FUNDAMENTALS OF

VALUATION
(OF IMMOVABLE PROPERTIES)
Presented by

Er. N.K. RAJKUMAR

B.E. (Civil), M.I.E, F.I.V, M.Sc (Val),
MRICS
Chartered Engineer and Govt. Regd. Valuer
# 6, 2nd Cross, Ashokanagara, Tumkur–572102, Karnataka.
Tel: 0816 – 2251616, Cell: 9844066471
E-mail: nkrajkumar.valuer.tmk@gmail.com
Fundamentals of Valuation:

Valuation of the property is very old concept, right from

civilization of mankind, man has learnt the art of developing
land by erecting small huts for shelter.

This development of community settlements also gave rise to

system of exchange of commodities between different
community groups. This exchange System is called as Barter
system.

This exchange of Commodity (goods) was evaluated in terms of

money. Ultimate settled price of the commodity is between a
willing buyer and willing seller (value) Price is nearly close to
estimated value. This is the exact process of valuation.
Factors affecting the Market Value:-

The four factors that affecting open market value are as follows:
1. Economic aspects (Developments, Recession, LIG, MIG, HIG, Etc.,)
2. Social aspects (Health, Education, Religious, Recreation, Etc.,)
3. Legal Aspects (Free hold or Lease deed, TDR Concept
& Govt. polices, Etc.,)
4. Technical aspects : (Maps, FSI, width, Coverage, Zoning Rules, Etc.,)

Valuation is a multidisciplinary subject of economic law, building

construction, study of human behavior, social customs and Govt.
Policy with legal aspects.

It is an art of estimating the value of the property based on

scientific data (with arithmetic calculation).
COST, PRICE & VALUE:-

Cost: Cost is actual expenditure in terms of money incurred on

both materials & labour of assets.

Price: It is an amount paid and expressed interns of money for

acquiring ownership rights or interest in the asset.
It is combination of cost & profit of an asset.

Value :
Value is settled price of the commodity in between a willing
buyer and willing seller.
Value is an estimate and not actual fact.
Value is mainly persons specific concept.

Ex:- As per justice hardley, The value is an estimate of price as it

ought to be.
Definition of Market Value as per International Valuation
Standard Committee (IVSC):-

Market value is estimated amount for which an asset should

exchange on the date of valuation between willing buyer and
willing seller, in an arm length transaction after properly
marketing, where in parties had each acted acknowledgeably,
prudently and without compulsion.

Arms Length Translation:-

It means that, the transaction between related buyers and

sellers only. And not between close friends that transaction
should be ignored. The sentimental OR Forced sale condition are
to be ignored. And both should have basic market idea and
ordinary prudence & the transaction with normal business
practice.
Qualifications and Functions of a Valuer:

A Valuer is an expert who can work out the market value of a

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:-
a) Estimating and Costing.
b) Surveying and Leveling.
c) Planning and Designing.
d) Experience in Construction Works.
e) Building Bye–laws of the Local Bodies.
f) Law of Easements.
g) Law of Contracts & Arbitration.
h) Land Acquisition and Town Planning Act.
i) Fire Insurance
j) Central and Local Government’s Taxation Rules
k) Money Market and Rate of Interest
l) Zonal Importance of Land and Buildings
m) Skill of Writing Reports.
Purpose of Valuation

1) Purchase for Investment or For Occupation:- For investment

a property is purchased and for this valuation of the property
becomes necessary. Such valuation shall depend upon the
possibility of increase in cost. Thus for occupation purpose
purchase of property is done and for this valuation of the property
is necessary. In this case valuation influences the choice of the
purchaser and may by more than its market value.

2) Tax Fixation:- To fix up municipal tax of a property, the

valuation is essential by the municipal authorities which depends
on the class of city and trade importance.

3) Rent Fixation:- In order to determine the rent of a property,

valuation is required rent is usually fixed on certain percentage of
the amount of valuation (6 % to 10 % of the valuation)
4) 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 .

5) Mortgage Value of Security of Loans:- To raise loans against

security of a property its valuation is necessary. The quantum of
money that be advanced against the mortgage of the property is
determined by valuation.

6) Compulsory Acquisition:- A property may be acquired by

government for public purpose and in such case compensation
against such acquisition is given to the owner by the government.
To determine the amount of compensation valuation of the property
is necessary. This is assessed at the market price of the property to
the date of acquisition or requisition.
7) Speculation:- When a purchase is intended for sale of the
property and make some profit, a short period valuation is
necessary for that purpose and this is known as speculation value.
Generally speculation value is lesser than the market value.

8) Betterment Charges:- The value of a property may increase as

a result making of new roads, development of land and by
providing other amenities. To fix up betterment charges of fees,
valuation becomes necessary before and after completion of the
developments.

9) Wealth Tax and Estate Duty:- Government fix 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. For this,
valuation of the property or estate is necessary.
10) Partition:- In the case of partition, market value of the joint
properties has to be determined to divide the property according to
the share of the owners. It is generally found that in partition deeds
values of properties are fixed at the low side, namely at figures
lower than the market value. So valuation for partition do not
furnish reliable guides in determinations of the market value of a
property.

11) Assessment of Income or Stamp Fees:- For a newly built

property the income tax authority used to determine the total
expenditure incurred to construct the property for comparison of
the income tax return by owner. Such assessment of valuation
becomes necessary. This is to verify the stamp fees provided during
purchase of a property. Income tax department engage valuers to
determine and verify the valuation by a purchaser during purchase
of a property.
Classification of Property Under Transfer of Property Act:
Real estate properties are classified under three groups

1. Income fetching marketable properties.

Ex:- Rented properties like hotels, cinema & shops,
2. Non-Incoming fetching, marketable properties.
Ex:- Owner occupied bungalows, Flats, office, shops, factories,
3. Non-Income fetching: Non marketable properties
Ex:- Temples, School / college / public bldgs. (Govt. Bldgs.)

Three Methods of Valuation (Based on above classification):

1) Income Approach Method
(for Income fetching marketable properties)

2) Market Approach Method

(Non-Incoming fetching, marketable properties)

3) Cost Approach Method

(Non-Income fetching : Non marketable properties)
TYPES OF VALUES

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 9. Scrap Value

2. Distress Value 10. Assessed Value
3. Potential Value 11. Book Value
4. Salvage Value 12. Monopoly Value
5. Speculative Value 13. Replacement Value
6. Annual Value 14. Sentimental Value
7. Market Value 15. Capitalized Value
8. Ratable Value 16. Forced Sale Value
1) Accommodation Value:-
It is a value of land which is not independently accessible/
buildable.
(Ex-: Odd size, Dead lock land, locking legal access Road
(Right of way).

2) Distress Value:-
The property is sold by owner distress condition is called as
distress value
Ex:- under urgent financial difficulty.

3) Potential Value:-
This is the value of the property with existing inferiors
underutilized use, (FSI) will fetch in open market by putting it to
the highest and best use in place of existing inferior use (Max FSI
can be utilized) (This extra benefit adds potential value to the land
value).
4) Salvage Value:-
It is an estimate of the sale price of old property after its probable
service/use full life, but it is still continued due to its physical
conditions.

5) Speculative Value:-
It is the value of the property to the speculator who invests in the
property with sole motive of selling @ profit after short period of
time.
(Ex:- Intelligent guess of getting more profit)

6) Ratable Value (Annual Value):-

Ratable value is the annual letting value of the property which is
obtained after deducting the amount of yearly repairs cost from the
grass income. This value is decided by local Authority for fixing tax
liability.
7) Fair Market Value:-
This is clear OR fair value of the property sold under open market
conditions.

8) Intrinsic Value (True Value):-

It is the Actual valuers true value of the property but in India there
is lot of difference between true value & Guideline value for stamp
duty (Actual Purchase Value)

9) Scrap Value (Junk Value):-

It is the value of the property receivable for its material content in
the market when it is completely useless for future life (value of
materials after demolition of bldg.)

10) Report value (Appraisal Value – Assessed Value):-

It is the final value of property assessed by the valuer after
thorough assessment.
11) Book Value:-
It is a written down value of an asset as shows in book of accounts
& balance sheet of the owner of the asset. (final W D V notionally
shown as Rs.1/-)

12) Monopoly Value:-

Some properties in prime locality, due to its location by the virtue,
will fetch more or fancy value is called as monopoly value.

13) Replacement Value

(usually assessed for Compensation Purpose):-
It is an estimate of the cost required to be incurred today to create
identical property @ current prices of materials & labour OR It is
an estimate of the cost of replacement of old & Existing asset
assuming as if today.
14) Sentimental Value (Personal Value):-
It is value of the property who determines on sentimental grounds
rather than market force (personal value)

15) Capitalized Value:-

Capitalized value of the property is the amount of money whose
annual interest at higher prevailing rate of interest which will be
equal to net income from the property. It is assessed by knowing
net income from the property at highest rate of interest.

16) Forced Sale Value:-

This is an established value of the property that would realize in
open market in short time.
(Ex:- Auction of N P A assets by bank).
 DIFFERENT TYPES OF LEASES
There are five types of Leases:
1. Building Lease
2. Occupation Lease
3. Sub Lease
4. Lease for Life
5. Perpetual Lease

1) Building Lease (Ground Rent):-

This is common type lease, in which lessor, lease his open plot/land
to lessee for construction by building (40 to 99 OR 999 years). The
rental income from the building is received by lessee, out of which
he pays ground rent to lessor.

2) Occupational Lease:-
This lease is for use of land and building which belongs to lessor the
lease period is usually 3 to 5 OR 10 years (Short period)
(In India for residential bldg.s due to freezing of rent provisions
under rent control Act.)
3) Sub Lease:-
In this type of lease head lessor, leases land to head lessee for fixed
lease rent for fixed period & head lessee give for sub lease, as when
required, but within the main lease period.

4) Lease for Life:-

In this type of lease, period of lease is fixed as the remaining life
span of lessee, the lease period will mature on the date of death of
lessee.
This is not common in India

5) Perpetual Lease:-
When the lease of a property is given for a number of years,
providing a condition that the lease is renewable from time to time,
even for endless time according to the desire of the lease holder,
such type of lease is called perpetual lease
 INCOME APPROACH

This method is applicable for income fetching marketable

properties.

Income approach of valuation is mainly based on investment

theory:

Value is not intrinsic or inherent to anything. It arises due to utility/

usefulness

Value comes into practice only when transaction takes place in the
market is called as exchange value OR market exchange value.

Second is interest in the property, i.e. “Legal right to derive benefits

by the legal use”
Net income from the property is considered as interest yield
Three Principal Methods of Income Approach:-

Rental Method OR Yield Method OR Return on Investment Method

Discounted Cash Flow Technique (DCF Method)
Profit Method OR Capitalization of Earnings Method.

Capital Value:- Net income x YP depends on rate of interest

expected to be yielded by investment in the property.

Capitalization: is a concept indicating the amount required to be

invested by a person at present, to derive benefits from rental income
in future, such fund is called as capital investment (which is useful in
Preparing balance sheet).

Annuity: It is defined as the net annual payment for the capital

invested in immovable property or other forms of investment.

Rate of Capitalization (for Rental Yield):- It is of interest at which an

investor is willing to invest his capital (funds) to get benefits income)
in future.
Years Purchase:
It is defined as capitalized value required to be paid once and for all
in order receive annual income of Rs. 1/- for specified period of
time, @specific rate of return

Y P = Capital Value x Rs. 1

Rate of Capitalization

Y P when multiplied with net income gives capital value :

Therefore C V = Net Income x Y P

NOTE:
Short term security – maturity less than 5 years
Medium term security – maturity from 6 to 15 years
Long term security – maturity from 15 to 20 years more
Immovable property is also considered as sound security
SINKING FUND

Sinking Fund:-
The fund which is gradually accumulated by way of
periodic on annual deposit for the replacement of the building or
structure at the end of its useful life, is termed as sinking fund. The
object of creating sinking fund is to accumulate sufficient money to
meet the cost of construction or replacement of the building or
structure after its utility period. The sinking fund is created by
regular annual or periodic deposits in compound interest bearing
investment, which will form the amount of replacement at the end
of the utility period of the property. The sinking fund may be
created by taking a sinking fund policy with an insurance company
or by depositing in bank to collect highest compound interest. The
calculation of sinking fund depends on the life of the building and
scrap value of the building for the cost of old materials. The cost of
land is not taken into account in calculating sinking fund as land
remains intact.
 The sinking fund may also be required for payment of loan. If a
property is owned or constructed by taking loan a sinking fund may
be created by setting aside a sum of money annually to accumulate
with compound interest in order to repay the debt at the end of the
term of loan. The amount thus set aside is also known as annuity
payment. The amount which will be set aside may also be paid
directly to lender by way of annual installment. The amount of
annual installment of the sinking fund may be found out by the
formula.
S= r ,

(1 + r)n -1

ASF = C x S

Where,
S = Total amount of sinking fund to be accumulated (sinking fund factor
n = numbers of years required to accumulate the sinking fund
r = rate of interest in decimal
ASF = annual installment required. (Annual Sinking Fund)
DEPRECIATION:-

Depreciation is the gradual exhaustion of the usefulness of a

property. This may be defined as the decrease or loss in the value of
a property due to structural deterioration, use life, wear and tear,
decay and obsolescence. The value of a building or structure will be
gradually reduced due to its use life, wear and tear etc., and a certain
percentage of the total cost may be allowed as depreciation to
determine its present value. Usually a percentage on depreciation
per annum is allowed. The general annual decrease in the value of a
property is known as annual depreciation. Usually, the percentage
rate of depreciation is less at the beginning and gradually increases
during later years.

The amount of depreciation being known, the present value of a

property can be calculated after deducting the total amount of
depreciation from the original cost.
Method of calculating depreciation:- The various methods of
calculating depreciation are as follows:-
1. Straight Line Method
2. Constant Percentage Method OR Declining Balance Method
3. Sinking Fund Method and
4. Quantity Survey Method

1. Straight Line Method:- In this method it is assumed 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.

Annual Depreciation D = Original Cost – Scrap Value = C – S

Life in year n
Where C= Original Cost, S= Scrap Value, n= Life of the property in years
and D= Annual Depreciation. The book value after the numbers of years,
say N years = Original Cost – N x D.
2) Constant Percentage Method or Declining Balance Method:-
In this method, it is assumed that the property will lose its value by a
constant percentage of its value at the beginning of every year.

Annual depreciation D = 1- Where C, S, n and D have the same

meaning as above.

The value of the property of the depreciated cost at the end of the first
year = C-DC-C1.

The value of the property or the depreciated cost at the end of

m years = C

3) Sinking Fund Method:-

In this method the depreciation of the property is assumed 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. If A is the annual
sinking fund and b, c, d; etc., represent interest on the sinking fund for
subsequent years and C= total original cost, then
 At the end of Depreciation Total Book value
for the year Depreciation
1st year A A C-A
2nd year A+b 2A+b C-(2A+b)
3rd year A+c 3A+b+c C-(3A+b+c)
4th year A+d 4A+b+c+d C-(4A+b+c+d)

4) Quantity survey method:- In this method the property is studied in detail

and loss in value due to life, wear and tear, decay, obsolescence, etc., worked
out. Each and every step is based on some logical ground without any fixed
percentage of the cost of the property. Only experienced valuer can work out
the amount of depreciation and present value of a property by this method.

Year’s Purchase (Y.P):- Year’s purchase is defined as the capital sum required
to be invested in order to receive a net annual income as an annuity of Rs 1/- at
certain rate of interest.

The terminology states the formula that to gain an annual income of Rs 1/- at a
fixed rate of interest the capital sum should be Rs. (1x100)/ Rate of interest.
Thus, year’s purchase = 100/ Rate of interest = 1/i, i = rate of interest in
decimal. For 5% interest, year’s purchase 100/5 = 20.
METHODS OF VALUATION
For the purpose of valuation, the properties in general may be
classified in to two types -
1) Open Lands
2) Lands with Buildings

I. Open Lands:- The open lands can be broadly be divided in to two

categories namely, urban lands and farm lands. The urban open lands
are classified in different ways such as residential, industrial, etc. and
the value of such lands primarily depends on the potentiality of their
development by constructing appropriate structures over them. The
farm lands are agricultural fields and they are capable of producing
earnings themselves.

Following are the three methods adopted for the valuation of urban
open lands.
1) Comparative Method,
2) Abstractive Method and
3) Belting Method.
1) Comparative Method:-

In this method, the various transactions of nearby lands are properly

studied and then a fair rate of land under consideration is decided.
Thus, the comparative method will be useful only in case of an
active market where there is large number of statistics available for
comparison. It should however be remembered that the method
involves few dangers, if the market is stable i.e. resistant to sudden
change of condition. It is for this reason that the valuer has to satisfy
himself after a thorough inspection of all the underlying factors in
the market that there have been no changes in conditions since the
transactions took place. The element of time plays a vital role in this
method.

The land values in an urban area are determined by the collective

demands for real property, both present and future. Hence,
ultimately, the land values will be dependent on the factors which
govern the prices of the developed real properties.
The question often arises as to who creates a particular urban land
value. Is it the private and public bodies which have made capital
improvements to the other surrounding land by way of roads,
transport facilities, garden, etc. or the developer who sees the
potential use for the particular piece of land?

Following factors are to be taken into account while making analysis

of sale instances:-
a) Situation
b) Size
c) Shape
d) Frontage and depth
e) Return frontage
f) Level
g) Nature of soil
h) Land-locked land
i) Restrictions on development
j) Encumbrances
k) Miscellaneous advantages
a) Situation:- The value of land which is situated in a busy locality
or centre of city or shopping district will certainly be more than that
of land which is situated far away from the town. The location of the
property is very important and it is quite likely that a slightly
different location can cause a vast difference to the market value.

The location is often and quite rightly, said to be a prime factor in

demand for land because people want to be near to the things like
their friends or relatives or social equals or superiors, shops,
transport, open spaces, sport grounds, theaters, schools, country, sea
and a host of other things; and at the same time, they want to be far
from other things like smoke, fog industry, busy airports, etc.

b) Size:- The size of plot also plays an important part in fixation of

its value. The rate of a large land cannot be compared to that of a
small land. Usually, there will be keen demand for plots of certain
sizes in a particular locality. The rate of land with such sizes should
be considered as the trend prevailing in that locality for arriving at
the value of open land under consideration.
c) Shape:- It is obvious that plots of land with regular shapes will be
sold at a higher price than those with irregular shapes. There is,
however, no hard and fast rule which connects the value of land with
its shape and depending upon the merits of each case, the valuer
makes suitable allowances for this aspect of land.

It is likely that the irregular shaped plots of land formed by curved

street lanes may enhance the appearance of residential locations and
in such cases, their value may be equal to, if not greater than, that
of rectangular plots of land. The most common irregular shapes
of land are triangular, trapezoids, oblique parallelograms and curved
boundaries.

In our country, the trapezoidal plots are also subject to the test of
Gomukhi or Vyaghramukhi. In case of Gomukhi plot (like the mouth
of a cow), the frontage is less than the width at the rear. In case of
Vyaghramukhi plot (like the mouth of a tiger), the frontage is more
than width at the rear.
 Rear Width Rear Width

Frontage Frontage

Figure 1 Shapes of Plot

Fig.1 shows these two shapes of plots. It is generally believed that

the purchase of a Gomukhi plot leads to prosperity and that of a
Vyaghramukhi plot is inauspicious and invites troubles on the family
of the purchaser. However, if a person is keen on purchasing a
Vyaghramukhi plot, he has to carry out religious rites as
recommended by his priest. Thus, the purchasers of Vyaghramukhi
plots will be few and consequently, the price of such plots will be
low as compared to those of Gomukhi plots.
d) Frontage and Depth:- It is quite clear that the most valuable part
of a plot of land is its street frontage and the value of rear portion of
plot decreases as the distance from street increases.

For a particular locality, there is a relation of frontage with depth,

known as the standard depth. If actual depth of plot is more than the
standard depth, the value of plot will be more because of the
increased plot area. But the increase will not be in proportion to the
increase in depth.

e) Return frontage:- A corner plot gets an additional return frontage

also as shown in Fig. 2 and depending upon the importance of
intersecting streets or roads, there will be corresponding increase in
the value of such plots. In residential area, a corner plot gives wide
scope for better architectural planning. In business area, a corner plot
permits better layout of shops or offices with greater space for show-
room and advertisements.
 Plot with 10m Plot with
Return wide Return
Road

30 m wide Road

Figure 2 Return Frontage

f) Level:- If the natural level of land is lower than the road level,
considerable amount will have to be spent for filling and there will
also be substantial increase in the cost of foundations. On the
contrary, if the natural level of land is considerably higher than the
road level, there will be difficulty in laying water lines and drainage
lines and hence, the extra earth will have to be excavated to make the
plot reasonably level.
g) Nature of Soil:-

For lands with building potentially, the bearing capacity of soil

should also be considered. If the bearing capacity is adequate, the
cost of foundations will be reasonable in proportion to the total cost
of the building. If, however, the bearing capacity is poor,
considerable amount will have to be spent to make the structure
stable. It is thus clear that the land with good bearing capacity will
command more rate as compared to the land with poor bearing
capacity.

h) Land-locked Land:-

It sometimes so happens that a plot of land has no well-defined legal

access and it is surrounded on all sides by plots belonging to other
owners. It is interesting to know how such a situation arises in
practice by taking a simple illustration.
 A
B
Land-locked Land
C Fig. 3 -Land-locked Land
Approach
Road

As shown in Fig. 3, a plot of land belonging to 3 brothers A, B and C

has been partitioned in such a way that the plots of A and C have
frontages on approach roads and the plot of B can be reached either
through A or B.

In the initial stage, when the property is held by three brothers,

the problem of passing through A’s or C’s portion by B may not
arise. But if in due course of time, if A and C have sold out their
portions to outsider or if B has sold to an unwanted man by A or B,
the right of passage for B may be blocked and the land of portion B
gets land-locked.
i) Restrictions on Development:-

The permissible floor space index or F.S.I. should be studied for the
plot to be valued and for the sale instances which are scrutinized.

The plot of land having more permissible F.S.I. will naturally be sold
at higher price as compared to the one having less permissible F.S.I.
Similarly, there may be restrictions on development in the form of
minimum distance to be kept permanently open from the banks of
river, lake or sea for plot situated along river, lake or sea. In a similar
way, for plots situated on National and State highways or railway, no
development is permissible for the specified distance to be measured
from the centre-line of road or railway line. Such land or portion of
land will command less value because of the restrictions imposed
upon its development.
j) Encumbrances:-

The plots of land which are subject to the easement rights of air,
light or passage will be less attractive to the prospective purchasers
and depending upon the inconveniences caused, there will be
reduction in values of such lands.

The other common type of encumbrance found in practice is the

occupation of the open land under reference by the unauthorized
hutment dwellers. The litigation process to get the peaceful vacant
possession of such plots of land will be quite uncertain, lengthy and
expensive. Hence, the value of such land will be far less than similar
open land with no such encumbrance.
k) Miscellaneous Advantages:-

In addition to the above considerations, if the property possesses some

special advantages because of its location or any other reason, the
same should be considered while arriving at the reasonable rate of
open land.

For instances, if river, lake or sea view is available for a particular

open plot of land, its value will be slightly higher than similar plots
without this special advantage. In a similar way, the surrounding
development of the area may also cause impact on land values. In this
respect, the distance to the churches, temples, schools, shopping units,
recreation centers, industrial establishments, transportation, etc., plays
an important role in deciding the land values of residential plots.
Similarly, the factors such as proximity of labour, availability of
power, cost of power, water supply, drainage system, transport
facilities, advertising possibilities, location of markets, etc. have great
influence on the values of individual lands.
2) Abstractive Method:-
The abstractive method becomes useful when no information is
available regarding land transaction in the nearby area or in other
words, the value of land where sales are not occurring frequently can
be worked out by the application of this method.

Following three distinct steps are involved in this method:-

i. A nearby property fetching rent is considered and its capitalized
value is worked out by multiplying its net income by year’s
purchase. Let us say this to be C.

ii. The estimated cost of the replacement of the above building is

worked out and then, after making due allowance for the
depreciation, a figure representing the cost of the building alone
at present is obtained. Call this as S.

iii. The difference C-S gives the value of the land and if A is the area
of land, the cost per unit area = (C-S)/A. This unit cost of land is
then used to find out the value of open plot under consideration.
3) Belting Method:-
When a plot of big size is to be valued or when a plot with less
frontage and more depth is to be valued, it is logical to adopt the
method of belting. It is due to the principle that the value of land in
general decreases as the depth of the plot increases or in other words,
that the front land abutting road is more valuable than the real land
away from road.

Recessed III Belt

Land Z = 1.5Y = 2.25X

Depth
II Belt Y = 1.5X

Figure 4 B I Belt 10 d X

Frontage
Road
The main problem facing the valuer while adopting this method is to
decide the depth up to which the maximum land value extend and from
that point onwards, it starts declining or diminishing. The next step
would then be to fix the relationship regarding the value of back land to
the front land.

In this method, instead of estimating an average rate of land, the plot of

land under consideration is divided into different sections or zones as
shown in Fig. 4 and different rates of land are estimated for each section
or zone. Usually, the plot of land is divided into three belts. The depth of
first belt near the road is suitably adjusted. The depth of second belt is
kept 50% more than that of first belt and the depth of third belt is kept
50% more than that of second belt.

Considering the size, shape, location and various other factors affecting
rate of land, a suitable rate of land is estimated and that is taken for the
first belt. For second belt, two-third of rate of first belt is taken and for
third belt, one-half of rate of first belt is taken. If the plot is of irregular
shape, the rate of recessed lands i.e. lands not lying between the
perpendiculars from the road frontage, are taken as one-fourth less than
their corresponding values from the consideration of belts.
 DIFFERENT METHODS OF VALUATION
FOR LANDS WITH BUILDINGS:

1) Rental Method of Valuation

2) Direct Comparisons with the Capital Value

3) Profit Based Valuation

4) Valuation Based on Cost

5) Development Method of Valuation

6) Depreciation Method of Valuation.

1) Rental Method of Valuation:-

In this method, the net income by way of rent is found out by

deducting all outgoings from the gross rent. A suitable rate of interest
as prevailing in the market is assumed and year’s purchase is
calculated. This net income multiplied by Year’s purchase gives the
capitalized value or valuation of the property. This method is
applicable only when the rent is known or probable rent is determined
by enquires.

Net Rent =
Gross rent-outgoings; Capitalized value = Net rent x Year’s Purchase.
Year’s purchase shall be worked out assuming the present rate of
interest of schedule banks.

(Outgoing:- Are the expenses which are required to be incurred to

maintain the revenue of the building. The various types of outgoings
are taxes, repairs, management and collection charges, sinking fund,
loss of rent and miscellaneous charges.)
2) Direct Comparisons with the Capital Value:-

This method may be adopted when the rental value is not available
from the property concerned, but there are evidences of sale price of
properties as a whole. In such cases the capitalized value of the
property is fixed by direct comparison with capitalized value of
similar property in the locality.

This method is suitable where it is not possible to know the fair

rent like owner occupied properties, schools, clubs, out-housed etc.

3) Profit Based Valuation:-

This is very much similar to the rental method of valuation and is

most applicable in case of valuation of hotels, cinemas, shops etc. In
this method net profit is worked out after deducting all possible
outgoings including interest of capital investment and also
remuneration of labour rendered by owner. This net profit can
reasonably be realized in the form of rent and is multiplied by years
purchase to determine 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 determine the value of
property. In such cases necessary depreciation should be allowed and
the point of obsolescence should also be considered.

(Obsolescence:- The value of property or structure become less by

its becoming out of date in style, in structure in design, etc. and this
is termed as obsolescence.)

5) Development Method of Valuation:-

This method of valuation is used for the properties which are in the
underdeveloped stage or partly developed and partly undeveloped
stage. If a large place of land is required to be divided into plots after
providing for roads, parks, etc., this method of valuation is to be
adopted. In such cases, the probable selling price of the divided
plots, the area required for roads, parks, etc., and other expenditures
for development should be known.
If a building is required to be renovated by making additions,
alterations or improvements, the development method of valuation
may be used. The valuation of the property may be worked out from
the anticipated future net income which it may fetch after its
renovation. The net income multiplied by the years purchase will
give the anticipated capitalized value. The total expenditure required
to be incurred in renovation should be worked out, and the original
cost of the property together with the new expenditure should be
compared with anticipated value and decided if the investment in
renovation is justified.

6) Depreciation Method of Valuation:-

According to this method of valuation the building should be

divided into four parts viz.- i) Walls, ii) Roofs, iii) Floor and
iv) Doors and windows and the cost of each parts should first be
worked on the present-day rates by detailed measurements. The
depreciation value of a building is calculated directly with the help
of the formula,
 D = (P (100- rd)n ) / 100
Where,
D = the depreciated value of a building structure after n years
P = cost of the building at present market rate as if new
rd = fixed percentage of depreciation (r = rate, d = depreciation)
n = the number of years the building had been constructed

The value of rd for different durations of life of a building is as below:

Building having a life Value of rd
100 years 1.0
75 years 1.3
50 years 2.0
25 years 4.0
20 years 5.0

By depreciation method of valuation the value of building structures

only may be determined. To calculate valuation of a property the cost
of land as per present market rate, cost of water supply, sanitation and
electrification shall be added to the valuation of building structure.
LEASE – MORTAGE
The person who takes the lease is called the lessee or the leaseholder
and the owner who grants such lease is known as the lessor.
In a wider sense there are two types of property namely:-

Freehold Property:- A freehold property means that the owner is in

absolute possession of the property, and the owner can utilize the
same in any manner, he likes, subject to the rules and regulations of
Government and local authorities. He may use the property by
himself; he may sell the property, divide it, develop it, or donate or
grant it on lease at his will.

Leasehold Property:- It indicates the physical possession of the

property and the use of it may be allowed by the original owner
(lessor) as per lease document. The owner of a freehold property
may give permission to any other person to use his freehold which is
known as giving on lease. The person who takes lease is known as
lessee or leaseholder and the owner who grants lease is known as
lessor.
Liabilities of Lessor:-

Following are the liabilities of a Lessor:-

i. He is bound to disclose the material defects with reference to

the intended use of the property which he only knows but which
a lessee with ordinary care could not find out.

ii. He should hand over the possession of the property to the

lessee, when so demanded by him.

iii. He should be clear in his mind that so long as the lessee goes on
paying the rent and performs the conditions of lease document,
the lessee is entitled to enjoy the property peacefully without
any interruption from him. This right shall move with the lessee
and shall be enforceable by everyone who happens to possess it.
Liabilities of Lessee:-

Following are the liabilities of a lessee:-

i. He is found to disclose the extent or nature of interest which he

is going to take in the leased property and which the lessor does
not know or could not know with ordinary care.

ii. He is bound to keep and restore the property as it was when

lease was granted except a reasonable wear and tear and also
allow the lessor to enter into the premises for the purpose of
inspection. If lessor finds out the defects and serve a notice to
that effect to him, he should carry out the repairs in a reasonable
time.

iii. He must pay the agreed rent at proper time and place.

iv. He must use the leased property as a prudent man would use his
own property.
v. He shall not do any act which causes a permanent injury to the
property.

vi. He should deliver the possession of the leased property when

the lease comes to an end.

vii. He will not use nor allow another one to use the leased property
other than the purpose for which it was let.

viii. If any encroachment is made on the property by a third party or

anybody claiming title, the lessee should very immediately
inform the lessor for the same.
MORTGAGE:-
An owner can borrow money against the security of his property,
and for that purpose he is required to grant an interest to the party
advancing the loan. The loan is required to be returned in specified
time. The person who takes the loans is known as Mortgagor, and
the person who advances the loan is known as Mortgagee, and the
relevant document for the mortgage transaction is known as
mortgage deed. When the loan is fully repaid together with interest
the mortgagor has got the right to free his property from the
mortgagee, and this is known as equity of redemption.

The amount of loan will depend on the valuation of the property;

usually 50 to 70 percent of the valuation is advanced as loan. The
interest should be paid by regular installments and the loan also may
be repaid by regular installments spread over the specified period of
the mortgage. If the mortgagor fails to pay the installment of loan as
per condition of the mortgage deed, the mortgagee can take over
possession of the property and sell it to recover the amount of loan,
the interest and other expenses. The surplus, if any, is paid to the
mortgagor.
 Yo u
h a n k
T
“ Engineering is the professional art of
applying science to the benefit of human kind”
- M.R. Smith