Valuation

Definition:
 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.

Objects of Valuation:
It is the technique of estimating and determining the fair price or value of a property such as a
building, a factory or other engineering structures of various types, land etc.
Important Purposes of Valuation:
The main purposes of valuation are as follows:

Buying or Selling Property:

When it is required to buy or sell a property, its valuation is required.

Taxation:
To assess the tax of a property, its valuation is required. Taxes may be municipal tax, wealth
tax, Property tax etc, and all the taxes are fixed on the valuation of the property.

Rent Function:
In order to determine the rent of a property, valuation is required. Rent is usually fixed on the
certain percentage of the amount of valuation which is 6% to 10% of valuation.

Security of loans or Mortgage:

When loans are taken against the security of the property, its valuation is required.

Compulsory acquisition:
Whenever a property is acquired by law; compensation is paid to the owner. To determine the
amount of compensation, valuation of the property is required.

Valuation of a property is also required for Insurance, Betterment charges, speculations

etc.

Factors affecting the value of Property:

Economic Factors:
 This is a macro-environment factor that affects the sale, purchase, and value of all goods
and services. Specific to a country, the disposable income levels of its population, the
unemployment rate in the country, the poverty index, the human development index,
and the GDP, are some of the economic indicators that illustrate a country’s economic
performance. Usually, the higher the economic performance the more income and
optimism the people of the country have, this leads to people having a positive attitude
towards spending and this drives up the demand for property, increasing the property
value and prices.

Political Factors:
 The political stability of a country determines the outlook of a lot of other factors, such
as ease of doing business, economic certainty, ease of making choices, and ease of
making investments. Generally, the stable the political scenario of a country, the better
is the country’s economic landscape. This keeps the aggregate demand high; the
economy keeps growing, and the value of the property and material wealth appreciate.

Er. Anup U. Nagpure Contact 9096985587

Valuation

Supply and Demand:

 The supply and demand of a particular size and kind of property would also determine
its value. The greater the demand for a property, the higher the price/value. The relation
of property value with supply is an inverse one, and the more of something is available,
the less valuable it becomes.

Location:
 The location where the property is located plays a big role in determining the value of
the property. What is the location like? Is it in an upscale area? Is it located near schools
and restaurants? What is the commercial value of the area? All such things play a part,
proximity to other residential areas and office areas, and many other such location-
dependent factors have a role to play.

The comp set:

 This is usually a term used to describe comparable properties. In a particular area, check
the prices and value of property similar to the one you want to find out more about.
Then compare the prices based on the size, space, age, location, and amenities present
among all these.

Age and Condition:

 How old is the property? How many real estate repairs does it need? Usually, if the
answers to these questions are relatively new, and not many repairs, the property has a
high value. Apart from age, the condition of the property matters. People would rather
buy a 10-year-old well-maintained space, rather than a new space with the need for
renovations

Interest rates:
 Interest rates in a country can determine the value of properties to quite an extent. They
determine the level of spending and the investor confidence in the area. The lower the
interest rate, the lower the mortgage payments and interest payables to banks and
lenders. This would also mean that investing is better than placing money in the bank
for lower returns. In this case, the property will become more affordable for people
wanting to take out mortgages.

Renovation potential:
 Buyers are interested in a property that they can customize and renovate according to
their will and choice. This would mean that if a property has more usable space and
there is room for upgrading bathrooms, and design implementation, then the property
is likely to have a higher value.

Basic Definitions:
Value:
 Value is nothing but the worth or utility of certain building, property, machinery,
equipment, etc. Value always changes from time to time and always depend upon
supply and demand. The value of the property within short time may be more than its
existing worth or price.
 Value varies from time to time and mainly depends on supply of products and demand
for it.
 Cost of construction of a building may have no relation with the value of the same if
sold in open market

Er. Anup U. Nagpure Contact 9096985587

Valuation

 If buyers are more that is demand is large the value of building increases.

Value depends upon

 Utility
 Scarcity
 Event

Cost:
 Cost means the original cost of construction and can be known after according all day
today expenditure from every planning stage till the construction is completed cost of
old building is less due to its age and change in fashion.

Price:
 It is the amount work out by adding the cost of production interest on investment
rewards to the producer for his labour and risk

Property:
 It means any interest in property more Hebbal aur immovable property means in a land
building or part of building together with machinery plant and other permanent fixtures
 Property is any item that a person or a business has legal title over. Property can be
tangible items, such as houses, cars, or appliances, or it can refer to intangible items
that carry the promise of future worth, such as stock and bond certificates.

Free Hold Land:

 A parcel of land is said to be freehold when the owner has absolute right of enjoyment
possession and ownership for it and it is free from any kind of encumbrance as to the
transfer of title Occupancy use
 Freehold property can be defined as any estate which is "free from hold" of any
entity besides the owner. Hence, the owner of such an estate enjoys free ownership
for perpetuity and can use the land for any purposes however in accordance with the
local regulations.

Lease Hold Land:

 The parcel of land is said to be leasehold when the right of enjoyment and position is
vested in a person other than the owner for a defined period of time in consideration for
a fixed some of friend alone at least ground rent the owner of the land is known lessor
and the person holding the leaves title is known as lessee.
 Leasehold refers to a property tenure, where one party buys the right to occupy the
property for a given length of time (30 to 99 years). In a leasehold land, the authority
(usually, a government agency) remains the owner of the land and gives the land to
builders, to develop apartment projects on a leasehold basis.

Scrap Value:
 Scrap Value is defined as the Value of dismantled materials. For a building when the
life is over at the end of its utility period, the dismantled materials like steel, timber,
bricks, etc will fetch certain value which is called as the Scrap Value of that building.

Salvage Value:
 It is the value of the building at the end of the utility period without being dismantled.
For example, A machine after the completion of its usual span of life or when it

Er. Anup U. Nagpure Contact 9096985587

Valuation

becomes uneconomical to use, it may be sold and the same machine may be purchased
by the other person for use for some other purpose. The price at which he purchased
that machine is called as Salvage Value and which is called as Sale Value.

Market Value:
 The market value of the property is the amount which can be obtained at any particular
time from open market if property is put on for sale. Market Value may differ from time
to time according to demand and supply. The Market Value also changes from time to
time for various miscellaneous reasons such as change in industry, change of fashion,
cost of labours and materials, cost of transportation etc.

Assessed Value:
 Assessed values the values of the property recorded in the registered of a municipality
in order to determine the amount of municipal taxes to be collected from the owner of
the property generally the assets value as determined from the grass annual rate at which
the land or building might at the time of assessment be reasonably expected to let from
year to year.
 For the purpose of taxation, a property is assessed for its monetary worth.

Book Value:
 Book Value is the amount shown in the account book after allowing the necessary
depreciation. The Book Value of the property at a particular year is original cost minus
the amount of depreciation upto previous year. The Book Value depends upon the
amount of depreciation allowed per year and will gradually increase year to year and at
the end of utility period of property the Book Value will be only Scrap Value.

Potential Value:
 When the property is capable of fetching more return due to its alternative use or by
advantageous planning or providing development works then that value of property is
called as Potential Value.

Sentimental Value:
 When the property is sold or purchased at the higher value than the market value due
to sentiments of the owner or the purchaser of the property is called as Sentimental
Value. The main causes for Sentimental value are as follows:
 The owner may be very much attached to the property so he/she shall demand fancy
price.
 The situation and the class of the property may suit a particular prospective purchaser
which may be ideal for his/her purpose and may have special value to him/her.
 If the property is put on for sale and 2 prospective purchasers are determined to outbid
then definitely the value of that property will reach higher than the existing market
value.

Speculation Value:
 When the property is purchased so as to sell the same at profit after some duration, the
price paid is known as Speculation Value. For example, If Government is planning for
some project or construction of new road or expansion on existing road from a
particular area then that area gains more value from actual and market value and the
speculators always buys such property low cost and sell it again after some duration.
The value at which he purchases the property is called as Speculation Value.

Er. Anup U. Nagpure Contact 9096985587

Valuation

Distress Value or Force sale value:

 If the property is sold at lower price than that which can be obtained for it in open
market is called as Distress Value. This may be due to various reasons which are
mentioned below.
a) Financial crisis for vendor due to which he/she sells the shop or property at very
low price.
b) Panic due to Riots, Earthquake etc.
c) Quarrel among the partners.
d) Sentimental reasons.

Accommodation Value:
 Small strips or land cannot be developed independently due to their restricted length,
depth and number of purchasers of such property are very less. This strip can only be
sold to the adjacent land owners who may be offering only low price. This value is
called as Accommodation Value.

Rateable Value:
 Rateable value is the net annual letting value of a property, which is obtained after
deducting the number of yearly repairs from the gross income. Municipal and other
taxes are charged at a certain percentage on the Ratables Value of the property.

Monopoly Value:
 In case land scared little remaining for field or a certain property possesses special
advantage with respect to adjoining property due to its location frontage size, shape that
may demand fancy price. Such value of the property is known as Monopoly value

Market Value:
 Market value is the price that willing purchaser would pay to a willing seller property
having due regard to its existing condition with all its existing advantages and its
potential possibilities when lead out in its advantageous manner.

Fair market value:

 It is the estimated price which any asset it sold in the open market on the valuation date

Difference between Lease and Rent:

Lease Rent

Lease agreement cannot increase lease Rent agreement may increase rent amount
amount till the completion of total period per year.
Money may be paid yearly, 5 year lies (in Money may be paid per month.
short for long period).

Total Lease amount paid to the owner if it Total Rent amount does pay to the owner if
discontinuous before the completion of lease it discontinuous before the completion of
period. rent period.

Er. Anup U. Nagpure Contact 9096985587

Valuation

Ground Rent:
 When land only is given on lease for a construction building or any other use by the
lessee, the periodic payment the lessee under the covenants of the lease is called
“Ground Rent”
The ground rent is of two kinds
 Secured Ground Rent: if under the lease agreement the lessee is required to construct a
building on the plot, the ground rent is said to be a secured ground rent.
 Unsecured Ground Rent: when under the lease agreement the plot remain open without
any construction of the building the ground rent is said to be a unsecured ground rent.

Rack Rent:
 Where the rate reserve under and occupation lease represents the full rental value of
land and building or full annual value of the property it is known as the Rack Rate that
is market rate in all cases the valuation by the rental method it is necessary to know the
Rack Rent of the property.

Nominal Rent:
 Nominal rate it is token rate of very small amount per annum mentioned in lease
documents in order to establish the relation between the landlord and a tenant or lessee.

Standard rent:
 Rent which can be lawfully charge from tenant under the relevant rent Control Act is
known as standard rate.

Concessional rent:
 When the property is let out at a Rent lower than the prevailing market trend the rent is
known as concessional rate.

Annual Gross Rent:

 It is the total amount of rent received from property during a year.

Annual Gross Net Rent:

 It is the net amount of rain deducting the outgoing from the annual gross rent.

Outgoings:
 The amount of taxes levied by local authorities State Government and other rescuing
expenses in respect of a house property such as a repair, maintenance, taxes, etc
collecting charges it is known as outgoing

Annual sinking fund:

 Sinking fund is the national fixed sum of money allocated annually at the prevailing
rate of interest to create the necessary capital for the replacement of an asset after the
economic life span of the asset is over.
OR
 A sinking fund is a fund containing money set aside or saved to pay off a debt or
bond. A company that issues debt will need to pay that debt off in the future, and the
sinking fund helps to soften the hardship of a large outlay of revenue.

Er. Anup U. Nagpure Contact 9096985587

Valuation

Capitalized value:
 The capitalized value of a property is the amount of money whose annual interest at the
highest prevailing rate of interest will be equal to the net income from the property.
 To determine the capitalized value of a property it is required to know the net income
from the property and highest prevailing rate of interest.
 Capitalized Value = Net Income X Years Purchase

Year’s Purchase:
 Year’s purchase is defined as the capital some required to be invested in order to receive
and net receive net annual income as an annuity of rupee one at a fixed rate of interest

Valuation of Building:
 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.
a) Market Approach
b) Cost Approach
c) Income Approach

Market Approach
 The market approach is a method of determining the value of an asset based on the
selling price of similar assets. It is one of three popular valuation methods, along with
the cost approach and discounted cash-flow analysis (DCF).
 Regardless of the type of asset being valued, the market approach studies recent sales
of similar assets, making adjustments for the differences between them. For example,
when appraising real estate, adjustments might be made for factors such as the square
footage of the unit, the age and location of the building, and its amenities.

Cost Approach
 It is normally used for individually designed properties are specialized properties for
which comparisons are not available for in appropriate.
 In this approach the value of the land is added to the replacement cost of a building
and other site improvements.
 There are properties in land and building which are meant for neither for investment
nor for sale in open market because of their specialized nature.
 Valuing the property on the basis of aggregate of separate cost of land structure or
improvement is known as land and building method or contractor method.

When to use
 Some properties are non-marketable in nature nor yield any income.
Eg. Police station, temple, church, masjid, etc
 The subject property hand characteristics that direct typical for the area.

Er. Anup U. Nagpure Contact 9096985587

Valuation

 The subject is a special use property.

 Adequate data available to value property component but limited data are available
to evaluate the whole property.

Income Approach
 The income approach includes any method of converting an income stream into an
indicator of market value. The income approach is also called the capitalization
approach because capitalization is the process of converting an expected income into
an indicator of market value.

Comparative Sales Approach:

 The Sales Comparison Approach to Value is an approach for estimating market value-
based assessments by comparison to the sale prices of similar properties that have sold
recently. The Sales Comparison Approach is based upon the theory that value is directly
related to the sale prices of similar properties, and the assumption that a purchaser
would not pay more to purchase a property than for comparable properties of similar
utility.
 This approach is best suited for residential and investment type properties that sell
frequently on the open market and where there are sufficient sales to use this approach.
 The sales comparison approach determines the value of a property by comparing it to
similar properties the vicinity that have been recently sold, along with proper
adjustments for land, size, amenities, time, etc. This approach to value is mainly based
on the principle of substitution.
 According to this approach, a buyer will buy a property with the cost which is not more
than the comparable substitute property. This approach assumes that an individual will
compare prices of the subject property with similar properties and will purchase the
property only when the cost is not more than the comparable.
 Data of recently sold properties that are similar to the subject property is collected. Data
of comparable may be collected from various sources that include public records, real
estate publication, real estate agent and brokers, buyers, sellers, etc. in the appraisal
report, every essential detail of comparable sales are described.
 Evaluating other, similar companies’ current valuation metrics, determined by market
prices, and applying them to the company being valued.
 The comparative method is one of the Property Valuation methods which exactly rely
on comparison. It includes comparing property values of similar properties from latest
sales figures in the market to achieve a capital value for properties and rental yield. The
prices may be lower or higher than the actual value.

Depreciation
 The loss in the value of the property caused by its use life, wear, tear and decay is called
as 'depreciation',
 The value of a building will be gradually reduced because of its use, life, wear and tear
etc, and a certain percentage of total cost may be allowed as depreciation to determine
its present value.
 Usually, a percentage of depreciation per year is allowed.

Er. Anup U. Nagpure Contact 9096985587

Valuation

Obsolescence
 When the value of property becomes less due to its out of date in style, in structure, in
design elegance etc. then it is called as Obsolescence.
 Thus, even though the property is physically sound; strong; the value of property
reduces because of changes in fashion, new inventions, improvements in design
technique; modern facilities etc.

Types of Depreciation
1. Straight line method
2. Constant percentage method
3. Sinking fund method
4. Quantity survey method

1. Straight line method

 This is one of the method useful to calculate the depreciation of the property.
 In straight line method it is considered that the property loses its value by the same
amount every year.
 A fixed amount of the original cost is deducted every year, so that at the end of the
utility period only the scrap value is left.
D = Annual Depreciation

𝐎𝐫𝐢𝐠𝐢𝐧𝐚𝐥 𝐜𝐨𝐬𝐭−𝐒𝐜𝐫𝐚𝐩 𝐯𝐚𝐥𝐮𝐞

D= 𝐋𝐢𝐟𝐞 𝐢𝐧 𝐘𝐞𝐚𝐫

2. Constant percentage method or Declining balance method

 This method is also one of the methods used to find depreciation of the property.
 In such method, it is considered that the property will lose its value by a constant
percentage of its value at the beginning of every year.
𝐒
D = 𝟏 − ( 𝐂 )^n

3. Sinking fund method

 This is also one of the methods in which depreciation of property is considered to be
equal to the annual sinking fund plus the interest on the fund for that year, which is
supposed to be invested on interest bearing investment.
 Sinking fund method is based on a well-established principle of compound interest,
however this method does consider the consumption of usefulness of the property.

4. Quantity survey method

 This is one of the most useful and widely used method in which the property is
studied in detail and loss in value owing to the physical deterioration is worked out.
 The amount spent or to be spent to modernization or important changes so as to
offset obsolescence is worked out.
s

Er. Anup U. Nagpure Contact 9096985587