What is Fair Market Value in Real Properties?


In the Philippines these days, the FMV or Fair Market Value is fast becoming a catch phrase together with the SALN – that ubiquitous document supposed to be filled up by government officials on a yearly basis.

Why, in fact just yesterday, my barber gives an in depth colloquy on the meaning of the FMV in relation to the CJ Corona affair – while cutting my hair! And alas, he spoke with an authority of one who is regularly glued to the TV channels every 2 o’clock in the afternoon watching the impeachment trial!

But really, what is a Fair Market Value? Is it the acquisition cost? Is it the zonal value of the BIR? Is it the schedule of market values given by the assessor’s office for the computation of the yearly real property tax? Or can it just be any value estimated by the owner of the property based on the so-called comparables, and what not?

To understand the concept of an FMV, one has to refer to the so-called International Valuation Standards or IVS which was adopted by the Philippines into the so-called Philippine Valuation Standards (PVS) recently. This is sort of a “Bible” for appraisers, or valuers, if you may – as it is styled in the PVS.

You see, the IVS – or as I said earlier, the PVS in the Philippines – was crafted by the London based International Valuation Standards Council (IVSC) to set the global standard for valuation. This was adopted by many countries in the world, especially in Europe. And since the Philippines do not live in a vacuum so to speak, we have also adopted these standards as our basis in making real property valuations in the Philippines.

FMV, IVS, PVS, IVSC… whew!

Before we drown on a deluge of foreign sounding acronyms, what is a Fair Market Value, again?

What’s in a name anyway?

As it turns out, the PVS does not recommend the use of the word Fair Market Value anymore – but just simply “Market Value”. This is because to add an adjective of “Fair” before the “Market Value” is an oxymoron of sorts!

After all,  the concept of a “market” implies the ability of buyers and sellers to carry on their activities without restriction, which implies fairness already – and to further qualify the word “market” with “fair” would be a bit of an overkill, is it not?

All of this harks back to that old reliable principle in economics –the supply and demand (which we will not tackle here now by the way – as it needs an entire article of its own!) – which requires an unrestricted open market economy by definition.

Why, to be precise even the ordinarily used words such as price and cost have special meanings, totally distinct from the word value!

According to the PVS, “price is the amount that has been asked, offered, or paid for an item”, while cost is the amount of money required to create or produce a commodity, good, or service. Sort of the former is the amount you get for your house, while the latter is the amount you pay in building it.

Therefore, the price is actually the acquisition cost of a real property, right?

What’s that again?

In the Philippine Valuation Standards, the term market value has a precise meaning for us real estate appraisers. It 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.

A bit too much to handle? Indeed! But let’s try to dissect this definition into easy to understand parts!

Here goes.

First of all, let me clarify that the market value refers to valuation of property in this case (of course, it could also be applied to that other class of property called personal property) – actually real property – and its value is  the result of the factors of utility, scarcity, desire, and purchasing power. These four stooges, by the way, are the so-called factors that create value in any product or service.

So let’s start with the term “ …the estimated amount…”.

It simply means that the market value is an estimate of the most probable price in terms of money (usually local currency) – repeat estimate – on a specific date of valuation in line with the other definition of the market value. Important! The estimate must be consistent with the highest and best use (HABU… oops another term again, but I explained this before in another blog here!  N.B. Here’s a link to that earlier blog on the HABU) of the real property in question.

What about “ … the property should exchange…”? Well, it means again, and as mentioned above – that the value is an estimated amount of a theoretical exchange of ownership – rather than a predetermined amount or actual sales price. It is the price at which the market expects a transaction that meets all other elements of the market value.

 The phrase “ … on the date of valuation …” means that a market value is time specific as of a given date – and may vary across time depending on the vagaries of the market. In fact, it may increase or decrease depending on the law of supply and demand.

The other element of market value is willingness between a buyer and a seller. This is clear in the phrase, “… between a willing buyer and a willing seller …”. It also means that the there is no compulsion on the parties involved – but rather that the exchange is based on the realities of the current market expectation alone. If the buyer or seller is compelled to buy or sell due to forces which render the price not reflective of the market forces then it is not true market value in the real sense.

Another important thing to consider is that the actual situation of the actual property owner is not considered in the valuation of market value because the “willing seller” is hypothetical – and not a real person.

So what do “ … in an arm’s length transaction…”. mean? Of course, it means that that the buyer and seller has no special relationship, right? A price cannot be considered as truly market value if the sale is between a parent and a child.

Market exposure presupposed.

After proper marketing …” means that the property is exposed in the market in an appropriate manner in sufficient time – enabling it to be exposed to the attention of an adequate number of potential buyers.

And finally, what do the phrase, “wherein the parties had each acted knowledgeably, prudently, and without compulsion.” It is presumed that both parties are reasonably informed about the nature and characteristics of the property, it’s actual and potential uses and the state of the market as of the date of valuation, and acts for self-interest with that knowledge – without being forced or unduly coerced to the transaction.

Side comments.

Truly, it is hard to encapsulate the meaning of market value in one sentence. But clearly it is an estimate of the value of a property at a given time – under conditions of a free market – with the stakeholders under no compulsion whatsoever.

In short, it is a concept of a price/value of a real property arrived at in a perfectly competitive market structure.(a paraphrase from an article of James R. MacCrate in WordPress).

Whatever that value is – it is the market value!

That’s why the valuation of a property is properly the work of a professional – the real estate appraisers. They alone are the professionals mandated by the law (RA 9646) to give estimates of market value for real property – having the skills, the know-how and the discipline of their craft to give valuations and appraisals.

Owners could estimate the market value of their property, why not? But it could be biased. It is human nature!

Even real estate brokers should in fact refrain from giving estimates of value for obvious reasons – since their commission or professional fee is actually tied up with the value of the property itself. A high property estimate means higher commission, while a low property estimate means a quick sale!

Again, its human nature!

Banks on the other hand could be also obviously biased especially if they will appraise a property – which is intended to be mortgage to the bank itself. A clear case of a judge, jury and executioner in action.

Only a real estate appraiser – who has no connection with the property being appraised, and whose professional fee is not contingent on the final valuation amount – could do a professional, uninterested, and unbiased valuation of a property.

As they say… res ipsa loquitur (the thing speaks for itself!), and so it is with real estate appraisers, or valuers.

Res ipsa loquitur, indeed!

34 thoughts on “What is Fair Market Value in Real Properties?

    • Hi. There are rules to be followed in estimating (not computing!) for the market value. Please read the USPAP, and the PVS/IVS standards.

      There are basically three approaches: Sales comparison, Cost, and Income approach.

      • Hi,
        There is no single formula to RE appraisal. Use the three approaches to Value: Sales, Cost, and Income approach. Refer to USPAP or the PVS/IVS. Also refer to the steps to in appraisal. I am referring to this technical terms because as you said you are an “appraiser”. If so I wonder, why this questions? Anyway good luck.

      • I am new for my Job as an appraser and i need your help in order for me to get background and different techniques in appraising real property. ty

      • Hi,
        Are you a licensed real estate appraiser with the PRC? If so, you must have taken the 120 credit hours of seminar which is required to take the Board Exam. In the seminar, all the techniques, and 3 approaches to value are given. As well as how to do appraisal reports, etc. By the way, RA 9646 or the RESA Law in the Philippines, requires license as an RE Appraiser with the PRC to practice appraisal in this country. Thank you and good luck.

  1. I have a question regarding appraisal reports. It seems that the valuation in the appraisal report is valid for one year. Is it indicated in any law or the Phil Valuation Standard that the report is valid only for one year?

    • Hi Rissa,
      Thank you for your query.
      I have not seen any provision in the PVS that specifies a validity of one year for appraisal reports.
      I think the validity of the report depends on the economic situation in the area, and also
      naturally, on the policy of the client.

  2. Hi Sir,
    I am about to decide a decision which could make or break not only my neck but most probably my love ones as well.
    Since Me and my wife who are both ofw, have somehow some savings to be invested into apartment for renting purposes.
    We are just in a dilemma if the offer we are recieving is indeed worth of the property. If you can help us to decide , we do really appreciate. The property is in las pinas near SM south the lot size is about 100sqm with an income of about 80k a month.
    My question is what could be a fair value of the property?

    • I cannot hazard a guess as it would be unethical to give an opinion of value without seeing the property. With this big investment, I suggest that you engage the services of a licensed real estate appraiser to get the market value. He/ she will be required to analyze the said property using cost approach, income and sales comparison approach. The rental rate of 80 k per month will not be used – it is what is called as the contract rent – instead the appraiser must use the market rent, market vacancy and losses, and market based operating expense. Thanks and good luck

  3. Forgive me: but I got an assessment of tax to pay the bir on my proposed donation of property, it is based on zonal value and ‘fair’ market value, both of which are computed by the assessor.

    So, I ask you, the zonal value I can get it myself from the internet with the bir website, but the ‘fair’ market value, where does the bir assessor get it?

    I am very curious, because if the bir assessor has a say in the ‘fair’ market value, then he is in ‘business’.

    What do you know?

    • First of all, let me clarify some terminologies as it is used in this industry in the Philippines: “assessor” usually refers to “city assessor, municipal, or provincial assessor” who prepares the Tax Declaration for real property taxation (RPT) purposes and from which the “fair market value” for RPT purposes ( a local tax we pay every year) can be found.

      Now at the BIR we have the “examiner” which determines in this case the “donors tax” for your proposed donation of real property (?) to a donee (the one who will be the recipient of donation).

      Now how does the BIR compute the donors tax? This can be found in their website, as follows for real property: BIR zonal value or the FMV on the tax declaration – whichever is higher! If it is a personal property, then it will be the FMV as determined by the BIR.

      Where does the BIR get their authority to do so? From the National Internal Revenue Code of the Philippines.

      This is just brief reply which I hope is satisfactory, but why not ask the examiner of the BIR how did he do it?

  4. Thank you so much!

    So, the bir examiner computes the fair market value, according to his own expertise(?).

    And you ask me, “This is just brief reply which I hope is satisfactory, but why not ask the examiner of the BIR how did he do it?”

    Well. I guess we the examiner and I can do ‘business’ if he has the last word; but who assigns him to me?

    Is that why an experienced outsider can get me a better i.e. lower donor’s tax than if I would by myself alone…? Some people referred him to me, I did not tell him I got my quotation from a bir examiner. He is not an attorney and not a cpa accountant.

    The trouble with him is that people who referred him to me also told me that he will take his sweet time to do his job, in the meantime he will already deplete your budget, and still not having completed fully his job; then there are still small details he neglects, so you have to do them yourself.

    I consulted also a law plus accounting firm, and this firm gives me an even higher quotation for the whole package, than the one-person expert.

    People told me better stick with the small-timer without a decent office, but just working from his home: because the big established firm can be a bigger wolf, and don’ think that they will work faster and more completely than the small fry.

    So, sir, what do you say?

    • My understanding of your question is that you want to donate something to someone. The steps you should do (as what others did) are as follows:

      1. Go to a lawyer and prepare a Deed of Donation and sign it. Then have the Donee accept your donation to make it valid.

      2. Go to BIR and pay the donors tax, and other taxes, and then get a Certificate Authorizing Registration.

      It is the BIR examiner who will compute this and no one else – why go to private practitioners (unless you hire them to process your papers for you) – go directly to the BIR.

      The donors tax is computed as mentioned in my previous answer by using the BIR zonal value fixed by law, and the Tax declaration from the assessors office also fixed by law – whichever is higher of the two. If you compute it yourself using the web, be sure that you have the training in accountancy, and law on taxation – as these things are a little complicated.

      Another thing is what “business” are you implying to? I suggest to just pay the correct tax, and proceed with whole process – meaning go to BIR, then Register of Deeds, then assessors office – and that’s it!

      I also suggest for you to just have the donor’s tax be computed and then pay it fully (and be sure to get an official receipt) – without resorting to any “under the table deal” if that is what you mean by “business” – as it would be illegal here in the Philippines – and will just serve to perpetuate this kind of culture.

  5. I was planning to buy a a residential and agricultural land. What steps do i need to do for the deed of sale and where can i find the zonal and actual value of the lot

    • Hi Gel,

      First is to agree with the seller the amount, and other details and then put this in a Deed of Sale. A lawyer can help you in this area. Be sure that the property is titled to the the seller, and that there are no problems with the ownership, what is called a “cloud” on the title. It is also better if you have a licensed broker to do the due diligence if you are busy. There is a saying in Latin, “Caveat emptor for “Let the buyer beware”, so take the necessary precautions to protect yourself.

      Second, the BIR zonal value can be found in the BIR website itself, just get the zonal value and then the exact address of the subject property. There is a zonal value for every site location. Remember that the zonal value is not the market value, as it is only used for taxation purposes. So DO NOT use it as a reference for the buying price of the property.

      Third, the actual value of the lot, if you mean the market value, can be estimated for you by a license real estate appraiser – but you have to pay for his professional services, just like you pay the doctor, lawyer, and even the mechanic for his services.

      The market value is defined in the Philippine Valuation Standards 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 arm‘s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion.”

      Simply put, this is the estimated amount that buyers and sellers would pay for the lot in an open market. And I presume that you would not pay more than what others would normally do, right? Unless, you have other reasons, like you feel generous to the seller, and in which case it would no longer be market value but a special value, or shall we say “generosity value?” .lol.

      God bless and Happy Easter.

      • Do i need to secure recent declaration of real property before asking my lawyer to draft the deed of sale?

      • Once i have the notarized deed of sale. Do i need to pay inmediately the capital gains and docs stamps etc to bir.

      • How many days before capital gains and doc stamps get penalized. Do you known the percentage of fees to pay.

      • What docs do i need to prepare in paying capital gains and doc stamps and also for transfer of title. What are the steps i need to do after buying a lot

  6. Of course you have to bring with you the following: xerox of the title (try to keep the original to yourself until the very last moment when you are fully paid and have to turn over said docs to the buyer – it is very hard, time consuming, requires court appearances, and quite expensive to reconstitute a lost owner’s copy!), xerox of the Tax Declaration (land and improvements of any), xerox copy of your ID (cedula is no longer allowed in the DOS), xerox of the ID of the buyer (better still if he can go with you to the lawyer – but this can be done later during the signing), list of the names of the spouses (mandatory if this is a conjugal or community property), other docs that maybe asked – case to case basis,

    The best for you to do is to go to the lawyer and ask him: what are the documents he needs, how much will he charge for the services?

    Also by the way, why not make the draft DOS yourself and just show it to the lawyer afterwards? There are so many sample DOS in the web nowadays, that it is no longer a hard to just prepare it ourselves.

    By the way, if you are a former natural – born Filipino citizen, the land you can buy is limited by: BP 185 – enacted in March 1982, for residential use: Up to 1,000 square meters of residential land, and pp to one (1) hectare of agricultural of farm land; and for for business or commercial use under RA 8179 – amended the Foreign Investment act of 1991: Up to 5,000 square meters of urban land, and pp to three (3) hectares of rural land.

  7. Hi Sir, good day. I just have a question. Is it fair/correct to base the updated fair market value from the deed of absolute sale sold price? The city assessor’s said that it should be based from the deed of absolute sale amount. Is that correct? I have the assumption that city hall’s fair market value should always be lower compared to BIR’s zonal value. If they will base the updated fair market value from the deed of absolute sale, then there will be instances (ex. lot was sold at a premium or above market price) that city’s halls fair market value for the lot would be higher than the zonal value of BIR.

    • Let us answer your questions one by one to erase some misconceptions about the Fair Market Value of Assessors Office. I will be answering very thoroughly so please bear with me.
      1. Hi Sir, good day. I just have a question. Is it fair/correct to base the updated fair market value from the deed of absolute sale sold price?
      Answer: It is not a matter of fairness but of what is the CORRECT way. In the Philippines, the governing law on establishing fair market value (FMV) at the assessors office FOR TAXATION PURPOSES (important: the market value of appraisers in private practice is different, take note!) is RA 7160 particularly Section 219, and the specific guidelines is in the MRPAO, and Mass Appraisal Guidelines issued by the BLGF-DOF.

      Every three years the Assessors office is required to update the FMVs of all real properties (land/building/machinery and others) – and during this period the assessors office conducts a MASS APPRAISAL using the above mentioned guidelines. And the Deed of Sales (hundreds of them and not just one) during the period considered is one of the reference to establish the market value. The selling price however, must conform to the strict definition of a market value. So the assessor is correct! This is called the Sales Comparison Approach which is accepted worldwide and is allowed under the Philippine Valuation Standards.

      2. I have the assumption that city hall’s fair market value should always be lower compared to BIR’s zonal value. Answer: NO sometimes the assessors FMV is higher than the BIR zonal value because the BIR Zonal value is not updated – in fact the latest is still 2006!

      3.If they will base the updated fair market value from the deed of absolute sale, then there will be instances (ex. lot was sold at a premium or above market price) that city’s halls fair market value for the lot would be higher than the zonal value of BIR. Answer: What is “market price?” We appraisers call this as market value! Inorder to arrive at a market value, there are stringent procedures under the generally accepted valuation principles. There are three methods: sales comparison approach (using the deed of sale you mentioned), then the cost approach, and the income approach (very hard to explain this in a few paragraphs, as we gave 15 days seminar on this topics) – but the point is – using all of this approaches an appraiser (in this case the assessors – who is required to be a licensed appraiser by the way!) – determines the market value of a specific area and of a specific type of property. The zonal value of the BIR is a value used for determining the base tax for capital gains, doc stamps, etc.

      Your confusion stems from a flawed assumption! THAT ALWAYS THE BIR MUST BE HIGHER THAN THE ASSESSORS MARKET VALUE. Well it is wrong! Why because it depends upon the general revision done every three years, and on the findings of the assessors office! And also in this case if the BIR zonal value is already outdated!

      Assessors office is a different office from BIR, and neither of them is inferior or superior to the other. BIR base their mandate on the National Internal Revenue Code (NIRC), while the Assessors Office under RA 7160.

      I hope I have explained this thoroughly. Sorry for the long post.

      • good day..update lang po sir, meron napong new zonal values ang BIR as of June 2015.

      • Is that so? Please cite the Department Order No, or better still please provide a link for our info. I wonder why then BIR recently requested us (Real Estate Appraisers) to be part of the committee reviewing the said Zonal Value. Nevertheless, the basic idea is that the CASSO FMV is different from BIR Zonal Value and either of them can be higher or lower than the other – and it depends upon the result of the mass appraisal conducted by the assessors office, which will become a law once it is approved by the Sangguniang Panlungsud.

  8. sir question, this is in relation to HABU, we have residential lot that is categorized by city hall as commercial I lot. When i checked the 2015 BIR zonal value it is value and categorized under commercial. However, last year when we had it as collateral for a credit loan, the bank appraised our lot as residential for that is the actual use. Is this correct or nashortchange ba kami? do banks follow the PVS or IVSC in valuating lands, and is it mandatory?

    • There are a lot of concepts being discussed here, and I suspect that you have read on this subject. Again for brevity let me go direct to the point:
      1. What is HABU? It is called the Highest and Best Use, and is used by RE Appraisers to appraise a property – as a required procedure under the PVS, and the GAVP. Why? it is a long story – I recommend that you just research this one!
      2. When you say “categorized by City Hall as Commercial” – do you mean the Zoning Ordinance? Or do you mean the Assessment of the Assessors Office? This are two different matters! Assuming that you mean the latter, first the Assessor will appraise or value the property, then the assessment for taxation purposes will be based on Actual Use – whether it is RACIMTS (res, agri, com, miniral, ind, etc) – and the % assessment level will be based on that, and ultimately the tax due for the year.
      3. The bank has its own internal rules for appraisal – they may follow or not the PVS or IVSC. I think you are not short changed because it is you who choose the said bank. Its a democracy you can select another bank if you like – and it depends upon what is advantageous or not to you.These are not mandatory for banks – please go over the PVS cover letter by the DOF for your info.

      I hope this answers your concerns.

  9. Sir, Am i correct to say that due to time and usage a house/building in a particular property decreases its market value (Depreciation)? The Fair Market Value of real property decrease as time passes. If so can you at least state approximately when can the devaluation start. If ever to what percentage.
    Another thing is regarding the annual real estate tax by LGU, Since they could refer to the building permit documents regarding the valuation of the FMV, What if the pricing stated in the permit was not followed and due to financial constrains the actual house was not all build with the exact new materials as stated but rather most of the finishing were refurbish use material that are not structural load bearing like the doors, windows, etc, Is there a way to correct this valuation of FMV?

    • Hi, I appreciate your question. Since you obviously took the effort to pen this question, let me therefore try my best to give my answer given space limitations:

      1. Sir, Am i correct to say that due to time and usage a house/building in a particular property decreases its market value (Depreciation)? – Answer: Yes, and this is due to wear and tear, and external obsolescence. I am assuming here that you have an appraiser’s view of what a market value and depreciation is – and that is in accordance with the Philippine Valuation Standards (same with the IVS and the USPAP). What is an example of external obsolescence in this case? For example, taste and preferences of the public – like design of roofing for example, common toilets before, whereas now it is usual to have CR in the masters bedroom, or now we have embedded telephone lines and internet connections in every room. These are just a few examples.

      2. The Fair Market Value of real property decrease as time passes. Answer: Generally, but not necessarily. Again take note of the definition of market value. Why? In some cases, especially land, market value increases with the passage of time – because of demand and supply situation. But if you refer to a building, and whether it is depreciated by the Assessor’s office, yes- because the assessor’s office follows the guidelines of the Department of Finance – BLGF, and the depreciation is automatic and by means of straight-line method. It is a legal requirement, for taxation purposes only.

      3. If so can you at least state approximately when can the devaluation start. If ever to what percentage. Answer: The deprecation using the straight-line method mandated by the DOF-BLGF (remember this is a legal mandate, regardless of the actual condition of your property for taxation only!) starts immediately after the building is occupied. It is simply actual age divided by the projected economic age x 100 to get the percentage – these economic is as defined in your local city ordinance, being followed by the Assessor’s office. Do not use this, repeat, do not use this as a basis for the actual depreciation of your building – because it is just for taxation purposes only, and artificially mandated by law – commonly applied to all properties. If you want an appraisal of your building, hire a licensed appraiser.

      4. Another thing is regarding the annual real estate tax by LGU, Since they could refer to the building permit documents regarding the valuation of the FMV, What if the pricing stated in the permit was not followed and due to financial constrains the actual house was not all build with the exact new materials as stated but rather most of the finishing were refurbish use material that are not structural load bearing like the doors, windows, etc, Answer: It is true that the assessor’s office could see the estimated cost of construction in the building permit you submitted to the Building Official, but take note that the assessor’s office will not use it computing for the base value of your building. Why? Because it will just compute the floor area of your building, classify what type of property, and multiply it by the value per square meters as specified in the local Ordinance. The Building Official uses the National Building Code of the Philippines as their basis, while the Assessor’s office uses the Local Government Code of 1991 and the local ordinance in computing the base value of your building. Entirely different laws are used.

      5. Is there a way to correct this valuation of FMV? Answer: Yes of course, but if you mean for the assessor to adjust the FMV based on the actual materials used? No, because the value per square meters (to be multiplied to the floor area established in the ordinance) already took those type of actual materials used into consideration. The only time a reassessment is possible is when there was error in appraisal, change in use, damage to the property, renovation, abnormal causes. Other than those, it is illegal for the assessors to reassess a property, unless ordered to do so by higher authorities.

      I hope I was able to somehow address all your concerns effectively, and not succeeded instead of making you more confused in the process. At the very least, I suggest you go the assessor’s office, and ask for an explanation from a competent person, say the head of the office. Thank you for your question.

  10. I have a condominium unit I am planning to sell. The CTC states it is 77 sq m floor area (as all other similar units are) but I have enclosed and improved another 44 sq m (my back yard) and converted it to a dirty kitchen. How should I determine the selling price..only the 77 (per CTC) or should I include the 44? Thank you.

    • Include the actual area in determining the selling price. One question you would ask yourself would be: what is the practice in your area, are the dirty kitchens included? And if you are a buyer of the condo unit, would you give value to the 44 sq. m. improvements? In short, how does the “market” looks at this?

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