Valuation

Introduction
❖ An engineer or architect has to work out frequently the value of an
existing property for various purposes.
❖ Every individual makes use of the art of valuation to find out the likely
value of property in selling and buying transaction.
❑ Definition
❖ Valuation is an art of judgement based on experience and relevant
statistical data to forecast the value of a property at present.
❖ The estimated price (value) of a property depends upon its power to
serve man’s need (i.e its utility), location, facilities, purpose and last
but not the least depending upon the supply and demand of a type of
property.
❖ It continuously varies with age, physical state and characteristics of
the property itself.
❑ Market Value
❖ When any property is put to open sale either through auction or
through sealed offers etc., by a willing seller, the amount which is
expected to be received by him is known as market value.
❖Purpose of valuation
➢ Purpose for which valuation is being done has a great impact on the
value of a property because the value considerably differs with the
purpose for which it is required.
❖ Valuation is done for the following purposes:
i) For buying or selling
✓Valuation of the property is always done by both the seller and
prospective buyer so as to arrive at a reasonable price.
✓ It is a matter of common experience that every willing seller fixes a
reserve price below which he does not sell the property.
✓ This reserve price is arrived at through valuation. Similarly, a buyer before
bidding his offer, will like to know the amount he is going to part with
against the value of property which is again a process of valuation.
❖ For mortgage, security of loans etc
✓ While advancing any sum of money on the mortgage or security of a
property, the mortgager estimates the cost of that property.
❖ Determination of a rent
✓ The return of property is judged from the amount of rent it can fetch if let
out.
✓ The valuation of property is done so as to work out the amount of fair rent
of a building.
❖ Assessment of tax
✓ The value of the newly built property for the purpose of assessing the
amount of expenditure incurred that is determined by income tax authorities
so as to ensure that the expenditure commensurate with the know source of
income of the owner.
✓ Similarly, to determine property tax, house estate duty, gift tax, wealth
tax, etc., valuation of property is done before levying these taxes. This is
because if a man has got wealth in excess of a certain amount he has to
pay tax.
✓ Therefore for determining the exact amount of wealth, valuation of
land, building etc., in possession becomes necessary.
❖ Acquisition
✓ Some times a property is compulsorily acquired by the government.
Suitable amount as compensation shall have to be paid to the owner,
for which valuation of property has to be carried out.

❖ Similarly, there are many other occasions, when the probable value of
the property is required.
✓ That is:
i) Insurance against fire of a building

ii) Compensation for any loss due to war, earthquakes etc.,

iii) Borrowing money from insurance corporation, banks or the state

Industrial Finance Corporations or such other institutions.

iv) Auction bids.

Principles of Valuation Expert
➢ When resorting to valuation of any property, a valuer must be expect in
the trade.

➢He must have sound knowledge of planning, designing, and

construction of property.

➢He should also be quite aware of administrative laws like town

planning laws, rent restriction act, local taxes etc.

➢He must be conversant with market rates, rate of interest together

with experience and capability in economic analysis of money, will take
him to exactness in arriving at the fair price of a property.
❖ Following principles should be observed at the time of evaluating a fair
and reasonable value of property:
i) Cost depends upon supply and demand of the property
ii) Cost depends upon its design, specifications of the materials used and
its location
iii) Cost varies with the purpose for which valuation is to be done
iv) Cost is affected by the age of the property and its physical conditions.
v) In valuation, a vender must be willing to sell as also the purchaser
willing to purchase.
vi) Present and future use of any property should be given due weightage
in variation.
vii) Cost analysis must be based on statistical data as it may sometime
require, evidence in a court of law.
 Terms Used in Valuation
1) Value
➢ The work “value” is very difficult to define precisely. Value price and cost do
not come into existence unless and until an exchange of commodities or
services takes place.
➢ The exchange depends upon utility, satisfaction and extent to which
commodity is scarce.
➢ The simple definition by Hadley is: “A price is a fact and a value is an
estimate of what the price ought to be”.
❖ In order that a commodity can have value, it should possess the following
three essential characteristics;
i) It must possess utility,
ii) It must be scarce
iii) It must be transferable or marketable
❖ Commodity may not have any value, in the absence of any of the
above. E.g rotten eggs may be scarce, since they have no utility, they
have no value. However, property has value because it satisfied all the
above essentialities.
❖As a result we can define value as the price estimated in a sale proceed
between a willing buyer and a willing seller.
❖ Value’s factors
▪ Location of property: A building situated in a good residential area will
fetch more price.
▪ Time: With the change in time, the money itself has changing value as
the value of dollar changes from time to time.
▪ Supply and demand conditions: It will also have impact on value that is if
demand increases than supply, the value will be more.
2) Price
❑It is the cost of a commodity fixed depending upon the demand from
consumers as compared to their other wants, and for sale purpose
taking into consideration its utility, durability, cost of production,
satisfaction and the extent to which it is scare.
3) Cost
❑ It is the amount of expenditure incurred to produce or acquire a
commodity having a value. To this cost of acquisition, agents or valuer’s
commission and stamp duty etc; is also added.
4) Book value
❑ It is define as the original investment shown in the account books of a
company on its assets including properties and machineries, less any
allowance for the period passed. Thus the book value will be reduced
year to year depending upon depreciation and will be only the scrap
value at the end of the utility period.
5) 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 properties.
6) Replacement value
❑ It is that value of a property or its services calculated on the prevailing
market rate to replace the same.
7) Rate-able value
❑ It is the net annual letting value of a property obtained after deducting
the amount of yearly repairs from the gross income.
❑Municipal and other taxes are charged on the rate-able value of the
property.
8) Potential value
❑ The land has got an inherent value which may go on increasing due to
passage of time or can fetch more return if used for some alternative
purpose.

❑ This inherent value is know as potential value. It include the following:

i) Beneficial present use of land
ii) Better lay-out than the existing one
iii) Better suitability for a definite purpose
iv) Future usefulness
9) Distress value
❑ When a property is sold at a lower price than that of an open market
rate, due to financial difficulties of a vendor or panic due to war and
riots or otherwise, it is said to have a distress value.

10) Annuity
❑ It can be define as the annual periodic payments for repayment of
capital amount invested in a property or in some other form of
investment by a party.

❑This annual payments are either paid at the beginning of the year or at
the end of the year, for a specific number of years.
11) Perpetual annuity
❑ If the annuities are receivable for an indefinite period, they are known
as perpetual annuities

12) Deferred annuity

❑ If the annuities begin at some future data after a number of years
though the capital is required to be paid at present, they are known as
deferred annuities.
Please note: Annuity may be paid by twelve monthly instalment or
quarterly or half-yearly instalments
13) Obsolescence
❑ Sometimes a building though physically quite sound yet it becomes
outdated because of change in design pattern, fashions living habits of
its inhabitants an thus it loses its functional utility. This is known as
obsolescence.
❑ It is very difficult to predict obsolescence. Loss due to natural calamities
like earthquakes, floods etc are included in obsolescence.

14) Scrap value

❑ After a property loses its utility, periodical repairs are not in position
to ensure its serviceability, it is required to be dismantled for
reconstruction or replacement.
❑ The value of dismantle materials less the cost of demolition is known
as scrap value.
15) Salvage value
❑ It is the value at the end of the utility period without being dismantled.
❑ For a machine, when it becomes uneconomic, may be sold, and the
purchaser may use it for some other purposes.
❑ The sale of the machine is the salvage value and it does not include the
cost of removal etc.

16) Gross income

❑ It is the total revenue realized from a property either as rent or lease
money during a year. The out goings and collection charges etc are not
deducted.
17) Out-going
❑ The are expenses incurred to maintain the property by undertaking
periodical repairs.
❑ It also includes taxes levied by government or local body e.g charges on
lift operation, water, and electricity bill etc.
18) Net income
❑ It is the net amount left with the owner after deducting outgoings
form gross income i.e Net income = Gross income – Out-goings
19) Return frontage
❑ Plots situated at the junction of two roads having the frontage on
these two roads are said to have return frontages such plots having
return frontages usually fetch more money than other plots in the same
area depending upon the development potentialities and demand for
the plots in that area.
19) Rent
❑ An annual or periodical payment made by the tenants for use and
possession of land and buildings.

20) Rental value

❑ It is the rent which may reasonably be expected to be obtained in the
open market.

21) Ground rent

❑ When a piece of land had been leased out, the rent reserved under the
lease is known as ground rent.
22) Contractual rent
❑ The rent fixed between the land lord and the tenant by
negotiations or haggling is known as contractual rent.

23) Standard rent

❑ It is the rent which would be permissible under the law to be
charged from a tenant.

❑ There can be great difference between the contractual rent and

standard rent.
24) Land acquisition act
❑ For the advancement of any country sufficient land should be available
where public utility services, public projects can be set up.
❑ Sometimes it is necessary to procure land at a reasonable price from the
public.
❑ The basic principles of land acquisition act are:
i) Land or properties is required for public utility service
ii) Sale by an owner becomes compulsory
iii) Owner is paid market value as against any other value
iv) Property is acquired free from all hindrances