Understanding real estate valuation is paramount, whether you're considering purchasing your dream home or preparing to list a property for sale. It can guide you through the intricate landscape of property transactions in the Philippine real estate market, ensuring fair deals and informed decisions. It's also an excellent way of monitoring how your real estate investment performs to ensure high returns.

Since many valuation techniques come into play when assessing the worth of properties, this article delves into real estate valuation methods you can use to determine property values in the Philippines. Whether you're a seasoned investor, aspiring homebuyer, or real estate enthusiast, this guide is sure to enlighten you.

5 Real Estate Valuation Methods in the Philippines

Your knowledge in this department can help you make well-informed decisions, comply with government regulations, and further educate yourself about the Philippine real estate market.

1. Cost approach
   The cost approach (1) assesses a property's value based on how much it would cost to build it today if it were destroyed and needed rebuilding from scratch. It considers current construction and land costs and excludes any depreciation using this formula:
   
   Property value = Construction costs + Land costs – Depreciation
   
   This method is helpful for newer properties where construction costs involve close estimates. It's particularly valuable when you don't have sales or income data to compare with.

2. Sales comparison approach
   Also known as the market approach, the sales comparison method (2) involves comparing a property to at least three recently sold ones in the same area with similar size, condition, or other characteristics. Appraisers usually adjust prices for differences between the subject property and the comparables, allowing a more accurate estimation of its market value (3).

   Let's say you're trying to determine the value of a house that doesn't have a garage, but comparable homes in the area all have garages. In the sales comparison approach, the appraiser reduces the subject property's value to account for the absence of a garage. This reduction reflects the perceived value that a garage adds to a property in that specific market.

3. Income capitalization approach
   This method primarily caters to income-producing properties such as rental apartments, condominiums, commercial buildings, or office spaces. It calculates the property's value based on its potential income, applying a capitalization rate to convert expected future income into a present value.
   
   Two variables come into play when using the income capitalization approach (4): the property's net income (how much it makes after paying expenses) and the cap rate (a percentage showing how profitable the property is compared to its value). Typically, the income approach is for commercial properties but can apply to homes, too.
   
   This method is suitable for you as an investor, considering factors like rental income, operating expenses, and the prevailing market cap rate.

4. Gross rent multiplier method
   The gross rent multiplier (GRM) method (5) divides a property's sale price by its gross annual rental income. The result is the number of years it would take to pay off the property. The ideal GRM is 4 to 7.

   For instance, you plan to purchase a small apartment building in Quezon City worth ₱4.5 million, generating an annual rental income of ₱800,000. Its GRM would be 5.6, which means you need nearly six years to pay for the property.

5. Discounted cash flow (DCF) method
   The DCF method is mainly for commercial real estate and investment properties. It estimates a property's value by projecting its future cash flows (6), like income and expenses, and discounting them back to its present value using a chosen discount rate. 
   
   The only downside to this approach is that it relies on estimates (7) instead of real numbers. You must correctly guess discount rates and future cash flows for an accurate value. Unfortunately, it can be tricky to predict future cash flows based on forecasts about market demand, economies, technologies, and competition.

What Happens After Appraisal?

After an appraiser inspects your property and its neighborhood, it can take a day, a week, or a few months to prepare the appraisal report. The timeline depends on the appraiser's schedule, how fast they can acquire and analyze the necessary information, and how busy the real estate market is in your area.

If you're selling a property, you can use the final appraisal report to justify your selling price and attract buyers. On the other hand, if you're buying a property, you can submit the report to lenders to help them determine the loan-to-value ratio, assess potential risks, and protect their investment.

Know Your Property's Worth

Being a homeowner or real estate investor comes with many responsibilities, including determining your property's value. Refer to the methods above to know your property's worth and the factors that affect it. For a more accurate valuation, consider hiring a qualified real estate appraiser.

If you're ready to buy or sell a property, browse through OnePropertee property listings across the Philippines. We're a leading real estate marketplace offering various properties, like condos or duplex houses for sale and rent. We can help you find the perfect property for your needs.

Explore our page to know your property options.

Sources

1. Liberto, Daniel. "What Is the Cost Approach in Calculating Real Estate Values?" Investopedia. Accessed September 27, 2023. https://www.investopedia.com/terms/c/cost-approach.asp.

2. "Sales Comparison Approach (Real Estate)." Corporate Finance Institute, January 16, 2023. https://corporatefinanceinstitute.com/resources/valuation/sales-comparison-approach-real-estate/.

3. Difference between Market Value and Fair Value in Real Estate." Clicbrics, March 15, 2023. https://www.clicbrics.com/blog/difference-between-market-value-and-fair-value.

4. Hargrave, Marshall. "Income Approach: What It Is, How It's Calculated, Example." Investopedia. Accessed Sept. 27, 2023. https://www.investopedia.com/terms/i/income-approach.asp.

5. Kimmons, Jim. "How to Calculate and Use the Gross Rent Multiplier (GRM)." The Balance, Sept. 13, 2022. https://www.thebalancemoney.com/how-to-calculate-and-use-the-gross-rent-multiplier-grm-2866791.

6. "How to Make a Cash Flow Projection Statement (with Example)." Indeed. Accessed Sept. 26, 2023. https://www.indeed.com/career-advice/career-development/cash-flow-projection-statement.

7. Fernando, Jason. "Discounted Cash Flow (DCF) Explained with Formula and Examples." Investopedia. Accessed Sept. 27, 2023. https://www.investopedia.com/terms/d/dcf.asp.