I. Overview: What “Fair Market Value” Means in Philippine Practice

Fair Market Value (FMV) is the price at which a property would change hands between a willing buyer and a willing seller, both knowledgeable of the property’s attributes and legal status, and neither under compulsion to buy or sell, after reasonable exposure to the market.

In the Philippines, FMV is not a single universal number. It is a context-dependent value that changes depending on why the valuation is being made (taxation, expropriation, estate settlement, sale, bank loan, corporate reporting, etc.), what legal standard applies, and which authority’s value controls.

Common “FMVs” encountered in practice include:

Assessor’s FMV (used as the basis for assessed value and real property tax)
BIR-related values for transfer taxation (the higher of the consideration or relevant benchmark values)
Judicial/just compensation value in expropriation
Market/appraisal value for private transactions and banking
Accounting fair value for financial reporting (often anchored on appraisal but subject to accounting standards)

Because different systems serve different goals, values can diverge. Determining FMV properly therefore begins with the purpose of the valuation.

II. Legal and Institutional Framework

A. Local Government Valuation for Real Property Tax (RPT)

Local governments determine property values for taxation through:

Schedule of Fair Market Values (SFMV) adopted by the local sanggunian by ordinance; and
Assessment levels applied to FMV to compute assessed value, which is the tax base for RPT.

Key features:

The SFMV is the LGU’s standardized table of land values (by zone/classification) and building/structure values (by type, materials, use, depreciation).
The assessor classifies property (residential/commercial/industrial/agricultural, etc.), identifies its location/zone, and applies the SFMV to arrive at FMV for assessment purposes.
Assessed Value = FMV × Assessment Level.
RPT = Assessed Value × Tax Rate (subject to local rates and special levies).

LGU values are administrative—they are designed to create a uniform tax base, not necessarily to match negotiated market prices in every sale.

B. BIR Values for Transfer Taxes and Estate/Donor’s Context

In property transfers (sale, donation, inheritance), the tax base often uses a “highest value rule” approach: the taxable base is generally the higher of:

the selling price/consideration (or declared value), and
a benchmark value recognized by the tax authority (commonly the relevant zonal or LGU-based reference, depending on the transaction and rules in force).

This is why parties sometimes encounter a “tax FMV” that is higher than their agreed price.

C. Judicial Valuation: Expropriation and “Just Compensation”

When property is taken for public use, the Constitution requires just compensation. Courts determine this based on evidence—commonly including:

appraisals by commissioners,
comparable sales,
income potential where relevant,
location and highest and best use,
and other market indicators.

Judicial FMV for expropriation aims to reflect the property’s real market worth, and is not necessarily tied to LGU SFMVs or tax declarations.

D. Private and Regulated Appraisal Practice

Banks, insurers, institutional investors, and many corporate transactions rely on professional appraisal anchored on accepted valuation methodologies, with attention to:

title/ownership condition,
land use and zoning,
physical condition and improvements,
market data and comparable transactions,
restrictions and encumbrances,
and highest and best use.

III. FMV Depends on Purpose: A Practical Matrix

Before you compute anything, define the valuation purpose.

Real Property Tax (RPT) compliance / assessment disputes Use the LGU SFMV and assessor’s classification rules.
Transfer taxes (sale, donation, estate) Determine the taxable base using the applicable benchmark and “higher of” rule plus documentary requirements.
Private sale/purchase fairness, partition, corporate transactions Use an independent appraisal and market-based analysis.
Expropriation / eminent domain Build evidence for court-determined market value and just compensation.
Financing and banking Follow the lender’s accredited appraisal process; expect conservative values and risk discounts.

IV. Core Valuation Concepts Used in Philippine Property Appraisals

A. Highest and Best Use (HBU)

FMV is driven by the most probable use of the property that is:

Legally permissible (zoning, land use plans, restrictions, easements, title conditions)
Physically possible (shape, topography, access, utilities, hazards)
Financially feasible (market demand supports it)
Maximally productive (produces highest value)

In Metro Manila and growth corridors, HBU can differ sharply from current use (e.g., old residential house in an emerging commercial strip). This is a frequent reason market appraisals exceed tax declarations.

B. Market Exposure and Arms-Length Assumptions

FMV assumes:

reasonable marketing time,
no abnormal pressure,
typical buyer/seller knowledge,
and transaction terms typical for that market.

Forced sales, distressed sellers, family transfers, or “package deals” can be real transactions but may not be good indicators of FMV unless adjusted.

C. Distinguishing Land Value, Improvement Value, and Contributory Value

Land value: location-driven and tied to zoning, accessibility, demand.
Improvement/building value: replacement cost and depreciation, or income contribution.
Contributory value: how much an improvement adds to overall market value (may be less than cost).

Example: An oversized luxury renovation in a mid-market neighborhood might cost ₱5M but contribute only ₱2M to market value.

V. The Three Main Valuation Approaches (and How They Are Applied Locally)

Professional valuation generally relies on one or more of these approaches, reconciled into a final FMV conclusion.

1) Sales Comparison Approach (Market Approach)

Best for: residential lots/houses, condominium units, and properties with active comparable sales.

Method: Identify recent comparable sales and adjust for differences.

Steps:

Define subject property: location, area, frontage, shape, zoning, road width, access, utilities, flood risk, view, restrictions.
Gather comparable transactions: ideally within same barangay/vicinity; adjust if broader area is necessary.
Normalize data: confirm whether transaction prices reflect:
- cash vs financed terms,
- inclusion of furnishings,
- atypical buyer/seller relationships,
- distress conditions.
Adjust comparables:
- time/market movement (if prices have shifted),
- location (corner, main road, interior),
- lot size (bulk discounts/premiums),
- frontage and depth,
- zoning/use potential,
- topography and hazards,
- access and road right-of-way,
- title condition (clean vs with encumbrances).
Derive an indicated value (often ₱/sqm for land; ₱/unit or ₱/sqm of floor area for condos; or lump-sum for houses).

Strengths: mirrors how buyers and sellers think. Weaknesses: reliable data can be hard; declared prices may understate actual; adjustments require judgment.

Philippine practice note: Many transaction prices are not publicly transparent. Appraisers often triangulate using broker data, listings (then adjust from asking to selling), and verified deeds/records when accessible.

2) Cost Approach (Replacement Cost Less Depreciation)

Best for: special-use properties (schools, churches), newer buildings, or when comparables are limited; also used by assessors for improvements.

Method: FMV ≈ Land Value (from market) + (Replacement Cost New − Depreciation) of Improvements

Key components:

Replacement cost new (RCN): cost to build an equivalent utility improvement today.
Depreciation:
- physical deterioration (wear and tear),
- functional obsolescence (layout not suited to market),
- external obsolescence (decline due to outside factors like new highway noise, neighborhood change).

Strengths: good for improvements where income data is weak and comparables scarce. Weaknesses: may not reflect what buyers will pay if building is over-improved or market is thin.

LGU assessor practice: Improvement valuation often uses cost tables and depreciation schedules standardized by local rules.

3) Income Capitalization Approach (Income Approach)

Best for: rentals, office buildings, apartments, commercial properties, warehouses, and land held for income.

Method: Value is based on the present worth of anticipated benefits (income), either by:

Direct capitalization: Value = Net Operating Income (NOI) ÷ Capitalization Rate
Discounted cash flow (DCF): Project multi-year cash flows then discount to present value.

Steps (direct capitalization):

Determine gross potential income (market rent × leasable area).
Deduct vacancy and collection losses.
Deduct operating expenses (excluding debt service and owner income tax).
Arrive at NOI.
Select a cap rate reflecting:
- location risk,
- tenant quality,
- lease terms,
- building condition,
- market liquidity,
- interest rate environment.

Strengths: aligns with investor decision-making. Weaknesses: requires credible rent and expense data; cap rate selection is sensitive and can be contested.

VI. Determining FMV for Key Property Types in the Philippines

A. Vacant Land (Residential/Commercial/Industrial)

Primary approach: Sales comparison (₱/sqm), with adjustments for:

road width / access and whether road is public or private,
corner lot premium,
frontage and depth,
shape (regular lots are more valuable),
topography, drainage, flooding,
easements, right-of-way issues,
zoning and development controls,
proximity to commercial nodes and transport.

If the land has development potential, HBU analysis is crucial.

B. House-and-Lot (Owner-occupied or Typical)

Common method: Land value (market approach) + building value (cost approach), reconciled with any comparable house sales.

Depreciation for older houses often materially reduces building contribution; some buyers treat old structures as “for teardown,” shifting value primarily to land.

C. Condominium Units

Primary approach: Sales comparison using:

same building or similar nearby projects,
floor level, view, orientation,
unit size and layout,
parking inclusion and whether titled,
building age, amenities, association dues,
market absorption and supply pipeline.

Income approach can be used for investor-heavy condo markets by capitalizing market rent, but it must reconcile with comparable sales.

D. Agricultural Land

Valuation hinges on:

land classification and conversion constraints,
irrigation access, soil quality, productivity,
proximity to farm-to-market roads,
potential for conversion (but only if legally permissible),
existing agrarian restrictions or tenancies.

Where income data is credible, an income approach based on agricultural returns may be considered, but legal constraints on use are decisive.

E. Commercial and Industrial Properties

Often require income approach plus sales comparison of similar income properties.

For warehouses and industrial sites, consider:

ceiling heights, loading bays, turning radius,
access to highways/ports,
power and utilities,
zoning and environmental constraints,
functional utility for modern logistics.

VII. The LGU SFMV and Assessment Process: How Tax FMV Is Determined

A. The Schedule of Fair Market Values (SFMV)

An SFMV typically includes:

Land values by zone (often per barangay/road classification)
Adjustments for corner lots, interior lots, main roads, etc.
Building/structure values by:
- type (residential/commercial/industrial),
- construction materials,
- number of storeys,
- quality class,
- age/depreciation.

B. Classification and Assessment Level

After FMV is found under SFMV, the assessor applies an assessment level based on property classification, producing assessed value. The assessment level is not a discount negotiated by the owner—it is a legally set percentage for tax base calculation.

C. Common Reasons LGU FMV Differs from Market FMV

SFMVs may be updated infrequently, lagging market shifts.
Uniform tables cannot capture micro-differences (view corridors, specific street premiums).
Some markets move rapidly; tax values adjust more slowly.

D. Challenging an Assessment

An owner who believes the assessment is erroneous typically focuses on:

misclassification (commercial tagged as residential or vice versa),
wrong lot area or floor area,
wrong zone/road classification,
incorrect building type/quality class,
failure to account for encumbrances or physical constraints recognized in the SFMV system,
computational errors.

Evidence often includes surveys, photos, plans, occupancy permits, zoning certifications, and comparable properties under the same SFMV classification.

VIII. BIR-Related FMV in Transfers: How to Avoid Tax Base Surprises

A. The “Higher Of” Principle in Practice

For many transactions, the taxable base is anchored on the higher between declared consideration and benchmark values. In practice, taxpayers should:

check the benchmark value before signing the deed,
model the taxes based on the higher value,
align documentary support to declared value (if declared price is genuinely lower due to defects, restrictions, or urgent sale conditions).

B. Common Pitfalls

Declaring a selling price far below benchmarks without strong supporting facts.
Ignoring that parking slots and improvements may alter perceived value.
Overlooking that property condition issues must be documented (engineering reports, photos, repair estimates) if used to justify lower value.
Title defects not raised early (clouded title, adverse claims, incomplete documentation) can delay processing and complicate valuation discussions.

IX. Due Diligence Items That Directly Affect FMV

FMV is not just physical and location-based. Legal and regulatory constraints can change value dramatically.

A. Title and Ownership

Clean Transfer Certificate of Title (TCT) / Condominium Certificate of Title (CCT)
Consistent technical description and boundaries
No adverse claims, lis pendens, attachments, levies
Proper chain of transfers, especially for inherited property

B. Encumbrances and Restrictions

Easements (legal easements, utility easements)
Right-of-way issues (access not legally assured)
Lease contracts (tenanted properties can be discounted depending on lease terms)
Homeowners’ association restrictions

C. Zoning and Land Use

Zoning classification (residential, commercial, industrial, mixed-use)
Permitted density, setbacks, height limits
Heritage, environmental, or hazard overlays
Land conversion requirements for agricultural land

D. Physical and Environmental Factors

Flood susceptibility and drainage
Slope and soil stability
Contamination risks for industrial sites
Coastal easements and shoreline regulations where applicable

X. Practical Step-by-Step: How to Determine FMV for a Real Property Matter

Step 1: Define the valuation purpose and controlling standard

Is this for:

RPT assessment?
transfer tax compliance?
negotiation and pricing?
court litigation?
financing?

Step 2: Collect complete property identifiers and documents

Title (TCT/CCT) and latest tax declaration
Lot plan / survey (or condo master deed and plans)
Location details (barangay, street, GPS pin)
Occupancy permit / building plans (if relevant)
Lease contracts (if income property)
Zoning/land use certification (if development potential is relevant)

Step 3: Establish legal permissibility and constraints

confirm zoning and any overlays,
confirm access rights and easements,
check title encumbrances.

Step 4: Choose the appropriate valuation approach(es)

sales comparison when comparable sales exist,
cost approach for improvements or special-use,
income approach for rentals and commercial properties.

Step 5: Gather and verify market data

recent comparable sales (as close as possible geographically and temporally),
adjust for differences and transaction terms,
avoid relying purely on listing prices without adjustment.

Step 6: Reconcile multiple indications of value

If approaches produce different values, reconcile based on reliability:

strong comparable sales data → heavier weight on market approach,
strong income/rent data → heavier weight on income approach,
new/special improvements → cost approach as support.

Step 7: Produce an FMV conclusion with assumptions and limiting conditions

A credible FMV statement identifies:

valuation date,
definition of FMV applied,
property description and legal status,
method(s) and data sources,
key adjustments and rationale,
final value (or value range) and sensitivity.

XI. Litigation and Evidentiary Considerations

When FMV becomes a legal issue (partition, annulment of sale, damages, expropriation, estate disputes), FMV must be proved by competent evidence. Typically persuasive evidence includes:

appraisal reports with transparent methodology,
verifiable comparable sales data,
testimony of qualified appraisers,
tax declarations and assessor records (supportive but not always determinative),
zoning certifications, engineering inspections, and market studies.

Courts can reject valuations that are conclusory, unsupported, or inconsistent with objective indicators.

XII. Value Ranges, Not Single Numbers: Handling Uncertainty

Philippine property markets can be illiquid and data can be imperfect. A defensible FMV analysis often expresses:

a value range (e.g., ₱X to ₱Y), with a point estimate,
sensitivity to cap rate changes (for income properties),
scenarios based on zoning outcomes or permitting risks.

This is especially useful where legal permissibility is uncertain (pending rezoning, conversion applications, or disputed access).

XIII. Best Practices for Philippine FMV Determination

Anchor on purpose: tax compliance and private negotiations use different standards.
Do legal due diligence early: title and zoning issues can change FMV more than aesthetics.
Use multiple approaches when stakes are high: reconciliation improves defensibility.
Verify comparable transactions: prioritize actual sales over asking prices.
Document adjustments and reasoning: transparency is what makes an FMV defensible.
Separate land and improvements: many disputes come from conflating the two.
Treat tax declarations as supportive, not definitive: they often lag or reflect administrative valuations.
Consider highest and best use realistically: only when legally permissible and financially feasible.

XIV. Illustrative (Non-Numeric) Application Examples

Example 1: House-and-lot in a mature subdivision

Land value driven by subdivision street comparables.
Building value often constrained by depreciation.
If structure is old and likely for teardown, land dominates FMV.

Example 2: Condo unit in a high-supply area

Comparable sales in the same building and nearby developments dominate.
Premiums/discounts for floor level, view, parking, dues, and building condition.
Income approach can check reasonableness against rental yields.

Example 3: Commercial lot on a developing corridor

HBU may shift to mixed-use or commercial.
Zoning confirmation and permissible density can materially raise FMV.
Comparable land sales must be adjusted for frontage, access, and road classification.

XV. Conclusion

Determining fair market value of real property in the Philippines is a legal-and-market exercise. The correct FMV depends on the governing context—LGU taxation, BIR transfer taxation, private commercial appraisal, or judicial determination. A proper FMV determination integrates (1) the legal condition of the property (title, zoning, restrictions), (2) its physical characteristics and location, and (3) disciplined application of the market, cost, and income approaches, reconciled under the property’s highest and best use.