For every known reason, ownership of investment properties can be sold off at any given time. A time when you decide to receive an amount for the value consideration of your property’s worth. Among the obvious reasons to sell include liquidity, diversification, uneventful situations and cashing out. Regardless, coming to terms with pricing, or how much your asking price for your property is an important decision in optimizing your profitability.
You might think now is the best time to sell? It is all up to you and your needs. It is all in your timeline. There are situations when economic crises are experienced in the market impacting transactions. Hard times come and go and investment properties are supposed to stay in different economic conditions. In other words, they say it is always temporary and real estate remains a stable investment. In fact, prices go up as the economy resumes. Again, selling is your prerogative at any given time although, the longer you own the property, the more it values due to appreciation and inflation. If used as a rental property, consider the income it generates. The Php 2-3 million from 10+ years ago could no longer buy you a studio, and parking alone costs Php 2 million in Makati Central Business District these days. Everybody knows that pre-construction offers high appreciation, in relatively 3-5 years, an investment can experience several price increases.
“Again, selling is your prerogative at any given time although, the longer you own the property, the more it values due to appreciation and inflation. If used as a rental property, consider the income it generates.”
By experience, 100 percent of my clients made profits with their resale transactions as it is also their primary purpose, earning money from property investment. Even for its end use purpose, one can really make money with the properties you own. I have had clients who have won like a lottery for making Php 5- to 6 million from a Php 16 million original purchase price to Php 21- to 22 million in resale value in just a matter of 5- to 6 years. This does not happen to all properties but some developments do have such potential dependent on market conditions and project development performance. Other properties take longer time to accrue appreciation. Some neophyte investors are content with Php 2- to 4 million income margin from an investment property upon selling. Over-all, It still depends on the project, location, and condition of your property.
Believe it or not but can you guess, how much a 4-bedroom property in Ritz Tower, along Makati’s Ayala Avenue asks for these days? Right in the heart of the premier commercial district of Makati City, Ritz is known to provide residence to some of Manila’s top businessmen, diplomats, and celebrities. You would not believe it but it is a whopping Php 55- to 65 million. It is almost impossible but hey, that is like the Fifth Avenue of the Philippines. Ritz Tower is one of the crown jewel buildings built in 1983. Interestingly, with more than 120 sqm, it is usual to see 3 bedrooms in Makati City priced at Php 30- to 35 million and above, depending on the building. Quite honestly, I am excited for all my clients who have chosen to put their investments in high rise condos, how much would they be in years to come.
Property Values
Pricing your property right is crucial to the success of your “for sale” property. There are few key factors to reaching the appropriate amount to your property. It would be awesome to understand more of the generally accepted valuation principles using international valuation standards in understanding key terms as Fair Market Value and Approaches to Value.
“Pricing your property right is crucial to the success of your “for sale” property.”
Market Value, used synonymously in other countries with Fair 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 arm‘s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. In layman’s terms, Fair Market Value (FMV) is the price that a person reasonably interested in buying a given asset would pay to a person reasonably interested in selling it for the purchase of the asset. While there is still no truly official way to determine FMV of properties in the Philippines, two effective and popular ways for estimation are (1) a comparative market analysis (CMA) using similar properties that had been sold in the last two to three months and (2) a real estate appraisal from professional appraisers on the value of the property involved as of a specific date.
Valuation of your property depends largely on demand and supply, market value and what improvements you have made. For the most part, I concentrate on high rise inventory but also cater to a few horizontal projects. Location is also a particularly important consideration. Where a property is in a business district close to transportation, commercial establishments, and high zonal value, it appreciates more. Market based valuations normally employ one or more of the valuation approaches by applying the economic principle of substitution, using market-derived data. This principle holds that a prudent person would not pay more for a good or service than the cost of acquiring an equally satisfactory substitute good or service, in the absence of the complicating factors of time, greater risk, or inconvenience.
Valuation Process
In many, but not all countries, three valuation approaches are recognized in the Valuation Process: sales comparison, cost, and income capitalization:
1. The Sales Comparison Approach– considers the sales of similar or substitute properties and related market data and establishes a value estimate by processes involving comparison. In general, a property being valued (a subject property) is compared with sales of similar properties that have been transacted in the market. Listings and offerings may also be considered. Understanding which (and to what extent) adjustments are reasonable for a given market area (for a given property) relies on the experience of the appraiser. A property characteristic that is highly valued in one neighborhood may not be valued to the same degree in a different area.
2. The Cost Approach – considers the possibility that, as an alternative to the purchase of a given property, one could acquire a modern equivalent asset that would provide equal utility. In a real estate context, this would involve the cost of acquiring equivalent land and constructing an equivalent new structure. Unless undue time, inconvenience, and risk are involved, the price that a buyer would pay for the asset being valued would not be more than the cost of the modern equivalent. Often the asset being valued will be less attractive than the cost of the modern equivalent because of age or obsolescence. A depreciation adjustment is required to the replacement cost to reflect this. The cost approach is more reliable when used on newer construction. The methods and results of the cost approach are less reliable with older construction.
3. The Income Approach – considers income and expense data relating to the property being valued and estimates value through a capitalization process. Capitalization relates income (usually a net income figure) and a defined value type by converting an income amount into a value estimate. This process may consider direct relationships (known as capitalization rates), yield or discount rates (reflecting measures of return on investment), or both. In general, the principle of substitution holds that the income stream which produces the highest return commensurate with a given level of risk leads to the most probable value figure.
“The three approaches to value are independent of one another even though each approach is based on the same economic principles. All three approaches are intended to develop an indication of value …”
The three approaches to value are independent of one another even though each approach is based on the same economic principles. All three approaches are intended to develop an indication of value, but the final value conclusion depends on consideration of all data and processes employed and their conciliation of the value indications derived from different approaches into a final estimate of value.
Overtime, property values go up as seen in properties in the above examples. The approaches to valuation offer understanding to determining a value. It is helpful to know pricing is achieved in market data, comparison, and appraisers’ professional opinion. One thing is clear to us: there is valuation to things in consideration to an asset. Important to note, the status of the local real estate market and the location, age, and current condition of the property. Noteworthy also are the special conditions to a sale that can decrease or increase pricing.
Sometimes, any situation challenges us with cash liquidity. And a hard asset is a highly effective way to turn cash at the “right” time albeit as needed. A hard asset as real estate investment requires patience. But in most cases the longer you keep your property, the better is the profitability. Ask yourself if it is about time to sell but also know your property’s resale value.
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(Stevenson’s experience in Philippine Real Estate spans more than 15 years. He has been involved in horizontal, vertical, vacation and commercial properties. He has worked as an International Property Specialist to markets in Asia, Europe and North America with Ayala Land, Federal Land and Century Properties. Through PhilHouseHunters, he offers real estate investment opportunities, marketing, and consultancy with a key focus to Metro Manila and Mega Cebu areas. Visit www.philhousehunters.com. Email at derodarsales@gmail.com.)
