique and Capiz.

 

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