VALUATION

Dr. Subhash C. Yaragal

Professor, Department of Civil Engg.
NITK, Surathkal
1
 VALUE

For classification, all the properties may broadly be

divided into two categories, namely land, and property
other than land.

Land is an immovable property and it is referred to as

real estate or real property or realty. A property other
than land is known as personal property or personalty
or chattel.

The distinction between real estate and personal property

is not very sharp. Everything firmly fixed to the soil is
to be treated as land e.g., foundations, buildings, trees,
etc. But things which can easily be moved are to be
treated as chattels. Thus building materials are chattels
till they are not incorporated in the structures standing
firmly on the soil. They become realty when used in the
construction of such structures. Ornaments, furniture,
etc are other examples of personal property.

Valuation of personal property or personalty or chattel is

based on principles of economics and such valuation is
of more importance to economists rather than engineers
or valuers.
2
Valuation of land or real estate or real property or realty is
rather difficult because of the nature of property
involved in such valuation. Every real estate has some
peculiarities of its own and the valuer is required to apply
his mind carefully to arrive at the fair and reasonable
value of the property under consideration. It is for this
reason that valuation of real estates is sometimes
referred to as an art rather than a science. In fact,
valuation is a mixture of both, namely, science and art.
In some cases, the scientific content will be greater while
in other cases, the process will entirely be an art.
However, there are certain well-established principles
and procedures on which the science of valuation of
real estates rests.

COST, PRICE, VALUE AND VALUATION

Cost: is the actual amount incurred in producing a

commodity which possesses some value. It is also used to
find out loss of value of the property due to wear and tear.
Such loss of value is called depreciation. Charge
represented directly in the commodity produced are called
prime costs and other charges like rent, management,
salaries and services, depreciation etc. are called
supplementary costs.
3
Price: Is used to indicate the cost of the commodity plus
profit of the manufacturer. As labour and capital are
required to produce a commodity, the manufacturer is
entitled to have some reward over and above the cost
of commodity. The price of a commodity is determined
by the supply and demand conditions prevailing in the
market for that particular commodity and as such, a
commodity may be sold above or below its cost of
production.

Value: In economics, the terms value is defined as the

corresponding exchange of one commodity into any
other commodity, e.g., the value of a motor car may be
expressed in terms of so many cycles or so many kg of
wheat etc.
There is a very thin distinction between the terms price
and value. A price indicates a fact that has already
occurred in practice and a value indicates the estimation
of a probable price of commodity.
4
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 the fair prices. Yet,
valuation is not an arbitrary process. It is based on
certain facts and only after a judicious processing of such
facts and indications, we can suggest the value or fair
price of the property.
Rises and falls at the fair price can occur in a very short
time. It follows therefore that all valuation must
clearly state the date to which the valuation relates,
since time is the essence of all valuations.

PURPOSES OF VALUATION

In order to have an orderly process of valuation, it is

necessary to understand the purpose for which valuation
is required. It will also assist in organizing the
observations of many factors and collection of suitable
data influencing the final result. The following are the
main purposes of valuation,

(1) Betterment charges (2) Balance sheet (3) Buying and

selling of the properties (4) compulsory acquisition (5)
Court fees (6) Insurance (7) Reinstatement (8) Rent
determination (9) Security of loans (10) Taxation (11)
Wealth tax and estate duty and (12) Gift tax
5
(1) Betterment charges: When the property comes under
some town planning scheme of the area, its value increase
and consequently, the owner of the property is required to
pay additional tax, known as betterment charge. It
becomes, therefore, necessary for the owner of the
property to know the value of his property before and
after the completion of town planning scheme.

(2) Balance sheet: Sometimes a company requires

valuation of its premises for the purpose of showing them
in the balance-sheet. In such cases, the premises are to be
valued as going concerns and due attention should be paid
to prevailing rules and regulations regarding the conduct
of business activities in the property to be valued.

(3) Buying and selling of the properties: When it is

required to buy or sell a property, valuation of the
concerned property becomes essential. In many cases, the
buyer or seller is acting as a trustee, guardian, partner of
firm or in such other capacity and he wants the valuer’s
report or certificate to protect himself for the decision he
6
is making for the purchase or sale of the real property.
(4) Compulsory acquisition: Sometimes a property is
acquired by law for some public or semi-public purpose.
In such a case the affected party is to be paid a suitable
amount for the property thus acquired. The amount of
compensation is to be determined by the process of
valuation. The owner whose property is acquired shall be
paid compensation as per Land Acquisition Act, 1894. In
addition to the market value of the property the law
provides for an extra payment of 15% as solatium to
compensate for owner’s sentimental feelings and
inconveniences caused to him due to acquisition.

(5) Court fees: When a case has to be filed with respect

to a real estate, it becomes necessary to affix stamp of
suitable amount. This amount is worked out after arriving
at the value of property under dispute.

(6) Insurance: For the purpose of taking out an insurance

policy of the property, the owner desires to know the
replacement value of the property, in case of an accident.
In this case, the value of land is excluded. Thus the land
value of the property is irrelevant when it is to valued for
insurance purpose. As the land value is not included, it
will usually be less than its fair market value. But if it is
made of expensive materials, its building value for
insurance purpose may work out even higher than its fair
market value.
7
(7) Reinstatement: The valuation of property becomes
essential when the owner desires to reinstate his property.
The possible use of old materials and requirement of new
materials should be taken into account while valuing the
property for this purpose.

(8) Rent determination: In order to determine the

probable rent which can be realized from a particular
property, the valuation of concerned property has to be
carried out. The main aim for such valuation is to justify
the investment in the property, i.e., a certain percentage
on investment in land and a certain percentage on
investment in building. The process is usually required
for the purpose of fixation of standard rent or fair rent
under the provisions of Rent Restriction Act.

(9) Security of loans: When loans are to be granted

against a property, the probable value of the property is to
be worked out by the process of valuation. It is also
referred to as valuation for mortgage purposes. Thus the
lender of money claims a right to recover the money
given on loan from the sale of the property in case of 8
default of the borrower.
(10) Taxation: In order to prepare a tax schedule, the
valuation of the property becomes essential. For working
out local taxes, the process of rating is to be adopted. For
calculating government taxes such as estate duty, wealth
tax, capital-gain tax and gift tax, the market value of the
property on the material date of valuation is to be fixed.

(11) Wealth tax and estate duty: Government fixes up a

minimum value of a property or estate above which
wealth tax or estate duty shall have to be paid by the
owner of the property.

(12) Gift tax: When a property is gifted, valuation of the

gifted property is necessary to pay gift tax to the
government by the person to whom the property has been
gifted.
9
QUALIFICATIONS AND FUNCTIONS OF A
VALUER

A valuer is an expert who can work out the market value

of property based on scientific analysis and instances of
sales. A good valuer is an engineer or architect who must
possess sound knowledge of the following subjects:

(1) Estimating and costing (2) Surveying and leveling (3)

Planning and designing (4) Experience in construction
works (5) Building bye laws of the local bodies (6) Law
of easements (7) Law of contacts (8) Land acquisition act
and town planning act (9) Arbitration (10) Fire insurance
(11) Central and local government taxation (12) Money
market and rate of interest (13) Zonal importance of land
and buildings and (14) Writing reports.

The function of a valuer is to determine the market value

of a property in order to help his client and also the courts
when required to do the valuation for the same.
10
DIFFERENT FORMS OF VALUE

Following are the different terms or names which are used

in connection with the value of a property:

(1) Accommodation value (2) Annual value (3) Book

value (4) Distress value (5) Market value (6) Monopoly
value (7) Potential value (8) Replacement value (9)
Salvage value (10) Scrap value (11) Sentimental value
(12) Speculative value (13) Reversionary value and (14)
Occupation value

(1) Accommodation value: The value of the surrounding

agricultural land of a city which is expanding
considerably will be more if the land is converted into
accommodation land after obtaining approval from the
competent authority. Besides this owners of the adjoining
plot of land may offer more price for owner’s
accommodation purpose or utilize the said land most
beneficially, and the price will be naturally more than the
market value for ordinary land and is known as
11
accommodation value.
(2) Annual value: The local authority has to decide the
annual value of the property so that taxes can be
calculated on that basis.

(3) Book value: Is defined as the value of the property

shown in the account book in that particular year, i.e., the
original cost less the total depreciation till that year. Thus
the book value of a property gradually reduces at a
constant amount year after year up to limit of scrap value
i.e., up to its utility period. Applicable to buildings and
movable properties but not on land. It is also required in
the accounts books of a company to show the assets and
to determine the reserved price for court sale.

(4) Distress value: In case a property is sold at a price

lower than the market value at that time, it is said to have
distress value. It may arise due to (i) Financial difficulties
of the seller, (ii) Court decree, (iii) Insufficient knowledge
of the seller, (iv) Quarrel among partners and (v) Panic
due to war or riots or civil commotion.

(5) Market value: Is the value at which it can be sold in

the open market at a particular time. Open market implies
that all efforts are made to advertise the sale, so that every
person who desires to purchase the same can make an
offer.
12
(6) Monopoly value: In case land is scarce, little
remaining for sale or certain properties possess special
advantages with respect to adjoining property due to its
location, frontage, size, shape , the owner may demand
his own fancy price. Such value of the property is known
as monopoly value.

(7) Potential value: When a property is capable of

fetching more return due to its alternative case or by
advantageous planning or by providing some
development works, such inherent value of the property is
known as potential value.

(8) Replacement value: The cost to be incurred to

replace the property, either fully or in part , at the
prevailing market rates for labor and materials, is known
as replacement value.

(9) Salvage value: It is value of built up property at the

end of its useful life without being dismantled. This is
generally accounted by deducting the depreciation from
13
its new cost.
(10) Scrap value: Is the value of the dismantled
materials of a property at the end of its utility period, and
absolutely useless except for sale as scrap. The scrap
value of a building is usually considered as 10 percent of
the cost of construction. The scrap value is also known as
junk value or demolition value. On rare occasions scrap
value may be zero or even negative if the cost of
dismantling or removal becomes equal or more than the
scrap value.

(11) Sentimental value: When a property is sold or

purchased at a higher value than the market value due to
playing of sentiments in the mind of the owner or the
purchaser is known as sentimental value. This arises due
to (i) The owner is so much attached that he demands
fancy price; (ii) The situation and class of the property
may suit a prospective purchaser. It may be ideal for his
purpose and may have a special value to him (iii) If a
property is for sale and two prospective purchasers are
determined to out bid each other, the selling price shall
definitely be higher than the market value. 14
(12) Speculative value: Speculation in agricultural land,
ripe for building development, will cause values to rise,
even before roads are made and services installed. A
proposal to construct a water line or to construct a
national highway or the like in an undeveloped area will
cause a rise in value. Speculators purchase such
properties at low price and then sell it at higher price a
little later, which is called as speculative value.

(13) Reversionary value: Reversion means right in

possession for the property at the end of the terms granted
to tenant or the lessee. Present value of an amount
deferred for a certain period at a fixed rate of interest is
known as reversion value.

Reversionary value of land: Is the present calculated

full value of open after demolishing all existing structures
obtainable after a specified period is over. A landlord
will come back into possession from leasehold property
when the lease expires. The period from the date of lease
to the date of taking possession after expiry of the lease is
15
known as reversion.
(14) Occupation value: When the purchasers are
attracted to own the property for occupying for their
personal uses which is regarded as a necessity and no
satisfactory substitutes exist then this is known as
occupation value. Thus, an increase in the price of living
accommodation would probably not result in any market
contraction in demand because a particular standard of
such accommodation is regarded as a necessity.

Sl. Scrap value Salvage value

No
1 This is the dismantled sale This is the estimated value of an
value of materials of an asset asset as a whole without
at the end of its useful life. dismantling at the end of its useful
life.
2 Scrap value is counted in the Ordinarily the salvage value factor
calculation of depreciation of in the calculation of depreciation
a property at the end of the is omitted by accounting scrap
useful life and usually this is value.
considered 10% of the cost of
structure or on lump-sum
basis.
3 Scrap value of an asset is Salvage value deposition may take
merely sale of scrap and has the form of a sale of the asset to a
limitation. purchaser who will continue to use
it for the function for which it was
originally designed. In this case
salvage value dominates scrap
value in the calculation of
depreciation.
4 Scrap value is not counted as There are times when this is a
a minus quantity. minus quantity.
16
Differences between market and book value
Sl. Market value Book value
No
1 The value is fixed by The value is fixed by the rate
purchaser of depreciation
2 The value may be higher The value cannot be higher
during subsequent years during the subsequent year
due to increase of price even due to increase of price
index index
3 The value may be constant The value cannot be constant,
for a period but there is a gradual fall.
4 This is applicable to any This is not applicable in case
type of property of land or metal articles like
steel, copper, gold etc.
5 Market value is considered Is considered for accounts
for valuation book of a company
6 This depends on forces of Is not variable due to its
demand and supply, demand and supply or
development of the area development of the area.
etc.

A market value, higher than the book value, indicates

profit for the seller. For an example the book value of a
motor car after its useful life may show only the cost of
scrap value or 10% of the original cost. But due to
increase of price index and sound maintenance, the
market value of the car may be more than the book value
or even more than the cost at which this was originally
purchased. This is a case of profit for the seller. 17
Factors affecting valuation

1. Changes in building technology: The improved

building techniques will certainly result in changes in
value. However adoption of such techniques will
certainly result in changes in value.

2. Changes in fashion and taste: Many people desire to

be up-to-date with the prevailing fashion and taste, and
this would certainly affect the value of the properties. For
example, properties that have concealed wiring are
preferred to those with surface electric wiring.

3. Changes in proportion of single people to married

people: It is quite evident that different types of
accommodation will be required for single people and
married couples. Change in this ratio would bring about a
change in value of the respective properties.

4. Changes in quality of area: If a particular pocket of

city assumes the status of fashionable or modern area, the
values will go up in such fashionable area. Similarly a
town or a city may also attain such a status due to
happening of certain event. 18
5. Changes in the age distribution of the population:
For example, if at a particular point of time, the majority
of the population is say between the age group of below
30 years, there is likely to be more demand for flats or
multi-storey building.

6. Design of property: The overall design of property

may also affect the values of properties. However
unfashionable designs may become fashionable or
fashionable designs of one area may prove to be
unfashionable designs for other areas.

7. Means of communications: The transport facilities

have significant effect on the value of the property. Any
improvement or deterioration in the means of
communication will have considerable effect on the
values of properties which either benefit or suffer as a
result of change.

8. Migration tendencies: Due to sudden

industrialization, there is heavy rush of people in the city
and hence changes in property values have taken more
rapidly with the corresponding dullness in the
surrounding villages. 19
9. Money supply: If money can be borrowed on easy
terms for house purchase, there will be competition
among potential purchasers which may result in the
sudden increase of property values otherwise there will be
sudden fall in property values.

10. Planning control: The control of local authority over

the planning aspect of the properties has a greater effect
on property values than any other single factor or possibly
than all other factors combined. For instance, if the
planning authority of a locality decides to convert a
particular residential zone into a commercial zone, there
will be sudden shooting up of the values in that area.
Similarly, if the green belt surrounding the city is
removed, the land values of properties in green belt will
suddenly rise because such lands can easily be converted
to non-agriculture use from agriculture use.

11. Population strength: Other things being equal, the

demand for properties will increase, if there is sudden
increase of population and conversely, the demand for
properties will decrease, if there is sudden decrease of
population. Similarly if there is migration of population
from one area to the other, the values will usually go
down in the area which is vacated and they will rise
where settlement is made. 20
12. Rent control act: Value of a property is calculated
from its probable income through rent. But rental value
of a tenanted property in areas subject to rent control act
may not reflect the value of a similar property
unencumbered by tenancy as rents are artificially freezed
while the price of land, labor and building materials have
been rising continuously. This may cause a slump in
property values.

13. Rent restriction acts: In big cities like Mumbai,

Calcutta, Chennai and Delhi the fixation of the rent which
an owner is expected to charge from the tenant is
governed by rent restriction acts.

Outgoings

Outgoings are the expenses to be made by virtue of

being in possession of the property and also the
expenses of maintaining the property. Outgoings may
be classified under the different heads of taxes, repairs,
management and collection charges, insurance premiums,
loss of rent.

(i) Taxes: These include municipal taxes. The rates that

are payable for occupiers share and for owner’s share of
taxes are calculated on the basis of “annual rental value”
of a property after deducting an amount for repairs etc.
(usually 10% of the rent for repairs). 21
(ii) Repairs: An amount is provided for annual repairs of
buildings to keep the same in a sound condition although
actual repairs are taken in hand periodically say at 3 to 6
years intervals.

(iii) Management and collection charges: An agent

collects rents for big/large buildings and if the estate is
large he will also manage the estate. Usually the charge
vary from 4 to 5% of gross rent, which includes
investigation of petty complaints and supervising petty
repairs.

(iv) Insurance: The amount of actual insurance premium

is considered on the outgoing expense.

(v) Loss of rent: Part of a property may remain vacant

for some period and will not fetch any rent for that period.
The average loss of this part in three years may be
considered as a guide to calculate the yearly loss of rent.

(vi) Income tax:

22
(vii) Sinking fund: etc.
Amortization
This is accumulation of sinking fund at compound interest
for payment of debt.

Annuity
Is the annual periodic payments for repayments of the
capital amount invested by a party. Annuity is either paid
at the beginning or at the end of each period of
installment.

If an annuity is payable at the end of each period and

payments are continued for certain fixed number of
periods it is known as Annuity certain.

When the annuity is payable at the beginning of each

period of year and payments are continued for certain
fixed number of periods it is known as Annuity due.

When annuity is receivable for an indefinite period, it is

known as Perpetual Annuity.

When the annuity commences after a few years from the

actual date of the capital investment it is known as
Deferred annuity. 23
The importance of annuity is to calculate the yearly or
periodic installment for loan or mortgage installment.
An amount shall be deposited in every year (or period) so
as to accumulate or redeem Re. 1 after a specified number
of years n on single rate of interest i. Each installment
includes a fund to the initial cost i.e., sinking fund
denoted by Ic and interest on outstanding annual balance
denoted by i.

Therefore, Yearly installment co-efficient = i + Ic

Capital cost
Is the total cost of construction including land, or the
original total amount required to possess a property.

Year’s purchase
Is defined as the capital sum required to be invested in
order to receive an annuity of Rs. 1 at certain rate of
interest.

Year’s purchase = 100/rate of interest = 100/i 24

Capitalized value
The capitalized value of a property is the sum or amount,
the interest on which at the prevailing rate would be equal
to the net income out of the property.

To determine the capitalized value of a property, it is

required to know the net income from the property and
the highest prevailing rate of interest.

If a property produce a net income of Rs. 40,000 per

annum and a purchaser desires 8% return on his capital
according to the highest prevailing rate, he should pay Rs.
40,000 x (100/8) = Rs. 5,00,000 maximum for the
property. Five lakh is the capitalized value of the
property.

The multiplier of the net annual return or rent (here 100/8)

to obtain the capital value is known as year’s purchase.

Capitalized value = Net annual return x Year’s purchase

25
A building fetches a gross annual income of Rs. 50,000
total annual outgoings is Rs. 7500. Workout the
capitalized value of the building, if rate of interest is 5%
per annum.

Net income = Gross income – Outgoings

= 50,000 – 7500 = Rs. 42,500
Years Purchase = 100/3 = 20
Capitalized value of property = Net income  Y.P
= 42500  20 = Rs, 8,50,000
PROBLEMS ON VALUE
1) A person has purchased an old building at a cost of
Rs, 90,000. On the basis that the cost of land is Rs. 50,000
and the cost of building structure is Rs, 40,000.
Considering the future life of the building structure be
20years, workout the amount of annual sinking fund at
4% interest when salvage value is 10% of the cost of
building structure.
Solution:
Salvage value = 10% cost of building structure
= 0.1  40,000 = 4,000
 Total amount of sinking fund for re-equipment of Rs.
30,000 in 20 years
Si 36, 000  0.04
I 
(1  i)  1 (1  0.04)  1
n 20
= Rs, 1,209.60
 Annual installment for sinking fund for a period of 20
years = 1,209.60 26
1) Workout the value of year’s purchase for an old
building if its future life is 15 years and the rate of interest
is 7% in capital and 4% for sinking fund.
Solution:
Year’s purchase, Y.P 
1
I p  Ic

Ip = 0.07 on capital
i 0.04
Sinking fund coefficient = Ic = 
(1  i)  1 (1  0.04)15  1
n
 0.05

Year’s purchase = 1
0.07  0.05
 8.33

2) A lease hold property is to produce a net income of

Rs, 12,000 per annum for the next 60 years. What is the
value of property? Assume that the land lord desires a
return of 6% on his capital & the sinking fund to replace
the capital is also to accurate at 6%. What will be the
value of the property is the rate of interest for redemption
of capital is 3%.
Solution:
1
Y.P 
I p  Ic
i 0.06
Ic    0.0019
(1  i)  1 (1.06)60  1
n

1
Y.P   16.155
0.06  0.0019
 Value of the property = Net income per annum  Y.P
= 12,000  16.155 = Rs. 1,93,860 27
When the interest for redemption of capital is 3% then
coefficient of sinking fund  (1  i)i 1  (1.03)
n
0.03
60
1
 0.0061

1 1
Y.P   15.129
Ip  Ic 0.06  0.0061

 Value of property = 12,000  15.129 = Rs. 1,81,548

1) A loan amounting Rs 40 lakhs has been granted by

L.I.C to municipality for implementation of water supply
scheme. The loan will be re-paid by way of annuity @
8.5% interest P.A in 22 equal instalment from the year of
commissioning of the scheme. Find out the amount of
annual installment of repayment.
Solution:
Each installment includes a fund to the initial cost i.e
sinking fund denoted by Ic and Interest on outstanding
annual balance denoted by …
 Yearly instalment Co eff = i  I c

i i(1  i) n
i 
(1  i)  1 (1  i) n  1
n

Applicable for single rate interest

0.085(1  0.085)22 0.85  6
   0.102
(1  0.085)22  1 6 1
Now LIC loan = Rs, 40,00,000
 Annual instalment of repayment = 0.102  40,00,000
= Rs, 4,08,000
28
Hence the deferred period from the date of loan to the
date of re-payment of amount of annual installment is
considered exempted

1) A concrete mixer was purchased at Rs, 8,000.

Assuming salvage value of Rs, 1,000 after 5 years.
Calculate depreciation for each year adopting (a) Straight
line method (b) Constant percentage method and, (c)
sinking fund method considering 6% interest
Solution:
Straight line method:
C  Si 8000  1000
Annual depreciation = D = n

5
 1400

Age in years Depreciation for that year Book value

0 0 8000
1 1400 6600
2 1400 5200
3 1400 3800
4 1400 2400
5 1400 1000

Constant percentage method:

S 1000 15
p  1 ( i )  1 ( )  0.34
C 8000
Value of property at the end of 1 year
= c(1  0.34)  8000  0.66  5280
 Depreciation = 8000-5280 = 2720 29
Age in years Depreciation upto for that year Book value
0 0.0 8000
1 2720 5280
2 1795 3485
3 1185 2300
4 783 1517
5 517 1000

Sinking fund method:

Annual sinking fund with 6% interest, salvage value =
1000
 1000)  0.06
Will be = (8000
(1  0.06)  1 5
 Rs.1240

Calculation for interest

For investment of Rs. 1 at the end of each year at the rate
of interest i in sinking fund for a period of n years
amounts to (1  i)i  1
n

For 2nd Yr at 1240/year amounts to, 1240  (1  0.06) 1

2
 2554.4
0.06
 Interest  2551.40  2 1240  74.40
1
For 3rd year at 1240/year amounts to, 1240  (1.06)
3
 3947.60
0.06
Interest  3947.6  31240  74.40  153.2
1
For 4th year at 1240/year amounts to, 1240  (1.06)
4
 5424.52
0.06
 Interest  5424.52  4 1240  74.40 153.2  236.9
1
For 5th year at 1240/year amounts 1240  (1.06)
5
 6990
0.06
 Interest  6990  5 1240  74.40 153.20  236.9  325.5 30
 Annual
Age in Interest in Book
sinking Depreciation
years sinking fund value
fund
0 0 0 0 8000
1 1240 0 1240 6760
2 1240 74.40 1314.4 5445.6
3 1240 153.20 1393.2 4052.4
4 1240 236.90 1476.9 2575.5
5 1240 325.50 1565.50 1010.0

1) A plot of land was purchased at Rs, 1,00,000, 10

years back immediately after purchase a sum of Rs,
20,000 was spent for constructing a boundary wall. The
annual cost of maintenance & management of the
property has been Rs. 3000 per annum since purchase.
Estimate the present value of the land allowing 6%
compound interest P.A. The land remained unproductive
since the time of purchase.
Solution:
Total first investment = 1,00,000 + 20,000 = 1,20,000
This amount has been unproductive for a period of 10
years. Has the investor, invested the amount for upto a
period of 10years at 6% compound interest, the amount he
could get should be added with total investment for
valuation of property.
Amount = 1, 20,00(1  0.06)
10

= Rs. 2,14,920 31
The investment for annual maintenance at 6% amounts to,
for Rs 3000 P.A for 10 years at 6% compound interest
= 3000  (1  0.06) 110
 3000 13811  39543
0.06
 Estimated present value = 214920 + 39543 = Rs,
254463

1) What is the present value of a net income of Rs, 2000

per month for a period of 20 years but will commence
after the development period of 3 years? The owner 10%
interest per annum on his capital and 5% interest per
annum on investment of sinking fund.
Solution:
Net income per annum = 2000  12 = 24000
Y.P for 20 years @ 10% on capital & 5% on sinking fund
0.05
Ic   0.0302
(1  0.05)20  1
1
Y.P for 20 years = 0.10  0.0302
 7.680

Present value of Rs.1 receivable after 3 years when the

income commences @ 10% on capital
1
  0.7513
(1  0.10)3
 Y.P for 20 years deferred by 3 years = 7680  0.7513 =
5.77
Present value of Rs. 24,000 P.A for a period of 20 years
receivable after 3 years = 24,000 x 5.77
= 1,38,480
32
1) What is the value of a plot of land which has been
leased out on a ground rent of Rs. 1200 Per annum for a
period of 19 years unexpired after which the lessor will
receive the ground rent of 5000 per annum in perpetuity
rate of interest is 6% (Y.P @ 6% for 19 years at 11.158.
Solution:
For unexpired years:
Lesser gets an income of Rs. 1200 p.a for a period of 19
years
Y.P @ 6% for 19 years = 11.158
Value = 1200 x 11.158 = Rs, 13,389.60
For income after 19 years
Value = Net income  years purchase in perpetuity
deferred for 19 years
Y.P in perpetuity = 100/6 = 16.667
Deduct Y.P for 19 years = 11.158
 Y.P in perpetuity @ 6% deferred for 19 years = 16.667
– 11.158 = 5.509
 Value = 5000  5509 = 27545
 Value of plot of land = 13389.6 + 27545 = 40934
Value rent for period after the terms: Term means the
period for which the rate is fixed. The period following
the term is called the reversion. When the future rent at
the end of the term can be ascertained after considering t 33
METHODS OF VALUATION

The following are the different methods of valuation:

1. Rental method of valuation
2. Direct comparison with the capital value
3. Valuation based on profit
4. Valuation based on cost
5. Development method of valuation

1. Rental method of valuation

In this method the net rental income is calculated after
deducting all outgoings from the gross rent and year’s
purchase is calculated after adopting the current bank
interest. Then valuation of the property is worked out by
multiplying the net rental income by year’s purchase.

2. Direct comparison with the capital value

This method may be adopted when the rental value is not
available from the property concerned. In such cases the
capitalized value of the property is fixed by direct
comparison with capitalized value of similar property in
34
the locality.
3. Valuation based on profit
This method is suitable for buildings like hotels, cinemas,
theaters, shops, etc., for which the capitalized value
depends on the profit. In such cases the net income is
worked out after deducting from gross income all
outgoings. The net profit is multiplied by Y.P to get the
capitalized value.

4. Valuation based on cost

In this method the actual cost incurred in constructing the
building or in possessing the property is taken as basis to
determining the value of the property.

5. Development method of valuation

This method of valuation is used for the properties which
are in the undeveloped stage or partly developed & partly
undeveloped stage. The valuation in such case depend on
initial investment, development cost and expected profit. 35
Land and building method of valuation

(i) Comparative method

Is the simplest and most direct method of valuation is
direct comparison. Is based on the instances of other
sales with dates of open comparative like lands in the
neighborhood. So there are two factors on which the
method is based (a) Sales price and (b) Similar
neighborhood lands.

Value of a particular plot may be adjusted with sales of

somewhat similar plots by analysis. The following
factors such as situation, shape, frontage and depth, return
frontage, vistas (second road joining the first road at the
front of a plot of a land) and nature of soil.

(ii) Belting method

Has a great bearing on its road frontage. Frontage land
has a greater value than the back land. So in order to find
out a more realistic value of land the entire plot is divided
into a number of convenient strips by lines parallel to the
centerline of the road.

Each strip of land is known as belt. The depth of front

belt is judiciously ascertained on the consideration to
what depth of the land does the maximum value extend.
Then a relationship regarding the value and depth of each
belt to the front belt is fixed up. Ascertaining a rate per 36
square meter of land for the first belt, the value of each
belt is worked out.

Normally the plot of land is divided into three belts. The

depth of the second belt is taken as 1.5 times that of the
front belt and the depth of the third belt at 1.5 times the
depth of the second belt or depth remaining after second
belt is considered as the depth of third belt. The value of
the front belt is maximum. The second belt is valued at
two-third rate of first belt and the third belt is valued at
half the rate of the first belt. Value of recessed land not
lying within the perpendicular drawn on belting lines
from the end points is valued at three-fourth value in that
particular belt of land. The courts usually consider this
method of land valuation.

37
38