What do gold jewelry, fine wine, and real estate have in common? Well, all of them increase in market value. A few years after you bought any of them, you’ll be pleasantly surprised to find out that they are worth more than what you originally paid for. Because of this, these items are considered a good investment for any business-minded individual.
Why is real estate property a good investment?
Real estate, in particular, whether it’s just an empty lot, a house and lot, or a condominium unit, is known to give a consistently good return on investment because it continuously appreciates.
Under normal circumstances, the place where the property is located undergoes constant development as the years go by. It can be a new road, a shopping center or supermarket, or a school that is built in the same place.
These are what is known as an “anchor feature,” which serves as a magnet for other businesses or individuals looking to relocate to a new residence. As a result of this increasing demand for properties within the location, the value of your investment goes up.
We have seen this trend time and again. Makati, of course, is the best example of a property’s rise in market value.
Previously a third-class agricultural town, Makati got its boost toward modernization when Nielson Airport, the very first airport in the Philippines, opened its business before World War II in what is now the Ayala Triangle. Then in the 1950s, a master-planned, mixed-use community was established, attracting businesses and private individuals to make Makati their new home.
Today, Makati remains to be the country’s foremost business and commercial district, with probably the highest real estate prices. It was indeed a great investment for those who bought lands and properties there while these were still cheap.
Incidentally, barangay Fort Bonifacio in Taguig is following in the footsteps of Makati, thanks to the establishment of the Bonifacio Global City. Properties within and around the BGC area have practically skyrocketed in the past few years.
To summarize, here are five reasons why it’s a good decision to invest in real estate:
It appreciates over time and gives a good ROI.
Unlike cars or high-tech devices, real estate does not lose value once it is bought. Try reselling a car you’ve just bought—you won’t be able to sell it at the same price you got it because it’s already depreciated even though it’s never been used.
There are certain circumstances, however, when real estate diminishes in value, like if it’s near a supposedly dead volcano that suddenly becomes active and even erupts. Same thing with properties that were inundated with floodwater.
Real estate is a generally stable industry.
Except for the volcano and flood situations mentioned above, the price of most real estate properties is expected to rise or, at the very least, remain consistent despite nationwide crises such as political upheavals or even a pandemic.
It’s a flexible investment.
You have a lot of choices on what to do with your real estate. You can live on it, rent it out to tenants, or make it a paid parking space or a storage area. And when you get tired of any of such things, then you can sell it at a higher price than what you originally paid for it.
There are different payment options to choose from.
Perhaps one good result of the COVID-19 pandemic is that real estate developers have become more flexible when it comes to payment terms for their products unlike before when it was just a down payment and then the monthly installments for the principal. Now, even the down payments can be paid in monthly installments.
You don’t need to be an expert to succeed.
It sure makes it a lot easier to get the services of a reputable broker or real estate company, but even without them, you will most likely do well in this business. All you need to make sure is that you are not underselling or overselling your property to make it more appealing to your target market. And for this, you just need to know how to calculate your property’s worth.
How do you calculate the market value of your real estate property?
It’s not exactly rocket science. Calculating how much you can charge for your property when you decide to sell it begins by knowing its market value, or at what price your buyer is willing to pay. But how can you determine that? Here are three steps to take:
1. Check out the price of your neighbors’ properties.
If you’re cozy with your neighbors, you may ask them how much their property costs or what they will ask for it should they decide to sell. This can help you have a rough estimate of your property’s market value.
Now, if you’re the shy type, you can just check out the zonal value of your area per square meter on the website of the Bureau of Internal Revenue (BIR). Another way is to simply check out property listings online to see if there is one right in your area.
2. Compare your property with your neighbors’.
Look for a neighboring property that is almost the same as yours in terms of lot area and floor area and even the house design (bungalow type, up-and-down) and location. Take note also of the condition the property is in (does it look run-down or newly renovated?), then refer to Step #1 to estimate the market value of your property.
3. Set your price.
If you think yours is better than your neighbor’s or it’s theirs that is better than yours, you can set the market value at 5% to 10% higher or lower. Keep in mind that you need to be objective when appraising the price of your property so as not to undervalue it (to your detriment) or overvalue it, which might make it harder to sell.
If you are still unable to come up with a satisfactory amount, you may get help from a licensed appraiser.
Speaking of licensed appraisers, or what we commonly know as real estate brokers, they usually make use of any of these three ways to determine the market value of properties. There is actually a science behind this, explained below.
This involves adding up the current market value of the land/lot and the depreciated value of improvements (usually a house or any structure built on the land). For example:
A three-bedroom, 5-year-old house inside a subdivision in Manila with a floor area of 70 square meters and a lot area of 120 square meters. The price per square meter of a lot inside a subdivision in Manila is P200,000 and the price per square meter of the house is P25,000.
Lot value: 120 x 200,000 = 24,000,000 (excluding VAT)
House value: 70 x 25,000 = 1,750,000
House and lot value: 24,000,000 + 1,750,000 = 25,750,000
Depreciation: 25,750,000 / 50 years = 515,000 x 5 years (the age of the house) = 2,575,000
Appraised value: 25,750,000 – 2,575,000 = 23,175,000
Note that the depreciation of the house affects the price of the lot. If it’s just the lot that you are selling, there should be no depreciation.
The sales comparison covers the number 2 and 3 steps mentioned previously when determining the market value of a property. Appraisers would need to adjust the pricing of a property depending on how it compares to the other properties within the same area—is it bigger or smaller, older or newer, has more or fewer additional features, etc.
This applies to properties that generate income and includes the Net Operating Income (NOI) earned in the first year in the calculation. The NOI is made up of gross potential income minus vacancy, collection loss, and operating expenses (excluding income taxes, debt service, and depreciation charges).
In short, commercial establishments are appraised based on the lot area, cost of structure on that lot, plus the revenue amount generated in the first year by the business.
How do you sell a property in the Philippines?
So, the next question to answer, especially if you won’t be hiring the services of a real estate broker and this will be your first time to do so, is how do you sell your property?
It’s not as simple as listing your property online or taking out an ad in a newspaper or magazine if you want to make sure that the transaction goes smoothly. You will need to secure a lot of legal documents to avoid headaches later.
Here is a step-by-step guide on how to properly sell a real estate property in the Philippines:
- Draw up a Contract of Agreement – this will contain the terms of the sale, fees, and commission (in case you will be hiring a broker to help you sell your property).
- Draw up an Authority to Sell – to make official the agreement between you and the broker. Aside from the fees and commissions, it will also stipulate if the broker has an exclusive right to sell your property or if it’s non-exclusive, meaning other brokers may also be employed for the same purpose.
- Have the property assessed – the broker will appraise the current value of the property and determine its selling price.
- The broker offers and sells the property – the broker and owner must agree on the expenses that need to be shouldered by both properties during the marketing of the property
- Have the property viewed – broker arranges for the viewing of the property by the potential buyer, and the owner must make sure that it is presentable
- Receive the Letter of Intent (LOI) – this will come from the potential buyer should they decide to buy the property.
- Accept Letter of Intent – the owner, by accepting the signed LOI, gives assurance that the property won’t be offered to anyone else as long as the buyer satisfies the conditions presented in the LOI.
- Accept earnest money – this amount will further bind the owner’s assurance to the buyer. It can, however, be forfeited in favor of the owner if the buyer defaults on the agreement.
- Prepare the legal documents – once steps 1 to 8 are satisfied, the owner or broker must then secure the following documents in preparation for the transfer of ownership of the property:
- Certified true copy of Transfer Certificate of Title (Land)
- Certified true copy of Tax Declaration (Land)
- Certified true copy of Tax Declaration (Improvement/Building)
- Real Estate Tax Clearance for Current Year
- Certificate of Non-Improvement (if the property is bare and without structures)
- Certificate Authorizing Registration from the BIR
- Original Real Estate Tax Receipts (Current Year)
- Lot Plan / Subdivision Plan
Correctly appraising the market value of your property, especially if you intend to sell it, is the best way to ensure that you get a good return on investment. But you must also consider that sometimes, your best option could come from your potential buyer.
Before quoting a price for your property, why not ask the buyer how much they are willing to shell out for it? You might be surprised to hear them give you an amount that is way more than what you were planning to tell them. If this happens, then congratulations!
If not, then let the haggling start. It might end with no deal being closed but at least, you will get a good idea of how the market views your property, and you can adjust your price and marketing effort accordingly.
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