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Chapter 13valuation 141012025324 Conversion Gate01
Chapter 13valuation 141012025324 Conversion Gate01
VALUATION
Introduction
Engineer has to work out the value of an existing property for
various purpose.
Valuation is needed for wealth tax, municipal taxation, etc
Valuation is an art of judgment based on experience and
relevant statistical data to forecast the value of a property at
present.
The estimated value of property depends upon its power to serve
man’s need, location, amenities, purpose and supply and demand
of a property type.
It continuously varies with age, physical state and characteristics
Terms used in Valuation
Cost & Value
Cost
It is the amount of expenditure incurred to produce or
acquire a commodity having a value.
To this cost of Product, agents’ commission and
stamp duty etc. is also added.
Value
Value is the price estimated to be realized in a sale
proceed between a willing buyer and willing seller.
Value
In order to have value for commodity, it should posses
the following three essential characteristics;
a) It must possess utility.
b) It must be scare.
c) It must be marketable or transferable.
In the absence of any one of above qualities, the
commodity may not have any value.
For eg. Rotten Mangoes though scarce do not have
any value because they have no utility. On the other
hand Land has got value because it satisfies all above
essentials.
Value also depends upon outside factors such as:
Location of Property
Time
Supply and Demand Condition
Terms used in Valuation
Price
It is the cost of commodity fixed depending upon the demand
from consumers as compared to their other wants, and for sale
purpose taking into account its utility, durability, cost of
production, satisfaction and the extent to which it is scare.
Book Value
It is an original investment shown in the account books of a
company on its assets including properties and machineries,
less any allowance for the period passed.
It will be reduced year to year depending upon depreciation
and will be only scrap value at the end of the utility period.
Terms used in Valuation
Assessed Value:
It is the value of the property recorded in the
register of local authority and used for the
purpose of determining the various taxes to be
collected from the owner of the property.
Replacement Value:
value of a property or its services calculated on
the prevailing market rate to replace the same.
Rateable Value:
net annual letting value of a property obtained
after deducting the amount of yearly repairs from
the gross income. Taxes are charged on rateable
value of property,
Terms used in Valuation
Potential Value:
inherent value got by property such as land. Such
value may go on increasing due to passage of
time or can fetch more return if used for some
alternative purpose.
Distress Value:
value at which property is sold at lower price than
that of open market due to difficulties of vendor.
Annuity
annual periodic payments for repayment of the
capital amount invested.
Terms used in Valuation
Obsolescence:
Sometimes a building though physically quite
sound yet it becomes outdated because of
change in design pattern, fashions living habits of
its inhabitants and thus it loses its functional
utility. This is knows as Obsolescence.
It is very difficult to predict obsolescence.
Loss due to natural calamities are included in
Obsolescence.
Scrape Value:
After a property losses its utility, the value of
dismantled material less the cost of demolition is
Terms used in Valuation
Salvage Value:
It is the value at the end of the utility period without
being dismantled.
Gross Income:
It is the total revenue realised from a property either
as rent or lease money during a year. The out goings
and collection charges etc are not deducted.
Out-going:
expenses incurred to maintain the property by
undertaking periodical repairs. It also includes taxes
levied by the Govt. or local body on that property.
Sinking fund, insurance, etc.
Net Income:
net amount left with the owner after deducting out
goings from gross income.
Net income = Gross income – Out goings.
Terms used in Valuation
Capitalised Value:
amount of money whose interest at the highest
prevailing rate of interest will be equal to the net
income or net return in perpetuity (for specific
period).
Capitalised value = Net return * Year’s Purchase.
For eg. Let annual rent =Rs 3500
Highest rate of interest = 8%
Capitalized value =3500*1/(8/100)= Rs 43750.
Terms used in Valuation
Return Frontage:
Plots situated at junction of two roads having the
frontage on these two roads are said to have return
frontages. Such plots usually have more monetary
value than other plots in the same area .
Reversionary value of Land
It is present consideration for the full value of land
obtainable after the specified period is over.
For Eg. Let life of building = 30 yrs.
Present value of land =50000
The person interested will get the said Rs 50000 after
30 yrs has passed.
Now if he wants its value at present then he gets Rs
15500 which if invested at present in some securities
at 4% compound interest will amount to Rs 50220 in
30 yrs.
Terms used in Valuation
Rent
annual or periodic payment made by the tenants for
use and possession of land and buildings.
Rental Value:
It is the rent which may reasonably be expected to
be obtained in the open market.
Ground Rent:
When a piece of land had been leased out, the rent
reserved under the lease is k/a ground rent
Contractual Rent
rent fixed between the land lord and the tenant by
negotiations.
Standard Rent
rent which would be permissible under the law to be
charged from a tenant.
Purpose of Valuation and Principles of
Valuation
Purpose of Valuation
Valuation is done for Following Purpose:
For Buying or Selling:
valuation of the property is always done both by the
seller and prospective buyer so as to arrive at a
reasonable price.
Other purpose
Similarly there are many other occasions,
when the probable value of the property
is required. Such as:
Insurance against fire of a building
Compensation for any lose due to war,
earthquake etc.
Borrowing Money from Insurance Company,
Bank or such other Institution.
Purpose of Valuation and Principles of
Valuation
Principles of Valuation
Following Principles should be observed at the time of evaluating a
fair and reasonable value of property.
1. Cost depends upon supply and demand of the property.
2. Cost depends upon its design, specifications of the materials used
and its location.
3. Cost varies with the purpose for which valuation is done.
4. In valuation, a vender must be willing to sell and so the purchaser
willing to purchase
5. Present and future use of any property should be given due
weightage in valuation.
6. Cost analysis must be based on statistical data as it may
sometimes require, evidence in a Court of law
Factor affecting the value of the Property
1. Supply and Demand (Market Conditions)
Basically the value of a property is determined by
supply and demand.
For eg: plentiful supply of a commodity and little or no
demand, lower the value of commodity, whereas, if
there is little supply and a great demand, higher the
value of property.
In the property market the supply of property is
relatively fixed at any one time. In order to increase
the supply, more properties need to be built. However,
this process takes time. Demand, in contrast, can
change relatively quickly. Therefore property values
tend to be influenced by demand rather than supply.
Factor affecting the value of the
Property
2. Location
Property proximity to public transportation, train
stations, shopping facilities, schools, etc., plays
an import factor in determining your property’s
market value. Every area has a high end and a
low end. The market value of your property is
affected by that reality. People that purchase
homes in “lower end” areas expect to pay less
than they would if they bought the same home in
a “higher end” neighbourhood.
Factor affecting the value of the
Property
3. Features
One of the key factors in property’s value is the
features it provides. For example, some house
styles are more popular with buyers than others.
The age and size of your home compared to
other available properties also plays a part in
affecting your home’s value.
4. Condition
The value of Property also depend upon its
condition and its functional utility. For eg: A home
in immaculate condition has a much higher
potential for a top dollar sale than one that is
lacking the most basic routine maintenance.
Factor affecting the value of the
Property
5. Property Improvements
Property improvements are unquestionably important
factors that affect the property value.
For eg: Improvements like room additions, bedrooms,
bathrooms, kitchens and other items like floor tiles,
swimming pools, etc., can increase the value of your
home.
6. Age
The age of a property can be a factor in value. If a
property has historical connections, it can make it
more valuable and imperfections such as uneven
walls and sloping floors that would not be tolerated in
a new property would perhaps be seen as quaint and
charming.
Some older properties may need more maintenance
and repairing than a modern property and a newer
property would meet all the latest up to date
Factor affecting the value of the
Property
7. Seller Motivation
Seller motivation is also a major factor which
affects the offer price made by the buyer. For
example, if you bought a home in a new area you
may be willing to accept a lower price to quickly
complete the sale your current house.
8. Marketing
The marketing plan that your agent executes on
your behalf will determine the amount of interest
that is shown in your property. Your agent’s level
of skill and expertise in the negotiating process
will affect the amount of money you’ll be able to
get for your Property.
Value Classification (spranger’s classification)
D – depreciated value
P – cost at present market rate
rd – fixed percentage of depreciation (r stands for
rate and d for depreciation)
n – The number of years the building had been
constructed.
To find the total valuation of the property, the present
value of land, water supply, electric and sanitary fitting
etc; should be added to the above value.
The value of rd can be taken as given in table below