PhilippinesAustralia Land Administration

and Management Project

PHILIPPINE VALUATION
STANDARDS

26 NOVEMBER 2004
REPORT B4

PHILIPPINE VALUATION STANDARDS

INTRODUCTION
The Philippine Valuation Standards is an initial step towards the development of a uniform
set of standards of professional appraisal practice in the country. This is in recognition of the
need to promote and maintain a high level of public trust in professional appraisal practice by
establishing requirements for the valuation of land and other types of property.
While the Standards have been prepared initially for taxation purposes, it is addressed to both
private and government appraisers and valuers. Assessors and appraisers of Local
Government Units (LGU) and the National Government should adhere to the Standards for
more reliable and consistent valuations. The Assessors primary role is to ensure that the
property appraisal, particularly for tax purposes is accurate so that the tax burden will be
distributed fairly.
In developing the Philippine Valuation Standards, various existing international valuation
standards were reviewed and used as models. These include the Uniform Standards of
Professional Appraisal Practice (USPAP), International Valuation Standards (IVS),
Australian Property Institute (API), New Zealand Property Institute (NZPI), Asean Valuers
Association (AVA) Standards, and the standards prepared by the International Association of
Assessing Offices (IAOO). Proper acknowledgement is therefore made to these organizations.
Three (3) Standards have been initially developed:
Code of Ethics and Professional Conduct
Market Value Basis of Valuation
Mass Appraisal Development and Appraisal
The above standards should be read in the context of the background materials and
implementation guidance contained in the General Valuation Concepts and Principle which
was prepared for this purpose.
The importance of adhering to a uniform valuation standard patterned after generally
accepted appraisal principles and internationally accepted standards cannot be
overemphasized. It is therefore highly recommended that all government agencies and private
appraisal organizations support and follow the Proposed Valuation Standards.

Philippine Australia Land Administration and Management Project

PHILIPPINE VALUATION STANDARDS

I.

GENERAL VALUATION CONCEPTS AND PRINCIPLES

1.0

INTRODUCTION

2.0

1.1

The underlying fundamentals of property valuation provide the basis in the

development of the valuation standard for the Philippines. The Philippine
Valuation Standards are developed based on the generally accepted valuation
concepts, principles and procedures which are similar throughout the world.
The draft of the Philippine Valuation Standards is based on these
fundamentals.

1.2

Property Appraisers and Assessors are those who deal with the special
discipline of economics associated with preparing and reporting valuations. As
professionals, Appraisers must meet rigorous tests of competence and training,
and demonstrate appraisal skills. They must also exhibit and maintain a Code
of Ethics and Conduct and follow the Standards of professional practice based
on a set of General Valuation Concepts and Principles (GVCP).

1.3

The Philippine Valuation Standards developed is patterned after valuation

standards of a number of international organizations and acknowledgement is
made to these various international organizations1.

LAND AND PROPERTY CONCEPT

2.1

Land is one of the major factors of production which is supplied by nature

without the aid of man. Land may include not only the earth surface, both land
and water, but also anything that is attached to earths surface, including all
natural resources in their original state, such as mineral deposits, wildlife,
timber2.

2.2

Property rights in land are established on the theory that the rights in fee
simple ownership in land normally include the wedge shaped area downward
from the earths surface to the center of the earth (sub-surface rights) and the
area upward from the earths surface out into space (supra-surface or air
rights). The latter is limited by Act of Congress concerning public use of
navigable air space which is considered in the public domain3.

- International Valuation Standards Committee (IVCS) Valuation Standards

- US Appraisal Foundation, Uniform Standards of Professional Appraisal Practice (USPAP)
- Asean Valuers Association (AVA) Valuation Standards
- Australian Property Institute & New Zealand Property Institute Standards
- International Association of Assessing Officers (IAOO) Standards
2
-American Institute of Real Estate Appraisers (AIREA), & Society of Real Estate Appraisers (SREA), Real
Estate Appraisal Terminology, Revised Edition (1982) p. 45
3
- Ibid

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3.0

2.3

Valuation of land as if vacant or of land and improvements on the land or for

the benefit of the land is an economic concept. Whether vacant or improved,
land is also referred to as real estate. Value is created by the real estates utility,
or capacity to satisfy the needs and wants of human societies. Contributing to
value are the real estates general uniqueness, durability, potential features of
location, relatively limited supply, and the specific usefulness of a given site.

2.4

All appraisals are concerned with property. Property is the inherent rights of
ownership and future benefits of tangible and intangible assets and is taken to
mean any right or interest reflecting a source or attribute of wealth. The word
property, used without further qualifications may refer to real property,
personal property, or other types of property such as businesses and financial
interests, or a combination thereof. Personal property pertains to movable
physical assets. Anything that is not part of real estate is personal property.
Realty consists of land and all improvements on and to the land. This term is
synonymous with real estate. Real property consists of rights in realty.

2.5

The distinction between real property (rights in realty) and realty (the physical
thing) is significant, in that it is the real property rights that are transferred and
valued in the market and not the real estate.

2.6

The basic rights of private ownership of property include possession, control,

enjoyment, disposition or use, exclusion, plus the right not to exercise any of
the above rights. The term used to describe the full set of private ownership
rights is bundle. The bundle of rights theory states that these rights are
both divisible and separable, i.e. they may be exchanged in whole or in part. In
every appraisal, it is necessary to identify what rights, or what part of the total
bundle, are appraised, i.e., which property rights is to be appraised.

2.7

Estates are ownership rights and interest in property. The estate most
commonly appraised is the fee simple estate, or the fee simple absolute estate
which is the fullest type of private ownership possible. Fee simple is an estate
without restrictions but subject to the limitation of eminent domain, escheat,
police power, and taxation.

2.8

Many recognized principles are applied in valuing real estate. They include the
principles of supply and demand; competition; substitution; anticipation;
increasing and decreasing return, balance, conformity, change; contribution
and others. Common in all these principles is their direct or indirect effect on
the degree of utility and productivity of a property. Consequently, it may be
stated that the utility of the real estate reflects the combined influence of all
market forces that come to bear upon the value of property.

REAL ESTATE, PROPERTY, AND ASSET CONCEPTS

3.1

Real estate is defined as the physical land and all those items which are
attached to the land. It is the physical, tangible entity which can be seen and
touched, together with all the additions on, above, or below the ground.

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Philippine law4 prescribes the basis for distinguishing real estate from personal
property. Although these legal concepts may not be recognized, they are
adopted here to distinguish important terms and concepts.

4.0

3.2

Real property includes all the rights, interests, and benefits related to the
ownership of real estate. Ownership of real estate is evidenced by a Certificate
of Title, Free Patent or Tax Declaration in the absence of Certificate of Title.

3.3

Personal property includes interests in tangible and intangible items which are
not real estate. Items of tangible personal property are not permanently affixed
to real estate and are generally characterized by their own moveability.

3.4

Property such as plant, machinery and equipment are tangible or physical

assets which are intended to be used on a continuing basis as part of an
enterprise.

3.5

Depreciation is loss in value brought about by physical deterioration and/or

obsolescence. Physical deterioration is loss in value due to wear and tear and
exposure to the elements. Obsolescence can either be functional or economic
(environmental). Functional obsolescence is loss in value within the property
as a result of the development of new technology, changes in design or market
preferences. Economic obsolescence is the loss in value resulting from
influences external to the property itself.

COST, PRICE AND VALUE

4.1

In appraisal terminology, the terms cost, price and value are distinct and not
synonymous to each other. The specific meanings of these terms have to be
distinguished as they are used in the valuation discipline.

4.2

Cost is the amount of money necessary to produce, create or manufacture an

item of property. It includes material, labor, equipment, contractors overhead
and profits, and fees.

4.3

Price is the amount of money necessary to purchase the finished goods or item
of property manufactured when offered for sale in the open market.

4.4

Value exists when an item of property has utility, is relatively scarce, arouses
the desire of potential buyer to buy and backed by purchasing power. Value is
an economic concept referring to the amount most likely to be agreed upon by
buyers and sellers in an open market transaction. The economic concept of
value reflects the markets view of the benefits that accrue to one who owns
the good or receives the services as of the effective date of valuation.

4.5

There are many types of value. In valuing property, it is of utmost importance

that the appraisers and the assessors use the type of value appropriate in the
particular appraisal engagement. Any change in the type and definition of the

Republic Act No. 386 as amended (Civil Code of the Philippines)

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value can have material effect on the conclusion of value assigned to property
for the specific purpose. For real estate appraisal the most common type of
value is market value.
4.6

5.0

6.0

Market value estimate for replaceable property may be based on cost of

reproduction new or replacement cost. Cost of Reproduction is the cost to
construct or manufacture a replica property using the same design, materials
and workmanship. A replacement cost estimate envisions constructing or
manufacturing a similar structure having the same or comparable utility and
using materials and design concept currently used in the market.

MARKET VALUE
5.1

The concept of market value reflects the collective actions and reactions of
buyers and sellers in a typical open market. It is usually the basis for valuing
real estate property particularly for taxation purpose.

5.2

Market value is defined as the estimated amount for which a property should
exchange on the date of valuation between a willing buyer and a willing seller
in an arms length transaction (a transaction between independent, unrelated
parties involving no irregularity) after proper marketing wherein the parties
had each acted knowledgeably, prudently, and without compulsion.

5.3

Market value may also be expressed as the amount at which ownership of the
appraised property might be justified by a prudent investor or alternatively as
the present worth of future benefits of ownership.

5.4

It is important to emphasize that market value is an objective estimate of the

identified rights of ownership under the Bundle of Rights Theory and as of the
specific date of appraisal. It is a market supported estimate developed in
accordance with the Philippine Valuation Standards.

HIGHEST AND BEST USE

6.1

Real Estate is valued on the basis of the rights inherent in the ownership
(Bundle of Rights) rather than the physical land. Consequently, in the
appraisal of land whether vacant or improved, the maximum benefits of
ownership must be analyzed.

6.2

When improved land is valued separately from the improvement, economic

principles require that the improvements be analyzed and valued based on
whether they contribute to the total value of the property or detract from it
(Principles of Contribution). Therefore, market value of land is analyzed as if
the land is vacant and available for use and development in accordance with
the Highest and Best Use concept.

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6.3

When improved land is valued as a property unit (combination of land and

improvements), market value is estimated by considering the highest and best
use of the property as improved.

6.4

Highest and Best Use is defined as:

The most probable use of property which is physically possible, appropriately
justified, legally permissible, financially feasible, and which results in the
highest value of the property being valued.

6.5

7.0

A use that is not legally permissible or physically possible cannot be

considered a highest and best use. A use that is both legally permissible and
physically possible may nevertheless require an explanation by the
Appraiser/Assessor justifying why that use is reasonably probable. Once
analysis establishes that one or more uses are reasonably probable uses, they
are then tested for financial feasibility. The use that results in the highest value,
in keeping with the other tests, is the highest and best use.

UTILITY
7.1

The key criterion in the valuation of any real or personal property is its utility.
Procedures employed in the valuation process have the common objective of
defining and quantifying the degree of utility or usefulness of the property
valued. This process calls for interpretation of the utility concept.

7.2

Utility is a relative or comparative term, rather than an absolute condition. For

example, the utility of agricultural land is ordinarily measured by its
productive capacity. Its value is a function of the quantity and quality of
produce, which the land will yield in an agricultural sense, or of the quantity
and quality of buildings essential to the agricultural operation. If the land has
development potential, however, its productivity is measured by how
productively it will support a residential, commercial, industrial, or mixed use.
Consequently, land value is established by evaluating its utility in terms of the
legal, physical, functional, economic, and environmental factors that govern
its productive capacity.

7.3

Fundamentally, property valuation is governed by the way specific property is

used and/or how it would ordinarily be traded in the market. For some
property, optimum utility is achieved if the property in question is operated on
an individual basis. Other property has greater utility if operated as part of a
group of properties, e.g., properties owned and managed by a business
enterprise such as a chain of multiple retail outlets, fast food restaurants, or
hotels. Therefore, a distinction must be made between a propertys utility
viewed individually and when considered as a part of a group. The
Appraiser/Assessor will regard the property as the market views it, whether as
a discrete entity or as part of an aggregate or portfolio. Typically, the
Appraiser/Assessor determines the value of the property as an individual entity.
If the value of the property, taken as part of an aggregate or portfolio is other
than its individual value, such value should be considered.

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7.4

8.0

9.0

A common effect of political or economic uncertainty is a change in utility,

whether in terms of capacity or efficiency. The Appraisers/Assessors
responsibility in such situations is to assess the market expectancy of the time
span for such events. Temporary shut-downs or closures may have little or no
impact on property values, whereas prospects for long-term cessation of
activities may result in a permanent diminution in value. The property valued
must be viewed in the light of all internal and external factors bearing on its
operating performance.

SPECIAL PURPOSE PROPERTY

8.1

Special purpose properties are properties which are designed, constructed and
developed for a specific use or purpose. By its very nature this type of
property is rarely offered for sale in the open market except as part of a going
concern. Because of the special design and function, conversion of special
purpose properties to other types of development or application is generally
not economically feasible.

8.2

In valuing special purpose properties, it is the Appraisers/Assessors

responsibility to gather pertinent data and information and develop sound
reasoning from the market to support conclusions of value. While all the
appraisal methods should be considered, the Cost Approach to value is
commonly applied in the appraisal of special purpose properties.

APPROACHES TO VALUE
9.1

Valuation of any type of property for any application including taxation

purposes requires that the Appraiser/Assessor apply one or more valuation
approaches. The term valuation approach or methodology refers to generally
accepted analytical methodologies that are in common use internationally.

9.2

There are three generally accepted methods of estimating fair market valuecost, market and income.
9.2.1

The Cost Approach to value considers the cost to reproduce the

property appraised. From this amount is deducted an allowance for
depreciation or obsolescence present, whether arising from physical,
functional or economic causes. This approach in appraisal analysis is
based on the proposition that an informed purchaser would pay no
more for a property than the cost of producing a substitute property
with same utility as the subject property.
Cost approach is particularly applicable to relatively new property and
to unique or special purpose property.

9.2.2

The Market Approach considers prices recently paid for comparable

assets. Appropriate adjustments are made in the indicated market
prices of similar property to reflect the condition and utility of the

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appraised property relative to the actual or normal market comparative.
This approach in appraisal analysis is based on the proposition that an
informed purchaser would pay no more for a property than the cost in
acquiring an existing property with the same utility.
Market approach is particularly applicable when there is an active
market with sufficient quantities of reliable data which are verifiable
from authoritative sources. It is relatively unreliable when market is
limited.
9.2.3

In the Income Approach, an estimate is made on the prospective

economic benefits of ownership. This approach is predicated on the
proposition that an informed purchaser would pay no more for a
property than the cost of obtaining an income stream of the same size
and embodying the same risk as that involved in the subject property.
Income approach is particularly applicable when the future benefits of
ownership may reasonably be estimated in the light of related risk to be
incurred.

9.3

10.

The Appraiser/Assessor must consider application of each of the three

approaches in every appraisal. The approaches selected must be supported by
the facts and circumstances of the case on hand. The applicability of any
approach in a given valuation problem depends on the character of the
problem, the type of property involved, the nature of the market, and of course
the availability of required data appropriate quality and in sufficient quantity.
SUMMARY

10.1 The Philippine Valuation Standards (for taxation purposes) are intended to
facilitate the use and adaptation of internationally recognized appraisal standards.
The adoption of international best practice valuation standards will contribute to
the acceptance and transparency particularly of the taxation system.
10.2 The taxation authorities, property owners and the general public need to have
confidence in the work of Appraiser/Assessors. The Valuation Standards when
supported by legislation and the regulation of Appraisers/Assessors will provide
the confidence that public can rely upon.

Philippine Australia Land Administration and Management Project

II.

STANDARD 1
CODE OF ETHICS AND PROFESSIONAL CONDUCT

INTRODUCTION
To promote and preserve the public trust inherent in professional appraisal practice,
an assessor/ appraiser must observe the highest standards of professional ethics.
It is fundamental to the operation of this standard that valuations performed in
compliance therewith should be provided by honest and competent Professional Assessors/
Appraisers, free of bias or self-interest, whose reports are clear, will not mislead, and will
disclose all matters essential to the proper understanding of the valuation.
Assessors/Appraisers should always promote and preserve public trust in the valuation
profession.
SCOPE
Assessors/Appraisers must comply with these Standards. A valuation claiming to be
prepared under this Standard binds the Assessor/Appraiser to follow this Code of Conduct.
The functions of Assessors/Appraisers are strictly professional in character. They are
charged with solemn business, civil and social responsibilities.
This Code is intended complementary to the rules, by-laws, and regulations of
national societies or organizations controlling or monitoring the activities of
Assessors/Appraisers.
Ethics
Assessors/Appraisers should at all times maintain a high standard of honesty and
integrity and conduct their activities in a manner not detrimental to government, the public,
their profession, or their respective national professional valuation body.
INTEGRITY
1. An Assessor/Appraiser must not act in a manner that is misleading or fraudulent.
2. An Assessor/Appraiser must not knowingly develop and communicate a report
that contains false, inaccurate, or biased opinions and analysis.
3. An Assessor/Appraiser must not contribute to, or participate in, a valuation
service that other Assessors/Appraisers would consider to be unreasonable or not
justified.
4. An Assessor/Appraiser must act legally and comply with the laws and regulations
of the Philippines
5. An Assessor/Appraiser must not claim, or knowingly let pass, erroneous
interpretation of professional qualification that he or she does not possess.

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6. An Assessor/Appraiser must acknowledge the contribution of others who
participate professionally with him in any appraisal.
7. An Assessor/Appraiser shall ensure that any staff person or subordinate assisting
in any valuation service adhere to this Code of Conduct.
8. An Assessor/Appraiser must render properly and adequately develop valuations
without advocacy for accommodation of any particular interest, being factual,
objective, unbiased and honest, in presenting his oral or written analysis,
conclusions and opinions.
RECORD KEEPING
An Assessor/Appraiser must prepare a complete file and working paper for each
appraisal, appraisal review, or appraisal consulting assignment. The file must include:
1.
2.
3.
4.

the name of the owner and the identity, by name or type, of any other intended
users;
true copies of any written reports, documented on any type of media;
summaries of any oral report or testimony, or a transcript of testimony, including
the appraisers signed and dated certification; and
all other data, information, and documentation necessary to support the
appraisers opinions and conclusions and to show compliance with this Rule and
all other applicable Standards, or references to the location(s) of such other
documentation.

An Assessor/Appraiser must retain the file and working papers for a period of at least
six (6) years after preparation or at least two (2) years after final disposition of any judicial
proceeding in which the appraiser provided testimony related to the assignment, whichever
period expires last.
An Assessor/Appraiser must have custody of his or her file, or make appropriate
retention, access, and retrieval arrangements with the party having custody of the file
working papers.

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III.

STANDARD 2
MARKET VALUE BASIS OF VALUATION

This Standard should be read in the context of the background materiasl and implementation
guidance contained in General Valuation Concepts and Principles
INTRODUCTION
1. The objective of this Standard is to provide a common definition of Market Value. This
Standard also explains the general criteria relating to this definition and to its application
in the valuation of property when the purpose and intended use of the valuation calls for
estimation of Market Value.
2. Market Value is a representation of value in exchange, or the amount a property would
bring if offered for sale in the (open) market at the date of valuation under circumstances
that meet the requirements of the Market Value definition
3. Market Value resides in estimate and determination of what is fair, economic, just and
equitable value under normal conditions and all elements of value that are inherent in
property should be considered.
4. Market Value is estimated through application of valuation methods and procedures that
reflect the nature of property and the circumstances under which the given property
would most likely trade in the (open) market. The most common methods used to
estimate Market Value include the cost approach, market data/ sales comparison approach,
and the income capitalization approach, including discounted cash flow analysis.
5. All Market Value measurement methods, techniques, and procedures will, if applicable
and if appropriately and correctly applied, lead to a common expression of Market Value
when based on market-derived criteria. Construction costs and depreciation should be
determined by reference to an analysis of market-based estimates of costs and
accumulated depreciation.
Sales comparisons or other market comparisons should
evolve from market observations.
The income capitalization approach, including
discounted cash flow analysis, should be based on market-determined cash flows and
market-derived rates of return. Although data availability and circumstances relating to
the market or the property itself will determine which valuation methods are most
relevant and appropriate, the outcome of using any of the foregoing procedures must be
Market Value if each method is based on market-derived data.
SCOPE
This Standard refers to the estimation of Market Value of real estate and other types
of property. It requires that the property under consideration be viewed as if for
sale in the (open) market, in contrast to being evaluated as part of a going concern or for
some other purpose.

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The standard covers both government assessors/appraisers and private practitioners
and is applicable for all purposes using Market Value as basis, including taxation and other
government purposes.
DEFINITION
Market Value is defined for the purpose of these Standards as follows:
Market Value is the estimated amount for which a property should exchange on the
date of valuation between a willing buyer and a willing seller in an arms length
transaction (a transaction between independent, unrelated parties involving no
irregularity) after proper marketing wherein the parties had each acted
knowledgeable, prudently, and without compulsion.
This definition assumes that titles to the property are good and marketable, free from
liens and encumbrances and that fee simple ownership is transferable.
Implicit in this definition is the consummation of a sale as of a specified date and the
passing of title from seller to buyer under conditions whereby:
1. buyer and seller are typically motivated.
2. both parties are well informed or well advised, and each acting in what they
consider their own best interest.
3. a reasonable time is allowed for exposure in the open market.
4. payment is made in cash or its equivalent.
5. financing, if any, is on terms generally available in the community at the specified
date and typical for the property type in its locale.
6. the price represents a normal consideration for the property sold unaffected by
special financing amounts and/ or terms, services, fees, costs, or credits incurred
in the transaction.
STATEMENT OF STANDARD
To perform valuations that comply with these Standards and General Valuation
Concepts and Principles (GVCP), it is mandatory that Appraisers/Assessors adhere to the
Code of Conduct pertaining to Ethics, Competence, Disclosure, and Reporting.
In performing and reporting a Market Value estimate, the Appraiser/Assessor shall:
1. completely and understandably set forth the valuation in a manner that will not be
misleading;
2. ensure that the estimate of Market Value is based on market-derived data;

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3. ensure that the estimate of Market Value is undertaken using appropriate methods
(Cost Approach, Market Data / Sales Comparison Approach and Income
Capitalization Approach) and techniques; and
4. provide sufficient information to permit those who read and rely on the report to
fully understand its data, reasoning, analyses, and conclusions. In this connection,
the Appraiser/Assessor should:
(a) define the value being estimated and state the purpose and intended use of
the appraisal, and the date of the report;
(b) clearly identify and describe the property and property rights or interests
being appraised;
(c) describe the scope/ extent of the work undertaken and the extent to which
the property was inspected;
(d) state any assumptions and limiting conditions upon which the valuation is
based;
(e) fully and completely explain the methods applied and the reasons for their
applications and conclusions; and
(f)

include a signed Compliance Statement (Certification of Value) attesting to

the Assessor/Appraisers objectivity, professional contributions, non-bias, as
well as Standards applicability, and other disclosures.

EXPLANATION
Market Value is an estimate of the price that is expected to be realized in the sale of
the property at the valuation date under conditions of the Market Value definition. Market
Value is a representation of the price to which a buyer and seller would agree at that time
under the Market Value definition, each previously having had time for investigation of other
market opportunities and alternatives, and notwithstanding the fact that it may take some time
to prepare formal contracts and related closing documentation.
The concept of Market Value presumes a price negotiated in an open and competitive
market. The words open and competitive have no absolute meaning. The market for one
property could be an international market or a local market. The market could consist of
numerous buyers and sellers, or could be one characterized by a limited number of
participants. The market in which the property is exposed for sale is not a definitionally
restrictive or constricted market. Stated conversely, the omission of the word open does not
indicate that a transaction would be private or closed.
Market valuations are generally based on information regarding comparable
properties. The valuation process requires an Assessor/Appraiser to conduct adequate and
relevant research, to perform competent analyses, and to draw informed and supportable
judgments. In this process, Assessors/Appraisers do not accept data without question but
should consider all pertinent market evidences, trends, comparable questions and other
information. Where market data are limited, or essentially non-existent (as for example with
certain specialized properties), the Assessor/Appraiser must make proper disclosure of the

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situation and must state whether the estimate is in any way limited by the inadequacy of data.
All valuations require exercise of an Assessor/Appraisers judgment, but reports should
disclose whether the Assessor/Appraiser bases the Market Value estimate on market evidence,
or whether the estimate is more heavily based upon the Assessor/Appraisers judgment
because of the nature of the property and lack of comparable market data.
Because changing conditions are characteristics of markets, Assessors/Appraisers
must consider whether available data reflect and meet the criteria for Market Value.
(a) Changes in market condition occur constantly and this may continue over a
period of years. Economic change may give rise to erratic market data. If some
sales are out of line with the market, the Assessor/Appraiser will generally give
them less weight. It may still be possible for the Assessor/Appraiser to judge
from available data where the realistic level of the market is. Individual
transaction prices may not be evidence of Market Value, but analysis of such
market data should be taken into consideration in the valuation process.
(b) In poor or falling markets there may or may not be a large number of willing
sellers. Some, but not necessarily all, transactions may involve elements of
financial (or other) duress or conditions that reduce or eliminate the practical
willingness of certain owners to sell. Assessors/Appraisers must take into
account all pertinent factors in such market conditions and attach such weight to
individual transactions that they believe proper to reflect the market. Liquidators
and receivers are normally under a duty to obtain the best price in asset disposals.
Sales, however, may take place without proper marketing or a reasonable
marketing period. The Assessor/Appraiser must judge such transactions to
determine the degree to which they meet the requirements of the Market Value
definition and the weight that such data should be given.
(c) During periods of market transition characterized by rapidly rising or falling
prices, there is a risk of over- or under-valuation if undue weight is given to
historic information or if warranted assumptions are made regarding future
markets. In these circumstances, Assessors/Appraisers must carefully analyze
and reflect actions and attitudes of the market and take care that they fully
disclose the results of their investigations and findings in their reports.
The concept of Market Value also presumes that in a market value transaction a
property will be freely and adequately exposed on the (open) market for a reasonable period
of time and with reasonable publicity. This exposure is presumed to occur prior to the
effective date of value. Markets for fixed assets typically differ from those available for
stocks/shares, bonds, and other current assets. Fixed assets tend to be unique. They are
usually sold to less frequently and in markets which are less formal and more inefficient than,
for example, markets for listed securities. Further, fixed assets are less liquid. For these
reasons, and because fixed assets do not commonly trade on a public exchange, the
application of the concept of Market Value requires the use of assumptions such as adequate
market exposure over a reasonable time period to allow for proper marketing, and completion
of negotiations.

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STANDARD 3
MASS APPRAISAL DEVELOPMENT AND REPORTING

IV.

In developing a mass appraisal, an appraiser must be aware of, understand, and

correctly employ those recognized methods and techniques necessary to produce and
communicate credible mass appraisal.
A mass appraisal includes:
1. Identifying the property to be appraised.
2. Classifying the properties by logical groups and constant market behaviour, physical
characteristics and general location.
3.

Identifying factors and forces that affect and influence value in the respective market
area.

4. Selecting a model property within each group that will represent the average
characteristics of the property comprising the group.
5. Adjusting the differences between the model and market comparable.
6. Applying the conclusions reflected in the model to the properties within the group.
7. Calibrating and adjusting the values to compensate for such factors as corner
influence, size and shape and other physical characteristics.
8. Reviewing the mass appraisal results.

STANDARD RULE 3-1

In developing a mass appraisal, an appraiser must:
(a) be aware of, understand, and correctly employ those recognized methods and techniques
necessary to produce a credible mass appraisal;
Mass appraisal provides for a systematic approach and uniform application of
appraisal methods and techniques to obtain estimates of value that allow for statistical
review and analysis of results.
This requirement recognizes that the principle of change continues to affect the
manner in which appraiser perform mass appraisals. Changes and developments in
the real property and personal property fields have a substantial impact on the
appraisal profession.

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(b) Be sure that there are no substantial error of omission or commission committed that
significantly affects a mass appraisal; and
(c) Render a mass appraisal in a careful and not negligent manner.
STANDARD RULE 3-2
In developing a mass appraisal, an appraiser must observe the following specific
appraisal requirements:
(a) identify intended users;
(b) identify the purpose and intended use of the appraisal;
(c) identify the scope of work necessary to complete the assignment, including any special
limiting conditions;
The scope of work is acceptable when it is consistent with:

the expectations of participants in the market for the same or similar appraisal
services; and

what other appraisers peers actions would be in performing the same or a

similar assignment.

(d) identify any extraordinary assumptions and any hypothetical conditions necessary in the
assignment;
An extraordinary assumption may be used in an assignment only if:

it is required to properly develop credible opinions and conclusions;

the appraiser has a reasonable basis for the extraordinary assumption; and

use of the extraordinary assumption results in a credible analysis.

(e) identify the effective date of the appraisal;

(f) define the value being developed;
(g) identify the characteristics of the properties that are relevant to the purpose and intended
use of the mass appraisal, including:
i.

the group with which a property is identified according to similar market

influence;

ii.

the appropriate market area and time frame relative to the property being valued;
and

iii.

their location and physical, legal, and economic characteristics.

(h) identify the characteristics of the market that are relevant to the purpose and intended
use of the mass appraisal, including:

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i.

location of the market area;

ii.

physical, legal, and economic attributes;

iii.

time frame of market activity; and

iv.

property interests reflected in the market.

(i)

in appraising real property, identify and analyze the effect on use and value of the
following factors: existing land use regulations, reasonably probable modifications of
such regulations, economic supply and demand, the physical adaptability of the real
estate, neighborhood trends, and highest and best use of the real estate; and
(j) recognize that land is appraised as though vacant and available for development to its
highest and best use and that the appraisal of improvements is based on their actual
contribution to the site;
(k) analyze the relevant economic conditions at the time of the valuation, including market
acceptability of the property and supply, demand, scarcity, or rarity.

STANDARD RULE 3-3

In developing a mass appraisal, an appraiser must:
(a) identify the appropriate procedures and market information required to perform the
appraisal, including all physical, functional, and external market factors as they may
affect the appraisal;
(b) employ recognized techniques for specifying property valuation models; and
Mass appraisers must develop mathematical models that, with reasonable accuracy,
represent the relationship between property value and supply and demand factors, as
represented by quantitative and qualitative property characteristics. The models may
be specified using the cost, sales comparison, or income approaches to value.
(c) employ recognized techniques for calibrating mass appraisal models. Calibration refers
to the process of analyzing sets of property and market data to determine the specific
parameters of a model.
STANDARD RULE 3-4
In developing a mass appraisal, an appraiser must observe the following specific
requirements, when applicable:
(a) collect, verify, and analyze such data as are necessary and appropriate to develop, when
applicable:
i.
ii.
iii.
iv.

the cost new of the improvements;

accrued depreciation;
value of the land by sales of comparable properties
value of the property by sales of comparable properties;

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v.

value by capitalization of incomei.e., rentals, expenses, interest rates,

capitalization rates, and vacancy data;
This Rule requires appraisers engaged in mass appraisal to take reasonable steps to
ensure that the quantity and quality of the factual data that are collected are sufficient
to produce credible appraisals.
Geographic data must be contained in as complete a set of cadastral maps and tax
maps as possible, compiled according to current standards of detail and accuracy.
Sales data must be collected, confirmed, screened, adjusted, and filed according to
current standards of practice. The sales file must contain, for each sale, property
characteristics data that are contemporaneous with the date of sale.

(b) identify the need for and extent of any physical inspection.
STANDARD RULE 3-5
In applying a calibrated mass appraisal model an appraiser must:
(a) value land with improvements by recognized methods or techniques based on the cost
approach, the sales comparison approach, and income approach, as applicable;
(b) value sites by recognized methods or techniques; such techniques include but are not
limited to the sales comparison approach, allocation method, abstraction method,
capitalization of ground rent, and land residual technique;
STANDARD RULE 3-6
In reconciling a mass appraisal an appraiser must:
(a) reconcile the quality and quantity of data available and analyzed within the approaches
used and the applicability or suitability of the approaches used; and
(b) employ recognized mass appraisal testing procedures and techniques to ensure that
standards of accuracy are maintained.
It is implicit in mass appraisal that, even when properly specified and calibrated mass
appraisal models are used, some individual value estimates will not meet standards of
reasonableness, consistency, and accuracy. However, appraisers engaged in mass
appraisal have a professional responsibility to ensure that, on an overall basis, models
produce value estimates that meet attainable standards of accuracy.

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STANDARD RULE 3-7
A written report of a mass appraisal must clearly communicate the elements, results,
opinions, and value conclusions of the appraisal.
Each written report of a mass appraisal must:
(a) clearly and accurately set forth the appraisal in a manner that will not be misleading;
(b) contain sufficient information to enable the intended users of the appraisal to understand
the report properly;
When any portion of the work involves significant mass appraisal assistance, the
appraiser must describe the extent of that assistance. The signing appraiser must also
state the name(s) of those providing the significant mass appraisal assistance in the
certification.
(c) clearly and accurately disclose all extraordinary assumptions, hypothetical conditions,
or limiting conditions that directly affect the appraisal and indicate its impact on value;
Examples of extraordinary assumptions or hypothetical conditions might include
items such as the execution of a pending lease agreement, atypical financing, a known
but not yet quantified environmental issue, or completion of onsite or offsite
improvements. In a written report the disclosure is required in conjunction with
statements of each opinion or conclusion that is affected.
(d) state the purpose and intended use of the appraisal;
(e) disclose any assumptions or limiting conditions that result in deviation from recognized
methods and techniques or that affect analyses, opinions, and conclusions;
One limiting condition that must be disclosed is whether or not any physical
inspection was made.
(f)

set forth the effective date of the appraisal and the date of the report;
In taxation the effective date of the appraisal may be prescribed by law. If no effective
date is prescribed by law, the effective date of the appraisal, if not stated, is presumed
to be contemporaneous with the data and appraisal conclusions.
The effective date of the appraisal establishes the context for the value opinion, while
the date of the report indicates whether the perspective of the appraiser on the market
or property use conditions as of the effective date of the appraisal was prospective,
current, or retrospective.

(g) define the value, including the type and definition and its source;

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(h) identify the properties appraised including the property rights;
The report documents the sources for location, describing and listing the property.
When applicable, include references to legal descriptions, addresses, parcel
identifiers, photos, and building sketches. In mass appraisal this information is often
included in property records.
(i)

describe the procedure for collecting, validating, and reporting data;

The summary report must describe the sources of data and the data collection and
validation processes. Reference to detailed data collection manuals must be made, as
appropriate, including where they may be found for inspection.

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V.

GLOSSARY OF TERMS
For purposes of these standards, the following definitions apply:

Abstraction Method - method of land valuation in the absence of vacant land sales, whereby
improvement values obtained from the cost model are subtracted from sales prices of
improved parcels to yield residual land value estimates.
Allocation - the distribution of the appraised value of the property between land and building.
This is accomplished on a ratio basis utilizing percentage breakdowns from comparable
locations by subtracting a figure representing the percentage contribution of buildings to total
value from total value of the improved property (100%). Although a distribution of a price
value between land and improvements by statistical ratio can be useful at times, the
procedure has limitations.
Anticipation, Principle of affirms that value is created by the anticipation of future
benefits.
Appraisal - is the act of estimating the value of property. It is an estimate or opinion of
value, usually market value or value as defined by the appraiser. It is made as of a specific
date and is a conclusion which results from a logical and orderly analysis of facts.
Appraisal date - the date as of which the conclusion or opinion rendered in an appraisal is
applicable and valid. The date of appraisal identifies the market conditions that existed when
the appraisal was made.
Appraiser/Assessor - one who conducts appraisals; specifically, one who possesses the
necessary qualifications, ability, and experience to execute or direct the appraisal of real or
personal property.
Arms length transaction - a transaction freely arrived at in the open market, unaffected by
abnormal pressure or by the absence of normal competitive negotiation as might be true in
the case of a transaction between related parties.
Balance, Principle of holds that the value is created and maintained in proportion to the
equilibrium attained in the amount and location of the essential uses of real estate. The degree
of value of a property is governed by the balance or appointment of the four factors in
production.
Bundle of Rights - is the combination of rights associated with the ownership of real
property, e.g., the right to use, to sell, to lease, to give away, or to exercise all or none of
these rights.
Cadastral Maps a scale map showing the dimensions of each parcel and related
information such as parcel identifier, survey lines easements.

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Capitalization the process of converting into present value (or obtaining the present worth
of) a series of anticipated future periodic installment of net income. In real estate appraising,
it usually takes the form of discounting.
Certification of Value a statement that appraisers, in their professional capacity, personally
conducted the appraisal in an objective manner. Such a statement permits appraisers to state
their precise position, thus protecting their integrity and the validity of their appraisals.
Change, Principle of holds that economic, physical, governmental, and social forces are
constantly at work and because changes brought about by these forces affect real property,
the appraiser view real property and its environment as in transition, observing evidence of
trends which may affect the property in the future.
Competition, Principle of holds that profit tends to breed competition and excess profit
tends to breed ruinous competition.
Conformity, Principle of holds that the maximum of value is realized when a reasonable
degree of homogeneity is present. Thus conformity in use is usually a highly desirable
adjunct of real property, since it creates and/or maintains value.
Contribution, Principle of states that the value of an agent of production or of a
component part of a property depends upon how much it contributes to the value of the
whole; or how much its absence detracts from the value of the whole. The Principle of
Contribution is sometimes known as the Principle of Marginal Productivity.
Cost - is the amount of money necessary to produce, create or manufacture an item of
property.
Cost Approach - also known as replacement or reproduction cost less depreciation. Under
this approach to value, the land is appraised as vacant. The land value is then added to the
depreciated cost of the improvements to arrive at an indication of value by the cost approach.
It is based on the Theory of Substitution which states that no property is worth more than
the replacement cost of a similar property having equal utility and equally desirable location
which can be obtained without undue delay.
Depreciation - loss in value brought about by physical deterioration and/or obsolescence.
Physical deterioration is loss in value due to wear and tear and exposure to the elements.
Obsolescence can either be functional or economic (environmental). Functional obsolescence
is loss in value within the property as a result of the development of new technology, changes
in design or market preferences. Economic obsolescence is the loss in value resulting from
influences external to the property itself.
Eminent Domain - the right of government or specified quasi-public bodies, such as public
utilities, to acquire private property for public or quasi-public use upon payment of just
compensation.
Encumbrance - an interest or right on real property which may diminish the value of the fee,
but does not prevent conveyance of the fee by the owner. Mortgages, taxes, and judgments

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are encumbrances known as liens.
encumbrances, though not liens.

Restrictions, easements and reservations are

Estate
1. A right or interest in property; it may be fee ownership interest or lease interest for
a period of years. An estate in land is the degree, nature, or extent of interest
which a person has in it.
2. The property of a deceased person.
Fee Simple an absolute fee; a fee without any limitations to any particular class of heirs or
restrictions, but subject to the limitation of eminent domain, escheat, police power, and
taxation. An inheritable estate.
Fixed Assets assets not readily convertible into cash. This term is synonymous with capital
assets in undertaking in which capital is employed for the purpose of producing revenue; but
it may also refer to tangible assets in undertakings where there is no proprietary
accountability as hospital, religious and charitable organizations, and educational institutions.
Fixed assets denotes a fixity of purpose or intent to continue use or possession. It does not
refer to the immobility of an asset which is the distinctive characteristics of fixtures.
Going Concern Value
1. The value existing in the proven property operation, considered as an entity with
business established, as distinct from the value of real estate only, ready to operate
but without a going business.
2. Includes consideration of the efficiency of plant, the know-how management, the
sufficiency of capital.
3. It is an excess of value over cost which arises as a consequence of a complete and
well-assembled operation production mechanism; it is the value of an efficient
layout and operational control system resulting in the most desirable
synchronization of the merchandising, production, or distribution activities of the
enterprise, and includes goodwill. Synonym: value in use.
Highest and Best Use - the most probable use of a property which is physically possible,
appropriately justified, legally permissible, financially feasible and which results in the
highest value of the property being valued.
Improvements broadly buildings or other more or less permanent structures or
developments located upon or attached to land. Not a significant or informative term without
qualifications.
Increasing and Decreasing (Diminishing) Return, Principle of states that when
successive increments of one or more factors of production are added to fixed amounts of the
other factors there is a resulting enhancement of income (in dollars, benefits, or amenities),
initially at an increasing rate to a point of maximum return and then decreasing until
eventually the increment to value becomes increasingly less than the value of the added
factors (or factors). The Principle of Increasing and Decreasing Returns is sometimes known
as the Principle of Diminishing Returns or the Principle of Variable Proportions.

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Income Approach - an appraisal technique used to estimate the market value of a property
on the basis of the income it produces or is capable of producing. The value is estimated by
capitalizing the estimated future income, either gross or net. This approach is based on the
theory that a property is worth what it will earn. Value is the present worth of future benefits
arising from ownership.
Interest Rate the rate of return on investment irrespective of, and independent of, any
capital recovery received or demanded by the investor. Specifically, the rate on borrowed
money.
Land Residual Technique a valuation technique which presumes that income can be split
between land and improvements and that the residual to land can be then capitalized into
value. Typically, the building is valued independently of the land, and the annual return on
the building value (return on investment and provision for capital recapture) is deducted from
the anticipated Net Operating Income to the property (land and building). The residual
amount is said to be attributable to the land and is capitalized at the appropriate Risk
(Discount) Rate to indicate the land value. For new structures, the value assigned to the
building is cost. If reasonably new and subject to minimal depreciation which can be
satisfactorily estimated, the assigned value is the depreciated value as of the date of appraisal.
Limiting Conditions conditions and assumptions under which appraisal is made.
Market - the environment or location in which goods and services trade between buyers and
sellers through a price mechanism. It implies that goods and/or services may be traded
among buyers and sellers without undue restriction on their activities. Each party will
respond to supply-demand relationships and other price setting factors as well as to the
partys own capacities and knowledge, understanding of the relative utility of the goods
and/or services and individual needs and desires.
A market can be local, national or
international.
Market Value - is the estimated amount for which a property should exchange on the date
of valuation between a willing buyer and a willing seller in an arms length transaction (a
transaction between independent, unrelated parties involving no irregularity) after proper
marketing wherein the parties had each acted knowledgeably, prudently, and without
compulsion.
Market Data Approach - also known as the Comparative Approach. Traditionally, an
appraisal procedure in which the market value estimate is predicated upon prices paid in
actual market transactions and current listings, the former fixing the lower limit of value in a
static or advancing market (price wise), and fixing the higher limit of value in a declining
market; and the latter fixing the higher limit in any market. It is a process of analyzing sales
of similar recently sold properties in order to derive an indication of the most probable sale
price of the property being appraised. The reliability of this technique is dependent upon: a)
the availability of comparable sales data; b) the verification of the sales data; c) the degree
of comparability or extent of adjustment necessary for time differences; and d) the absence
of non-typical conditions affecting the sales price.

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In essence, all approaches to value (particularly when the purpose of the appraisal is to
establish market value) are market data approaches since the data inputs are presumably
market derived.
Mass Appraisal - the process of valuing a group of properties as of a given date using
standard methodology, employing common data, and allowing for statistical testing.
Model Calibration the process of analyzing sets of property and market data to determine
the specific parameters of a valuation model.
Price - the amount of money necessary to purchase the finished goods or item of property
when offered for sale in the open market.
Personal Property all property other than real property; it is not permanently attached and
is, therefore, movable.
Property any object that may be lawfully acquired or owned which may normally, but not
necessarily, have value.
A group of rights inherent in the partys relation to the physical thing, as the right to
possess, use, and dispose of it.
The right to the future benefits of economic goods material and nonmaterial as
determined by law. Although, technically the terms mean a right or interest in things rather
than the things themselves, common usage makes it applicable to the things rather than to the
right in interest.
Real Estate - the physical land and all those items which are attached to the land. It is the
physical, tangible entity which can be seen and touched, together with all the additions on,
above, or below the ground. Philippine law prescribes the basis for distinguishing real estate
from personal property. Although these legal concepts may not be recognized, they are
adopted here to distinguish important terms and concepts.
Real Property includes all the rights, interests, and benefits related to the ownership of real
estate. Ownership of real estate is evidenced by a Certificate of Title, Free Patent or Tax
Declaration in the absence of Certificate of Title.
Replacement Cost - is the cost of constructing a similar property which is equally desirable
and has the same utility as the one under appraisal.
Reproduction Cost - is the cost of constructing an exact replica of the building being
appraised using current prices of labor and materials and contractors practices.
Special Purpose Properties - are properties which are designed, constructed and developed
for a specific use or purpose. By its very nature this type of property is rarely offered for sale
in the open market except as part of a going concern. Because of the special design and
function, conversion of special purpose properties to other types of development or
application is generally not economically feasible.

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Substitution, Principle of - states that prudent purchaser would pay no more for real
property than the cost of acquiring an equally desirable substitute on the open market. The
Principle of Substitution presumes that the purchaser will consider the alternatives available
and will act rationally or prudently on the basis of the information about those alternatives,
and that reasonable time is available for the decision. Substitution may assume the form of
the purchase of an existing property, with the same utility, or of acquiring an investment
which will produce an income stream of the same size with the same risk as that involved in
the property in question.
Supply and Demand, Principle of - states that market value is determined by the interaction
of the forces of supply and demand in the appropriate market as of the date of the appraisal.
Tangible Property - property that, by its nature, is perceptible by the senses. Generally the
land, fixed improvements, furnishings, merchandise, cash and other items of working capital
used in carrying on an enterprise.
Useful life - the period of time over which the structure may reasonably be expected to
perform the function for which it was designed or intended.
Utility In general economic theory, the capacity of an economic good to satisfy human
desires or needs.
Valuation Model - is a representation in words or an equation of the relationship between
value and variables representing factors of supply and demand.
Value relationship between a thing desired and a potential purchaser. It is also refers to the
present worth of future benefits arising out of ownership of property value exists when an
item of property has utility, is relatively scarce, arouses the desire of potential buyer to buy
and backed by the purchasing power.

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NOTES
Sources of Information:
[1]
[2]
[3]
[4]
[5]

Appraisal of Property (Revised Edition May 1987)

International Valuation Standards Committee (IVSC) Standards
Property Appraisal and Assessment Administration, IAOO, 1990
Real Estate Appraisal Terminology (Revised Edition 1982)
Uniform Standards of Professional Appraisal Practice (USPAP)

Philippine Australia Land Administration and Management Project