MAHATMA EDUCATION SOCIETY’S

Pillai HOC College of Architecture Rasayani

Valuation
Module – 1
Professional Practice – 2 (B. Arch, Mumbai University)
Dr. Joydeep Dutta – Fall 2020-21
Valuation: Topics to be covered
• What is Real Estate Valuation?
• Types of Property
• Cost, Price and Value
• Purposes of Valuation
• Different Forms of Value
• Factors affecting Market Value
Valuation
What is Valuation?
• Valuation is the determination of the economic value
of an asset or liability.
• In general, value to relates to worth or utility of
something
• Real estate valuation (also called property valuation)
deals with appraisal of land and buildings
What is Real Estate Valuation?
• Real Estate Valuation is the process of determining
the fair value (usually the market value) of a real
estate property at a given time and location, under
given conditions
Valuation
• Valuation of real estate is rather difficult because of
the nature of the property (with peculiarities)
involved in such valuation
• Every valuer is required to apply his mind carefully to
arrive at a fair and reasonable value of the property
under consideration
• Hence real estate valuation is considered as much as
an art as a science
• Thus, valuation is the art of judgment and forecast
based on data which can be obtained and organized
scientifically
Valuation
• Proper valuation needs an experienced valuer who has
previously gone through the processes of training and is
familiar with all kinds of unique/ special situations
• The science and art of valuation rests on certain well-
established principles and procedures
• Thus, valuation is may be defined as a basic process by
which the estimated price of a specific real estate
property at a specified time and place, and assuming a
specific use or purpose, can be worked out considering
the prevailing economic factors
Types of Property
• All properties can be broadly divided into two categories:
• Land property – immovable property, referred to as real estate/ realty
• Property other than Land – also called personal property or chattel
• Estate: derived from Latin word status (= standing). The person who held
the land was called estate holder
• The law recognizes land as the type of property which the owner enjoys
herself and its passes on to her heirs for successive generations
• Real estate is corporeal (Latin: corpus = body) – a material thing (not
immaterial or intangible) capable of being owned or possessed
• Land by nature is indestructible and immovable – properties other than
land are movable and generally capable of destruction
Types of Property
• Land by nature is indestructible and immovable – properties other
than land are movable and generally capable of destruction
• If the owner is wrongfully dispossessed of her land, she can approach the
court of law for recovering the possession of her land.
• This is referred to as real action, i.e. the legal objective is to restore the thing
in dispute
• However if goods or chattel are stolen, we don’t know if these stolen
articles can be replaced or restored.
• Here the law grants personal action, i.e. takes action not against the thing in
dispute, but against the wrong-doer and compels him to make compensation
Differences between realty & personal properties
• (1) If realty owner is wrongfully dispossessed of land, she can recover it by
taking real action. For chattels, she can only take personal action against
the wrong-doer for recovery of damages
• (2) If the estate owner dies, the real property passes on to her legal heirs.
For chattels, the personal representative of the deceased take immediate
possession of the goods/articles
• (3) Realty is the subject of tenure, while personal property is the object of
absolute ownership
• (4) Ownership of realty can be split up into a number of parts for benefits
of persons in succession, but ownership of chattel is always absolute
• (5) Transfer of realty happens through registered deeds/documents, while
chattel can be freely transferred by delivery of possession
• (6) Note: Land under vast deserts, forests, inaccessible mountains and seas
are immovable in nature, but not considered real estate
Doctrine of Estate
• Historically, the concept of money was not prevalent – the produce of
the land was the main item of wealth and exchange
• Hence possession of land was extremely coveted
• In feudal times, the land supposedly belonged to the King, who distributed
it to nobles in exchange of services to be rendered by them
• The word tenure (Latin: teneo = I hold) refers to the tenant, i.e. the person
holding the land
• Essentially two types of tenure:
• Free tenure
• Free tenant cannot be dispossessed of the land at any time by the
will/order of the lord
• Unfree tenure
• Unfree tenant (servant) can be evicted at any time at the will/order of
the lord
Concepts of COST vs. PRICE vs. VALUE

Cost is the amount to spend to produce something

Price is the financial reward for providing that something
Value: is what the customer believes that something is worth to them

This something could be a product, a service, an asset or (in our case) a

real estate property
Pricing should be in line with the value of benefits to the customer,
while also bearing in the mind the competitor’s price
Concepts of COST vs. PRICE vs. VALUE
Cost: It is the expenditure to produce a commodity having a value. It means
the original cost of the construction including the cost of materials and
labour. Hence, the cost is a fact
Price: It is the cost of a commodity plus additional reward to the producer
for his labour and capital. It means the original cost of construction plus a
certain percentage of profit, which depends upon various conditions. Hence,
the price is a policy
Value: It is an opinion or estimate of the worth or utility of a commodity,
which will be determined by many factors like the purpose, supply and
demand, depreciation, obsolescence etc. Hence, value is a relative measure,
depending upon a specific person, place, date and purpose

Let us watch a video of the concept of Cost/Price/Value

Cost
• Cost is a term used to indicate the actual amount incurred in
producing a commodity which possesses some value
• Used to find out loss of value of the property due to wear and tear.
Such loss of value is known as depreciation
• Costs of commodity could be quantitative or qualitative (e.g. labour
or capital)
• Prime Costs: Direct expenditures made to create the commodity
• Supplementary Costs: Indirect expenses for the production, e.g. rent,
management salaries, services, depreciation, etc.
• So, in real estate, cost is what was actually paid for the real property,
plus the cost of acquisitions
• (such as stamp duties, advocate’s fees for title investigation, fees for broker &
valuer, registration & preparation of document charges, etc.)
Price
• Price is a term used to indicate the cost of the commodity plus profit
of the manufacturer
• Since labour and capital are required to produce a commodity, the
manufacturer is entitled to have some reward over and above the
actual cost incurred
• The price of a commodity is determined by the supply and demand
conditions prevailing in the market
• As such, the commodity may be sold above or below its cost of
production, also called the selling price
Value
• Value (in economics) is defined as the corresponding exchange of one
commodity into any other commodity
• e.g. value of a motor car may be expressed in terms of so many bicycles (or so
many kg of rice, etc.). This system is known as the barter system
• In modern times, the relative value of commodities are expressed in
terms of money
• i.e. some recognized medium of exchange accepted in a country, or
internationally accepted monetary unit, e.g. USD, INR

• Money is defined as any token that serves as the commonly

acceptable medium of exchange and the common measure
of value of any commodity.
• Money can be used as a store of value, i.e. money can
be lent in the form of property loan, but returned in the
form of monthly rent or interest
Cost vs. Value
• Cost includes expenditures or charges incurred in the past
• Value considers the availability of incomes, amenities and potential
advantages of the future
• Thus, cost of production is neither equal to the value or price of a thing
• The price is also not necessarily equal to the value of a commodity
• Man has primary needs, but he also has wants
• Along with this, there should also be an exchange (or buying) power for
satisfying the wants of the consumer
• This is called purchasing power and it is this power of exchange that
creates the demand for the commodity
Cost vs. Value
• Superficially, the total Cost plus ordinary profit should represent the
Value of the commodity, but there are some logical objections to this:
• (a) It is not possible to find the exact cost of qualitative labour (skill levels or
individual brilliance) – e.g. an simple innovative machine produced quickly
• (b) Misdirected capital and labour may produce a thing of no value at all – e.g. an
expensive machine that does not work
• (c) A special article produced at high cost gets superseded in utility before it
enters the market, and hence is not acceptable to the public
• (d) The element of time makes a difference – woollen garments lose value after
winter is over, since the demand dies down
• (e) The element of scarcity makes a difference – cost of a rare painting made by a
genius artist
• (f) The element of location makes a difference – a masterpiece resort
constructed at a holiday resort that becomes unpopular
• (g) Exact prime cost cannot be determined if cost of by-products are not known
Price vs. Value
• There is a very thin line of difference between the two …..
• Price indicates a fact that has already occurred in practice (in the
past)
• Value indicates an estimation of a probable price of a commodity (in
future)
• If the valuer is able to correctly assess the prevalent conditions, and
he is able to correctly analyse the facts & figures placed before him,
the estimated value of the property will fairly resemble its price on
the material date of valuation
• Hadly, a famous economist, said: “a price is a fact and a value is an
estimate of what the price ought to be”
4 important attributes of Value

• For any commodity to have value, it should have the following 4

important attributes. They must:
• (1) possess utility – worth (usefulness) to the customer
• (2) be scarce – limited in supply quantity (air/water vs. oxygen/bottled)
• (3) have demand – purchasing power for being exchanged
• (4) be transferable – capable of being given away by owner

• Note: Lands & buildings are not portable, but they can be transferred
Purposes of Valuation
Purposes of Valuation
• It is absolutely essential to understand the purpose for which the
valuation of a real estate property is being done
• The various purposes of real estate valuation are as follows:
• (1) Buying / selling property
• (2) Tax fixation (property tax/ municipal tax/ wealth tax/ gift tax, etc.)
• (3) Rent fixation
• (4) Compulsory acquisition
• (5) Security of loans
• (6) Insurance premium (fire/ calamity/ riots)
• (7) Other miscellaneous purposes
Purposes of Valuation: (1) Buying/selling property
• When it is required to buy or sell a property, its valuation becomes
essential
• In some cases, the buyer/seller acts as a trustee, guardian, partner of
firm, etc. and she wants the valuer’s report or certificate to protect (or
justify) herself for the decision she is making
Purposes of Valuation: (2) Tax fixation
• When it is required to prepare a proper tax assessment of a property, its
valuation becomes essential
• The market value of the property at a given time needs to be fixed in
order to levy taxes of various kinds, such as:
• Government taxes such as property tax (estate duty) payable to
municipality
• Wealth tax
• Capital gains tax
• Gift tax
• Local taxes – for operations & maintenance (to a
society/ locality)
• Every state (or nation) may have different rates (% of
property value) for various kinds of taxes
Purposes of Valuation: (3) Rent fixation
• In order to determine the probable rent which can be realized from a
property, its valuation needs to be conducted
• The main aim for such valuation is to justify the investment in the
property, i.e. certain % of investment in land, and certain % in building
• The process is usually required for the purpose of fixation of standard
rent or fair rent under the provisions of Rent Control Act (may vary by
state)
• Rights of landlords and tenants are mentioned in these Acts
• Nowadays, Leave & Licence Agreements are made to demarcate these rights
• Standard market practices are prevalent in different localities such as Security
Deposit, Lock-in period, notice period, eviction conditions, etc.
• Brokerage charges are also informally and mutually agreed upon
Purposes of Valuation: (4) Compulsory Acquisition
• Sometimes, a property is compulsorily acquired by law by the
Government or City Planning Body, for some public or semi-public
purpose (e.g. new road, railway, green zone, public facility, etc.)
• In such cases, the injured party has to be given adequate compensation. Hence
market value of the property is required
• This is called the power of Eminent Domain (State can take property from owner for public use) –
while under police power (State merely regulates the use and enjoyment of property)
• In India, the acquisition proceedings are started as per provisions of the
Land Acquisition Act, 1894
• Compensation is paid based on the market value of the property of the date of
declaration of intention (by a notification)
• In addition, the law provides for an extra payment as solatium (consolation) to
compensate the owner’s sentimental feelings and inconveniences caused to him
Purposes of Valuation: (5) Security of Loans
• When loans are to be granted against a property, its probable value is to
be worked out by valuation
• This is sometimes called Valuation for mortgage and often conducted by
the bank/financial officials
• The lender of money claims a right to recover the money given on loan
from the sale of the property, in case of default of the borrower.
Purposes of Valuation: (6) Insurance premium
• For the purpose of buying an insurance policy for the property, the
owner desires to know the replacement value of the property
• The valuer’s job here is to estimate the replacement cost of the building
(or a part thereof) in case of any accidental damage to the property
(such as by fire, floods, earthquakes, riots, terrorism, etc.)
• In such cases, the land value is excluded. In fact, the concept of market
value of the property is not in question here in the insurance valuation
• While this value is often less than the market value, in special cases where the
building is made up of very expensive materials, this valuation may be greater
than the fair market value
• Based on this valuation, the claim for compensation of losses is settled –
and the insurance premium is also calculated accordingly
Purposes of Valuation: (7) Miscellaneous purposes
• Betterment charges: When the property comes under some new town planning
improvement scheme, its value increases – thus the owner is required to pay an
additional tax
• So the owner needs to know the market values of the property before and after the
improvement scheme
• Balance sheet: Sometimes, a company requires valuation of its premises for the
purpose of showing them in the balance-sheet
• The premises are to be valued as a going concern (to fulfil business needs, rather than be sold)
• Reinstatement: Sometimes, the valuation of the property becomes essential
when he owner desires to reinstate her property (restore to the former condition)
• The possible use of old materials and requirement of new materials are taken into account
• Court fees: In case of a disputed property, when a court case has to be filed
• It becomes necessary to affix stamp paper duty of suitable amount
Different Forms of Value
Different forms of Value: Definitions
• Market Value: It is defined as the sum of money that the property will fetch if it
is sold in the open market.
• Guideline Value : It is the value of the land which is recorded in the Register of
Registrar’s Office and used for the purpose of determining the Stamp Duty at
the time of registration of the documents.
• Book Value: It shows the original investment of a Company on its assets,
including properties and assets, less depreciation for the period passed.
• It may not be affected by market conditions.
• Salvage Value: Value of some assets in a property which are realized when the
building is discarded after its useful span of life is over.
• e.g. sleepers used on railway tracks may be re-used for fencing.
• Scrap Value: (also called Junk Value or Demolition Value). It represents the value
of old materials in a discarded building (after useful span of life), that can be
scraped off or broken into units for disposal, and resold for some price.
Different forms of Value: Definitions
• Insurance Value: It is the value of the building for which the building is insured
(normally just the superstructure alone and not the substructure or land).
• Potential Value: It is an inherent value which may go on increasing with passage
of time, for some advantageous factor that will fetch more return in future
• e.g. agricultural land in the outskirts of a town, that has potential to get converted to N-A
• Distress Value: If a property is sold at a lower price than the open market value,
it is said to have Distress Value.
• Possible reasons may be: Financial crisis for Vendor; Panic due to war, riots, earthquakes,
floods; Land locked land; Sentimental reasons; Nuisance; Intention to favour a purchaser
• Speculative Value: When the property is purchased so as to sell the same at a
profit after some duration, the price paid is known as Speculative Value.
• Normally this is lesser than the market value when the purchaser buys this, so as to make a
profit when he re-sells this after a short period. e.g. second homes for investment.
Different forms of Value: Definitions
• Monopoly Value: Some properties possess certain advantages w.r.t. adjoining
properties due to its size, shape, frontage, location, etc. – or there may be short
supply of a coveted kind of property. The fancy price demanded by the Vendor
in such cases is known as Monopoly Value
• e.g. a successful plotted development, the corner plots, or last few remaining plots
• Sentimental Value: When the owner attaches certain personal sentiments or
feelings to her property, for which she is unwilling to part with it even if a fancy
price is offered, it is known as Sentimental Value.
• Often this has no relation to the Market Value
• Fancy Value (also called Desired Value): If the purchaser keenly desires to
acquire a particular property for some special reason, and is willing to pay more
than other parties, the extra sum she is prepared to pay is called Fancy Value.
Different forms of Value: Definitions
• Accommodation Value: When some lands are not suitable for development in
its present state, and the purchaser has to spend an additional sum to get it
ready for building development, he pays a value lower than market value. This
is called Accommodation Value.
• e.g. very small strips of land need to be amalgamated to be suitable for development; or
may only be utilized by the adjacent land owner; or agricultural land needs to be converted
• Replacement Value: Replacement Value is the cost of reproduction of a similar
building with similar specifications at the current market price on the date of
valuation. It is also called as Reproduction Value or Reinstatement Value.
• Depreciation Value: It is the reduction of value of the property due to age,
deterioration, lack of maintenance, obsolescence, decay, wear and tear etc. This
is Depreciation Value and depends upon the age and future life of property
• Present Value: It is the most widely used indicator for valuation. It is the
Replacement value less the Depreciation value.
Occupation Value vs. Investment Value
• The main intention of every purchaser of a real estate is to invest his capital, so
as to obtain enough benefit (or return) for it.
• Some purchasers buy property for the sake of investment, while some buy
property for their personal use, for occupying the property.
• Investment Value of a property indicates the amount offered by a prudent
purchaser keeping in view the advantages of possessing it from an investment
point of view.
• With inflation in an economy, property values normally show a steady rate of appreciation,
and there is a constant strong demand for such property to be re-sold when desired.
• Occupation Value indicates the amount offered by a purchaser who wishes to
personally occupy and use the property.
• There is often a wide gap between Investment value and Occupation value of
the same property.
• This may be due to market (trade) conditions; Government regulations; or demand intensity
 The concept of Markets
• The term Market is used to indicate a place (a region,
geographic or otherwise) or a commercial activity where
exchange of commodities between buyers and sellers
take place
• Markets can broadly classified as:
• (a) Central public place (in a village/ town/ city) where
transportable commodities are exchanged in a physical location
or facility
• (b) A region level place where transportable commodities are
exchanged (e.g. cotton, corn) in a wholesale manner
• (c) A commercial activity without a specific physical facility –
where the actual commodity is not brought for display or
inspection – but buyers & sellers (or agents/ brokers) transact
business
 Market Value: Definition
• Market value is the sum of money which a willing wise buyer
(buying without any restriction or undue necessity, or any
physical, sentimental or mental influence) pays for a real
estate property in its existing condition (including all interests,
advantages and disadvantages) ….
… to an offering willing wise seller (who sells without any
restriction or influence), as on the date on which the value is
to be ascertained
• Thus the market value will be that fair and reasonable sum of
money which will be available at a particular time in a
hypothetically ideal market, wherein all related factors are
duly considered (physical, legal and environmental aspects of
the property, the supply-demand factors, market trends and
economy of the time, etc.)
Considerations for valuation of a property
• A real estate property should be valuated considering the following
five major factors:
• (1) Market
• (2) Location
• (3) Condition
• (4) Age
• (5) Neighbourhood
Factors affecting changes in Market Value
• Market value depends on the forces of supply and demand. Various
factors might influence changes in Market value of a property:
• (1) Changes in building technology
• (2) Changes in fashion and taste
• (3) Changes in proportion of single to married people
• (4) Changes in quality of area
• (5) Changes in age distribution of the population
• (6) Designs of property
• (7) Means of communication
• (8) Migration tendencies
Factors affecting changes in Market Value
• Market value depends on the forces of supply and demand. Various
factors might influence changes in Market value of a property:
• (9) Money supply
• (10) Planning control
• (11) Population strength
• (12) Unstable time
• (13) New horizons or paradigms:
• Environment
• Neighbourhood
• Rapid Transport system
• Time sharing premises
 Peculiar characteristics of Real Estate Markets
• It is a commercial activity that is largely regional in demand-supply
• It is local in character – products cannot be transported/displayed
• A property is not a standardized commodity
• This market is not an organized one
• Correct information regarding demand-supply is easily available
• Info collection takes a long time (due to legal/environmental issues)
• Adjustment of supply and demand is a long range problem
• General competition like other commodities is not possible
• Different stakeholder intentions (investment vs. occupation)
End of Module – Thank you!