Valuation of real properties

- Types, methods, purpose of valuation

VALUATION
Valuation is the art of assessing the present fair value of a property at a stated time.
Valuation of anything is an estimate of the value of that thing in terms of money. It only
attempts at suggesting fair prices. Rises and falls of the fair price can occur in a very short
space of time.
 1

PURPOSE OF VALUATION
(a) Purchase for investment or for occupation:
For investment a property is purchased & for this valuation property becomes necessary.

(b) Tax fixation:

To fix up municipal tax of a property, the valuation is essential by municipal
authorities which depends on the class of city and trade importance.
(c) Sale:
For sale of property valuation becomes necessary which depends upon price that
can be obtained in the market and the sellers consider this amount as a reserve
piece below which any offer is not acceptable to them.
(d) Rent fixation:
Valuation of property is necessary to determine or justify the rent of a property and
is usually required for fixation of standard rent or fair rent according to Rent
Control Act.
(e) Insurance premium:
To fix up insured value of a property excluding the cost of land, valuation is required
in order to replace the same and thus to determine the insurance premium.
(f) Mortgage value or security of loads:
The raise loans against security of a property its valuation is necessary. The
quantum of money that be advanced against the mortgage of property is
determined by valuation.
 2

METHODS OF VALUATION
(1) Traditional valuation methods:

-Comparable method
-Investment/income method
-Profit method
-Development/residual method
-Contractor's method/cost method
-Multiple regression method
-Stepwise regression method.

(2) Advanced valuation methods:

-Artificial neural networks (ANNs)
-Hedonic pricing method
-Spatial analysis methods
-Fuzzy logic
-Autoregressive integrated moving average (ARIMA)

There are different methods used to value property, three most common methods:

Market comparison approach: Compares the property being valued with other similar
properties that have recently been sold in that area

Income or investment approach: Looks at how much income the property being valued is
already generating or could potentially generate

Cost approach: Looks at how much it would cost to build an equivalent property
 3

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.

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 a 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

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 are 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.

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
 5

VALUATION OF REAL PROPERTIES

● Valuation of buildings depends on the type of building. Its structure and durability,
size, shape, width of road way, quality of material used in the construction and
present day price of material.

● Also depend on the locality if it is in market area having high value then the
residential area.

● And depending on the specialities in the building like sewer, water supply, and
electricity etc.

● The value of the building is determined on working out its cost of construction at
present day rate and allowing a suitable depreciation.

● The age of the building is generally obtained from record if available or by enquires
or from visual inspection.
The methods for analyzing the value of a real estate investment are analogous to those
used in the fundamental analysis of stocks. Because real estate investment is typically not a
short-term trade, analyzing the cash flow, and the subsequent rate of return, is critical to
achieving the goal of making profitable investments.
To profit, investors must know how to value real estate and make educated guesses about
how much profit each will make, whether through property appreciation, rental income, or
both. Accurate real estate valuations can help investors make better decisions when it
comes to buying and selling properties.
 6

KEY TAKEAWAYS
- Real estate valuation is a process that determines the economic value of a real
estate investment.
- The capitalization rate is a key metric for valuing an income-producing property.
- Net operating income (NOI) measures an income-producing property's profitability
before adding costs for financing and taxes.
- The two key real estate valuation methods include discounting future NOI and the
gross income multiplier model.
- On the downside, because the property markets are less liquid and transparent
than the stock market, it can be difficult to obtain the necessary information.