ELEMENTS OF VALUATION

Introduction to the subject:

From the dawn of civilization land has been found to have value for its capacity to
provide the essentials of the life like food cloth and Shelters. It was also recognised
even at that time the difference two value of two plots by trial and error when
people found the produce from one plot per acre more than that of the other. The
greater productivity of some lands made them skills and part of fertile land used to
be exchanged for a big chunk of fallow lands. In olden days there was a barter
system whereby one commodity was exchanged for another.

in the past kings used to appoint experts to evaluate precious stones diamonds gold
extra and value was determined by them based on their experience without detailed
and critical analysis of facts and circumstances.
The present day requirements of the valuation procedure demand that valuation
done by a valuer should stand to reasons and the valuer is not expected to act like a
prophet prophesying the price the property would fetch if offered for sale in an
open market.
Valuation is an adventure in economic research leading to an economic decision of
a valuer which indicates the conclusions arrived at after taking into consideration
all factors like economic social political legal and physical which effect the value
one way or another

VALUE, PRICE AND COST

Every individual makes use of the art of valuation without finalizing it because
when he purchases a commodity he balances the value of money parted by him
against the value received by him in form of other commodity.
The word value is very difficult to define precisely and a number of books
economics have dealt with the problem. The simple definition by Hadley is a price
is a fact and a value is an estimate of the price change takes placee ought to be.
Value, price and cost do not come into existence unless until an exchange of
commodities or services takes place the exchange usually takes place depending
upon utility satisfaction transferability and the extent to which a commodity is
scarce. The exchange of commodities helps a person to satisfy a few of his wants
from among his bundle of unlimited wants. Today the process of exchange comes
in between wants, efforts and satisfaction.
ESSENTIAL CHARACTERISTICS
1. Value
a) In order that a commodity can have value, it must possess three
essential qualifications, namely
i. It must possess utility
ii. It must be scarce
iii. It must be transferable or marketable
It is necessary that all these essentialities must go hand in hand and in the
absence of any one of them, the commodity will have no value, e.g.air possess
utility but is not scarce and hence it has no economic value. Rotten apples may be
scarce but they posses no utility hence they have no value. A property has got a
valuebecause it satisfies all the above three requirements.
At times arguments are also advanced that a bungalow in a desert (a property) has
no value as it has no utility.the bungalow at present has got a demolition value and
it is likely to have a value in future if developments like oil explorations take place
in the desert and at that time it will find a class of proper purchasers for it. If the
proposition of a bungalow in the desert is critically analysed, it will be observed
that no investor will construct a bungalow in a desert for its future utility or a
bungalow in a desert can be said to be a bungalow in a deserted place may develop
once again in future in which case the bungalow will have future utility. In the
absence of development the value will be negligible or may tendto zero when the
cost of demolition and transportation of old building materials of the bungalow to
the place of sale may exceed their sale value.
Likewise the Kohinoor diamond when put on the open market for sale may not
find a buyer. It doesn’t mean it has no value. It has a value but the class of
purchasers to whom it is offered for sale is not suitable for it.
b) It can be said to be a ratio between the price of mode and the price of
commodity in return.
c) It is not necessarily the price of commodity
d) It can be an unearned increment or an unfortunate increment in the
price.
2) Price
(I) it is the cost of a commodity plus additional reward to the producer for his
labour and capital.
(ii) it is a special form of value.
(iii) it is fixed depending upon the demand from consumers as compared to their
other wants and this adjustment of price brings into existence the value.
(iv) it depends on utility durability satisfaction and the the extent to which a
commodity is scarce.

3) Cost:
(I) Expenditure to produce a commodity having a value.
(ii) Depreciation is usually worked out on the cost of a commodity rather than on
its value.
Market value
the market value has been defined as the amount which might be expected to
realise from a willing purchaser on a sale of a property by a willing seller in the
open market.
(I) in the open market means the property is offered for sale in such a manner
that every person who desire to purchase can we can offer and that the necessary
steps are taken to advertise its sale in papers and all necessary means are
adopted to bring to the notice of all the purchases that the property is for sale in
the market under the most favourable condition.
(ii) willing seller is a person who will not sell the property unless he obtained
something more than his reserve price.given the necessary advantage to fix a
reserved for the property does making him a free person to sell and not force to
sell due to certain unforeseen difficulties. In short it must be a free will sale.
(iii) might be expected to realise refers to the expectations of the purchases after
they have been supplied with all the necessary data etc., And after then know the
conditions of the market.
Essential characteristics of market value
(I) vendor must be willing to sell.
(ii) purchaser must be willing to purchase and must be a prudent one who can put
the hand to the most beneficial use.
(iii) no compulsion on either in the transaction.
(iv) urgent necessity of purchase or sale to be discarded.
(v) disinclination of vendor to be ignored.
(vi) sentimental value to the vendor will have no place.
(vii) present and future uses known as potentials are to be taken into account.
Value classification:
Assessed value: the value of a property which is recorded in the register of a local
authority and used for the purpose of determining the amount of property taxes
to be collected from the owner of the property.
Book value: it is also known as book cost which shows the original investment of
a company on its assets including properties and machineries less depreciation for
the period passed.
Salvage value: value of a machinery realised on sel when it's useful span of life is
over but it has not become useless.
Scrap value or junk value:value of a machinery realised when it becomes
absolutely useless except for sale as junk it also applies to build up properties
which have outlived their useful span of life and in such cases the value of the old
materials of such buildings less cost of demolition will represent the scrap value
or break up value it is also known as demolition value.
Replacement value: it indicates the value of a building or portions there of if
these have to be replaced in the form of acceptable substitute at the corrent
market rates.
Earning value: it is the present value of a property which will start yielding an
income in future.
Potential value: the land has got an inherent value which we go on increasing due
to passage of time or due to some alternative use fetching more return. This
inherent value is known as potential value it includes the following:
 Beneficial present use of land.
 Future usefulness.
 Special suitability for a definite purpose.
 Better layout.
 Distress value: when a property is sold at a lower price then that which can
be obtained for it in an open market it is said to have distress value. It may
be due to the following:
 Financial difficulties of vendor
 It direct benefit to vendor or purchaser
 Part consideration paid otherwise
 Panic due to war and riots.

Purpose of valuation ( a few purposes)

 Purchase for investment or for occupation
 Sale
 Mortgage
  Rent fixation
 Land acquisition
 Betterment charges
 Auction bids
 Probate
 Speculation
 Insurance
 Wealth tax
 Capital gains
 Stamp duty
 Gift tax
 general court purpose in order to determine the amount of court fee stamp
in a suit etc.

The purpose of valuation plays an important part in determining the market value
of a property. Hence, it is most essential that the purpose of valuation should be
known in advance as the values will differ with different purposes for which they
are required. You are not technical person it is a packet of surprises when he finds
different values for the same property but he hardly realises the differences in the
function of a value which depends upon the purpose of valuation namely.
(a) for mortgage: in case of a mortgage proposal the value has to advice the
mortgagee as to what sum can safely be advanced on the property.does the
function of the value of here is to safeguard the position of the mortgagee, his
client.
(b) for sale or purchase: in the case of purchase the value desire that his client
should get a bargain proposal where has in case of sale he will value at a price
that could be obtained in the market depending upon the conditions of the
money market and rate of interest on securities
(c) for acquisition proceedings: for acquisition proceedings of the valuer is likely
to take a liberal view as a seller is an unwilling person and you to acquisition he
may have to undergo a lot of trouble and expense.
(d) for government taxes: for the purpose of government taxes the value
determines the market values of the property that is what are willing buyer to
would pay to a willing seller.
Factors affecting the value of a property:
 Supply and demand
 Cost of replacement
  Occupational value : when a property is required for the purpose of
residential occupation the price paid is generally more than its market
value arrived at by rental method. It has been observed that a built up
property part vacant will fetch a good price even if the premium for vacant
portion is taken into consideration. In the purchase of such a property the
return forms a secondary consideration.
 Interest and security of capital
 Rent restriction act
 Abnormal conditions
 Town planning act.: Due to declaration of a town planning scheme in a
particular area where by the said area is proposed to be provided with all
civic amenities like roads gardens drainage. The value of open plots in the
locality will go up.

Valuation of Building – Methods and Calculation of Valuation

Valuation of building or property is the method of calculating the present

marketable cost of a building. Valuation of a building depends on the sort of
building, its structure, durability, location, size, shape, the width of roads,
frontage, types and quality of building materials used and the cost of these
materials.
Valuation of a building also depends on the height of the plinth, height of the
building, thickness of its walls, nature of structure (such as load bearing or framed
structure), type of flooring, roofing, doors and windows etc.

Location of a building also plays an important role in deciding the value of a

building. For example, a building located in a market area would have a stronger
and higher valuation than the same building located in a residential area. Also, the
buildings located in areas with proper municipal water supply, sewer and
electricity have increased values. A building located on a freehold land generates
a higher valuation amount compared to a building located on the leasehold land.

The valuation of a building also depends on the demands for purchase which
varies from time to time. More demands make the building more valuable.
A building may provide income to the owner in the form of rent; thus valuation
also depends on the income the building can generate if let out. If a building is not
let out, then 6% of the capital cost of the building is considered as the annual
rent. It varies from time to time and location and depends on the prevalent
market rate.

Valuation of Building
Calculation of Valuation of Building or Property
Age of property affects the valuation of the building, so the age of the property
should be known from the records or by enquiries or from visual inspection and
the future life of the building should be ascertained.

The valuation of the building is calculated by finding the present-day cost of the
building and allowing a suitable depreciation. The present-day cost of the building
can be calculated by:

1. Cost from the Record

The cost of construction can be determined from the estimations, the bill of
quantities and using the present-day rate of building materials and labors. If the
actual cost of construction of the building is known, this cost can be manipulated
by using the percentage of increase or decrease to the present-day rate of
materials and labors.

2. Cost by Detailed Measurement

If the old record is not available, then the cost of construction can be calculated
by a detailed measurement of the building and preparing the bill of quantities of
various items of works. The present rate of materials and labors are used to
calculate the cost of the building.

3. Cost by Plinth Area Method

Plinth area method of calculating the cost of a building is simpler than the
detailed measurement method which is laborious and lengthy. In this method, the
plinth area of the building is measured and calculated and plinth-area rate of a
similar building in the locality is obtained by enquiry and cost is calculated.
The plinth area method may not be accurate if the building is not thoroughly
examined and compared with the reference building of the locality. To fix this
problem, different parts of the building such as foundation, structure, floor, roof,
doors, windows, finishing etc. should be thoroughly examined. If the plinth area
method is judiciously used, then the cost calculation will be precise and sufficient
to suit practical purposes.

Determination of Depreciation
Depreciation is allowed to the current cost of the building to calculate the
valuation of the building or the structure. Depreciation depends on the use of the
building, age of the building and type of maintenance etc. generally, for the first 5
to 10 years, there is a very little depreciation of the building or the structure. The
depreciation increases with the age of the building.

Consider a building with a life of 80 years, if well maintained, the following table
shows the depreciation with the age of the building:

The final 10% is the scrap value on the dismantling at the end of the utility period.

Methods of Valuation of Buildings and Properties

Following are the different methods of valuations of the property:

1. Rental Method of Valuation

2. Direct comparison with capital value
 3. Valuation based on profit
4. Valuation based on cost
5. Development method of valuation
6. Depreciation method of valuation
1. Rental Method of valuation
In this method, net income from the building is calculated by deducting all the
outgoings from gross rent. Year’s purchase (Y.P.) value is calculated by assuming a
suitable rate of interest prevailing in the market. For example, consider a rate of
interest as 5%, the Year’s Purchase = 100/5 = 20 years.

The net income multiplied by the year’s purchase gives the capitalized value or
the valuation of the property. This method is used only when the rent is known or
probable rent is determined by enquiries.

Years purchase (Y.P.):

The capitalized value which needs to be paid once for all to receive a net annual
income of rupees one by way of interest at the prevailing rate of interest in
perpetuity or for a fixed number of days.
Suppose the rate of interest is 5% per annum. What has to deposit rupees
hundred to get rupees 5 per annum. Now to get rupees but he has to deposit
100/5=Rs 20 per annum
Therefore, YP = 100/ rate of interest=1/R
a case of life of property is anticipated to be shot into account the accumulation
of 6ft at it was taught income of the property to replace capital, the years
purchase is suitably reduced
2. Direct Comparison with Capital Value
When the rental value is not known, this method of direct comparison with the
capital value of a similar property of the locality is used. In this case, the valuation
of the property is fixed by direct comparison with the valuation or capitalized
value of similar property in the locality.

3. Valuation based on Profit

This method of valuation is suitable for commercial properties such as hotels,
restaurants, shops, offices, malls, cinemas, theaters etc. for which the valuation
depends on the profit. In such cases, the net annual income is used from the
valuation after deducting all the outgoings and expenses from the gross income.
The valuation of building or property is found by multiplying the net income by
year’s purchase. The valuation, in this case, can be too high in comparison with
the actual cost of construction.

4. Valuation based on Cost

In this case, the actual cost of construction of the building or the cost incurred in
possessing the building is considered as the basis to determine the valuation of
the property. In this case, necessary depreciation is allowed and points of
obsolescence are considered.

5. Development method of valuation

This method is suitable for properties which are under the developmental stage.
For example, if a large place of land is to be divided into plots after provision for
roads and other amenities, this method is used. The probable selling price of the
plots, the area required for amenities and other expenditures for development is
considered for valuation.

Development method of valuation is also used for properties or buildings which

are required to be renovated by making alterations, additions, improvements etc.
The value is calculated based on the anticipated net income generated from the
building after renovation work is complete.

The net income multiplied by year’s purchase gives the valuation of the property.
The actual cost of the property with a total cost of renovation shall be compared
with the anticipated value of the property to decide if the renovation is justified.

6. Depreciation Method of Valuation

Based on the depreciation method, the valuation of the buildings is divided into
four parts:

1. Walls
2. Roofs
3. Floors
4. Doors and windows
Cost of each part at the present rate is calculated based on detailed
measurement. The life of each part is calculated by the formula:

D = P [(100 – rd)/100)]n
where,
D = depreciated value
r = rate
d = depreciation
n = age of building in years
rd values are considered as per following table:
The valuation calculated is exclusive of the cost of land, amenities, water supply,
electrical and sanitary fittings etc. and is used only for buildings which are well
maintained. If it is not well maintained, then suitable deductions are considered
in the valuation calculated above. The present values of the land, amenities,
water supply, electrical and sanitary fittings should be added to find the valuation
of the property.