Elements of Valuation

Valuation of Immovable Properties

Mr. S.M. Wandare

Assistant Professor
Department Of Civil Engineering
Walchand College Of Engineering, Sangli
Sagar.wandare@walchandsangli.Ac.In
 Value
2

 Value means worth or utility of any property, object or

thing.
 Value varies time to time and depends largely on the supply
of that particular type of property and the extent of the
demand for it.
 Cost of construction of a building may have no relation to
the value of the same.
 The value of a property within a short time may be more
than the cost of construction when there are more buyers
for that type of property and vice-versa.
 The value of product depends mainly on its utility, scarcity
and events.
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 Cost
3

 Cost means the original cost of construction and can be known

after accounting all day-to-day expenditure from the planning
stage till the construction is completed.
 The cost of an old building becomes less due to its age and
changes in fashion.
 For valuation purpose, the cost of an old building is worked out
from the present cost of construction of such a new building less
the calculated amount of loss of the building due to its wear and
tear.
 Estimate is prepared by calculating quantities of various items
from the measurements of the existing old building and
multiplied with the present unit cost of the item concerned. From
the estimated cost a calculated amount is deducted according to
the age of the building.
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 Price
4

 This is an amount worked out adding the cost of

production, interest on investment, reward to the producer
for his labour and risk.
 Thus the selling price is fixed for a commodity.
 For less demand, the selling price may have to be fixed
lower and vice-versa.

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 Essential Elements of Value
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 Utility

 Scarcity

 Demand

 Transferability

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 Broad Forces Influencing Value
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 Physical

 Social

 Economic

 Legal

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 Valuation
7

 Valuation is the art of assessing the present fair value of a

property at a standard time, valuation of anything is an
estimate of the value of that thing in terms of money.
 It only attempts at suggesting price. Yet, valuation is not an
arbitrary process. It is based on certain facts and only after
a judicious processing of such facts and indicators, we can
suggest the value of fair price of the property.
 Rise and fall in the fair price can occur in a very short space
of time.
 Therefore, all the valuations must state the date to which
the valuation relates, since time is the essence of all
valuations.
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 Purpose of Valuation
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 Purchase for investment or for occupation

 Tax fixation
 Sale
 Rent fixation
 Insurance premium
 Mortgage or securities of loans
 Compulsory acquisition
 Speculation
 Betterment charges
 Wealth tax and estate duty
 Gift tax
 Partition
 Stamp fees
 Capital gains tax
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 Income
9

Gross income
 It is the total income or receipt from all sources without
deducting the outgoings necessary for taxes, maintenance,
collection, replacement or loss of income, ground rent etc.
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, voids, sinking
fund, ground rent and income tax.
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 Income
10

Net Income
 It is the gross income less all outgoings which includes the taxes,
premiums, repairs, insurance, management and collection
charges, loss of rent, ground rent, sinking fund etc. necessary to
maintain the property in a state, to command that income.
Perpetual Income
 The income receivable for an indefinite period is known as
perpetual income.
 Provision of sinking fund for redemption of capital is not
required.
Deferred Income
 The income receivable after a lapse of certain period is termed
as deferred income.
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 Scrap Value
11

 It is the value of dismantled materials of a property at the

end of its utility period.
 When old building has outlived its useful span of life and
repairing for reuse is not viable, a certain amount can be
recovered by selling the old useful materials like bricks,
steel, wooden articles etc., minus cost of demolition of
buildings.
 The scrap value of building is usually considered as 10% of
the cost of construction.
 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.
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 Market Value
12

 Market value of a property is the value at which it can be

sold in the open market at a particular time.
 ‘In the open market’ means the property is offered for sale
by advertising in newspapers and all necessary steps are
adopted so that every person who desires to purchase the
same can make an offer.
 The owner willing and not obliged to sell might reasonably
expect the price from a willing purchaser with whom he was
bargaining for sale.
 So, market value must be free from forced value or
sentimental value.

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 Book Value
13

 It 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 the limit of scrap
value i.e. up to its utility period.
 Book value is applicable on building and movable
properties but not on land.
 Book value is required in the accounts book of a company
to show the assets.
 A market value higher than the book value indicates profit
for the seller.
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 Assessed Value
14

 It is the value of a property recorded in the register of a

municipality in order to determine the amount of municipal
taxes to be collected from the owner of the property.
 Generally the assessed value is determined from the gross
annual rent at which the land or building might at the time
of assessment be reasonably expected to let from year to
year, less in the case of building, an allowance of ten
percent for the cost of repairs and for all other expertise's
necessary to maintain the building.
 In case, the gross annual rent of a property can not be easily
estimated, then an amount of 5% of the estimated cost of
the property shall be considered reasonable for valuation.
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 Distressed Value
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 In case a property is sold at a lower price than the market value at

that time, it is said to have a distress value.
 Distress value may be due to following reasons:
 Financial difficulties of the seller
 Court decree
 Insufficient knowledge of the seller
 Quarrel among partners
 Panic due to war or riots
 Property in need of major repair, is also considered distressed.
 A building requiring huge money in repairs to be salable could
have a distress value far below that of comparable nearby
homes.
 Owners with properties in need of a great deal of repair
sometimes discount list prices to attract buyers.
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 Forced Sale Value
16

 Forced sale value is an estimate of the gross amount that

the tangible assets would fetch when the seller is forced to
sell the assets compulsorily without proper marketing
time / exposure time.
 There is an urgency to sell and the seller does not have
control of sale process (generally sales by the banks/
courts/receivers, etc.).

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 Liquidation Value-Orderly
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 It is an estimate of the price that would be realized by

putting up the property for auction sale in the market.
 The sale under public auction is carried out after proper
advertisement and due publicity. Such auction may be
under an order of the Court.

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 Potential Value
18

 When a property is capable of fetching more return due to

its alternative use or by advantageous planning or by
providing some development works, such inherent value of
a property is known as potential value.

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 Hope Value
19

 Sometimes property owners expect some likely changes in

Government or Municipal policies and such likely sellers,
expect value of the property to rise in the near future.
 likely increase in F.S.I. rules etc. are instances of Hope
Value.

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 Monopoly Value
20

 Certain property may command an excellent situation in

highly developed area or enjoying unique advantages not
enjoyed by any other property.
 Due to prime location and absence of supply of any other
similar property in the vicinity, the said property will be
sold at premium i.e. at a fancy price.
 This is the monopoly value or a special value due to its
unusual and peculiar advantages.

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 Mortgage Value
21

 It is an estimate of value of a property offered as a security

by a borrower to the bank/financial institution for loan
advanced.
 Each financial authority has its own regulations about
safety margins etc. to arrive at the safe mortgage value of
the property; in case of a bank having safety margin of 25%;
mortgage value works out to 75% of market value.

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 Sentimental Value
22

 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.

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 Speculative Value
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 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 without spending any
further amount towards its development.
 Speculations in agricultural land, ripe for building development
will cause value to rise, even before roads are made and services
installed
 The value at which he purchases the property is called as
Speculation Value.
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 Special Value
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This is also a personal value because it is a value to a

particular buyer or seller.
However, here sale or purchase is not governed by sentiments
of individual but is governed by personal reasons of an
individual.
A purchaser may pay special price for a flat only because it is
close to his work place as well as close to his children’s school.
Other competing purchasers have no such criteria in mind.
An entrepreneur may be willing to pay higher price than
prevailing in market for an open plot of land next to his
factory because said extra land would enable him to expand
his rapidly developing industry in most profitable manner.
Other buyers have no such consideration.
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 Accommodation Value
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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 strips can only be sold to the adjacent land
owners who may be offering only low price. This
value is called as Accommodation Value.
In some cases, this price could be more than the
market value due to its importance or convenience
for adjacent land owners.

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 Occupation Value
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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 probable will not affect
demand of the property because a particular
standard of such accommodation is regarded as a
necessity.

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 Capitalized Value
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 It is the sum or amount, the interest on which at the highest

prevailing rate would be equal to the net income out of the
property.
 If a property produce a net income of Rs. 40000/- per
annum and a purchaser desires 8% return on his/her capital
according to the highest prevailing rate he/she should pay
Rs. 40000x (100/8) = Rs. 500000/- maximum for the
property. This Rs. 500000/- is the capitalized value of the
property.
 The multiplier of the net annual return or rent (in this case
100/8) to obtain the capital value is known as the Year’s
Purchase.
Capitalized Value = Net Annual Return x Year’s Purchase
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 Factors affecting value of a property
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Forces of demand and supply

Rise in population
Cost of construction
The imposition of control of prices of building
materials
Improvement by public schemes

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