VALUATION AND THEIR METHOD

SUBMITTED TO: AR.J.K GUPTA

SUBMITTED BY: MONIKA B.ARCH 5TH YEAR AR/06/209

HISTORY OF VALUATION

The concept of valuation is as old as human civilization. There was barter system in which goods or services are directly exchanged for other goods and/or services without a medium of exchange, such as money. Money or currency came into being about 4000 years ago by which trade became easier. In 1894 the land acquisition act came into being. Some property required to be acquired by the government fro the public purpose was appropriated and compensation was paid to the owner. Activity by Improvement Trust in big cities had become common in the year 1920 to 1940. This activity need a warranted a need of land valuation. The Reserve Bank of India act came into being in the year 1939. Authority to valuate a property is vested with the government officer , which is challenged in many cases. That gave birth to a practice of the private valuers . Value is the basis of tax to be levied . Several acts and legislation required valuation report , such as Income Tax Act ,Wealth Tax Act , Estate Duty Act , Gift Tax Act , Capital Gains Tax rules etc. Freedom to challenge the valuation of a government officer gave a big boost to colour and content of the subject of valuation. A person registered with the Department of Direct Taxes i.e. registered valuer and shall be acceptable to all. To a be a valuer of real estate , one should have a good knowledge and experience of planning , quantity surveying , estimating etc. therefore , a civil engg. And an architect is considered as a valuer of real estate.

VALUATION

Valuation is the technique of estimating or determining the fair price or value of a property such as a building, a factory, other engineering structures of various types, land, etc. By valuation the present value of a property is determined. The present value of property may be decided by its selling price, or income or rent it may fetch. The value of property depends on its structure, life, maintenance, location, bank interest, legal control, etc. as well as on supply on demand and the purpose for which valuation is required. Value is the estimate of the price that would be achieved if the property were to be sold in the market. Value of a thing or an object changes as per the situation or the circumstances , not only that , a value changes from the person to person. For example : I have a bungalow with an open space around , having ten room in it , in a village at a very remote place. A two room tenement on ownership in Mumbai is more expansive than the value of that bungalow which shows how the value change as per the situation or the location. A father had profound interest in astronomy and was precious collection of books on that subject.bt his son have no interest in astronomical physics. The huge collection of book is like a junk for him. This is how the value of a thing changes from person to person.

VALUE PRICE & COST

VALUE

In order that a commodity can have a value , it must passes three essential qualifications namely It must be useful. It must be scares. It must be transferable or marketable. It is necessary that all these three essential must be present at one time . Absence of any one of them will make lose its value.
Commodity Essential qualifications as above Useful Scares x Transferable x Has market value No market value No market value Remark

Sr. no. 1 2 3

Water Fresh air Rotten vegetable

Example: When in draught condition ,water is scarce and one has to pay even for a bucketful of water. Fresh air also sometimes has a value when it scarce and you have to pay entry fee. It is in a way that the price for fresh air you inhale in the garden . For high altitude trek ,where air is scarce , a trekker carries air in cylinder for which he has to pay . This proves that when a useful commodity is scarce it has a value.

VALUE PRICE & COST

VALUE

Value can also said to be a ratio between the price of money and the price of commodity in return. Example : A son of a wealthy person at a hill station happily pays Rs.15 for an article , which in my view is not worth for Rs.1.50 because when I equate money to the commodity , money is dearer to me as I have much less money than the child of that wealthy man. Value is not necessarily the price of commodity. Example : A few years ago when land prices in Pune where not that high , builders from Mumbai entered Pune market , for them relatively a land appeared to be cheaper , so they willingly paid more price than the local prevailing market. Value can be unearned increase or an unforeseen decrease in price. Example : A person was holding a piece of land little away from the city limits and there was no demand for the land in that locality . Industrial zone was declared nearby and lot of factories were built. Being next to the industrial zone, the land in the locality was in demand and the prices shot up . In fact, the owner of the land did nothing special, yet his land appreciated . This is unearned increment. On the other hand, suppose a dump yard was declared for the city waste near this plot, there will be no demand for the plot. This would be an unforeseen decrease in the price.

VALUE PRICE & COST

PRICE

It is the cost of a commodity plus an additional reward to the producer for his labour and capital. COST OF PRODUCTION + REASONABLE PROFIT = PRICE. Price is demanded by the seller while the value is determined by the purchaser. When the price and the value concur, then the transaction takes place. Thus, you will find that the price and the value is almost identical , but approached from the opposite directions. PRICE VALUE

COST

An expenditure to produce a commodity having a value, is the cost of a commodity. Depreciation is usually worked out on the cost of a commodity rather than on its value. COST means original cost of construction of purchase, while VALUE means the present value which may be higher or lower than the cost. A building whole cost of construction is Rs.50,000, when put for sale may fetch Rs. 60,000.00 this sale price is the value of the building. Similarly, the value may be less than the original cost.

DIFFERENT VALUES

SCRAP VALUE :
Scrap value is the value of dismantled materials. For a building when the life is over at the end of its utility period the dismantled materials as steel, bricks, timber, etc., will fetch a certain amount which is the scrap value of the building. The scrap value of a building may be about 10% of its total cost of construction. The cost of dismantling and removal of the rubbish material is deducted from the total receipt from the sale of the useable materials to get the scrap value.

DEMOLITION VALUE :
It means a scrap value or junk value . A value of the building realised on sale , when the Building has out lived its useful span of life. This value is usually the value of old building material obtained , less the cost of demolition.

REPLACEMENT VALUE OR A REPRODUCTION COST :

It is the reasonable of construction on the given date , to rebuild a building or a part thereof, as it was. OR It is the cost of a construction at the current market rate to reconstruct a building or a portion thereof , same as it was.

DIFFERENT VALUES

POTENTIAL VALUE :
An inherent value of a property , which may go on increasing due to a passage of time or by a change of the user , fetching more return, is called its Potential value.

DISTRESS VALUE :
When a property is sold at a lower price than the open market rate , then the value is called a Distress value. Example : when the owner is in difficulty and also in a haste to recover money from the sale , he may accept a lesser price to his property , such a sale is a distress sale at a distress value.

SPECULATIVE VALUE :
Value of a property purchased apparently at a higher price, with an intention to be able to sale the same with a higher price , with an intention to be able to sale the same with a bigger profit within a short duration of time.

MONOPOLY VALUE :
As per the law of demand and supply when the properties in a particular locality become scarce , a fancy price could be demanded by the vendor . This could be said as monopoly value.

DIFFERENT VALUES

SENTIMENTAL VALUE :
Value usually higher than the market value attached to property due to some sentimental reasons is known as sentimental value.

CAPITALIZED VALUE :
Value which is obtained on the basis of income yielding capacity of property. It is obtained by multiplying the Net annual Returns by a factor based on a current rate of interest for the capitalization. MARKET VALUE : It is the value of a property purchased that could be realised from a willing purchaser on sale by willing seller in an open market.

PURPOSE OF VALUATION

BUYING OR SELLING PROPERTY:

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

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

RENT 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).

SECURITY OF LOANS OR MORTGAGE :

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

COMPULSORY ACQUISITION :
When ever a property is acquired by law compensation is paid to the owner. To determine the amount of compensation valuation of the property is required. Valuation of a property is also required for Insurance, Betterment Charges, Speculations etc.

PURPOSE OF VALUATION

GROSS INCOME :
Gross income is the total income and includes all receipts from various not sources outgoings and the operational and collection charges are not deducted.

NET INCOME OR NET RETURN :

This is the saving or the amounts left after deducting all outgoings and the operational and collection expenses from the gross income or total receipt. NET INCOME = GROSS INCOME OUTGOINGS

OUTGOINGS

Outgoings or the expenses which are required to be incurred to maintain the revenue of the building.

TYPES OF OUTGOINGS :

TAXES :
These includes Municipal Tax , Property Tax , Wealth Tax , etc. which are to be paid by the owner of the property annually. These taxes are based on the basis of Annual Rental Value of the property after deduction for annual repairs etc.

REPAIRS :
The repairs are required to be carried out every year to maintain a property in fit condition. The amount to be spent on repairs depends on the age, construction nature of the building, etc., and usually 10 to 15 % of the gross income or gross rent or 1 to 1 month rent is allowed for repairs. For annual repairs 1% to 1% of the total cost of construction taken.

TYPES OF OUTGOINGS

MANAGEMENT AND COLLECTION CHARGES :

These include the expenses on Rent Collector , Chaukidar, (watchman) Liftman, Pump attendant, Sweeper, etc. About 5 to 10 % of the gross rent may be taken on these account. For small building none of these may be required and be no outgoings on these account.

SINKING FUND :
A certain amount of the gross rent is set aside annually as sinking accumulate the total cost of construction when the life of the building is over. This Annual fund is also taken as outgoings.

LOSS OF RENT :
The property may not be kept fully occupied in such a case a suitable amount should be deducted from the gross rent under outgoings.

MISCELLANEOUS :
These include electric charges for running lift , pump , for lighting common places and similar other charges which are to be borne by the owner.

METHOD OF VALUATION

Rental Method of Valuation Direct Comparisons of the capital value Valuation based on the profit Valuation based on the cost Development method of Valuation Depreciation method of Valuation

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 years purchase is calculated . This net income multiplied by years 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 enquiries.

DIFFERENT VALUES

ASSESSED VALUE :
It is a value of property recorded with the local authority and which is used for the purpose of determining the amount of a property tax to be levied on the property.

BOOK VALUE OR DEPRICATED VALUE :

It is an amount obtained by deducting the depreciation from the original value of a property , worked out on a given date. Book value or a depreciated value , reduces by the passage of time and has to be worked out for a given date. It depends on the amount of depreciation allowed per year and will be gradually reduced year to year and at the end of utility period of the property the book value will be only scrap value.

SALVAGE VALUE :
Value of building released on the sale when its useful span of life is over , but it has not become a worthless. It doesnt include the cost of removal , sale etc. Normally the scrap value or the salvage value of a property or an asset has got some positive figure, but it may also be zero or negative. For example : The scrap value or a R.C.C. structure will be negative, as dismantling and removal will be costly.

METHOD OF VALUATION
DIRECT COMPARISONS OF 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.

VALUATION BASED ON THE PROFIT :

This method of Valuation is suitable for buildings like hotels, cinemas, theatres etc for which the capitalized value depends on the profit. In such cases, the net income is worked out after deducting gross income; all possible working expense, outgoings, interest on the capital invested etc. The net profit is multiplied by Years Purchase to get the capitalized value. In such cases, the valuation may work out to be high in comparison with the cost of construction.

VALUATION BASED ON THE 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 points of obsolescence should also be considered.

METHOD OF VALUATION
DEVELOPMENT METHOD OF VALUATION :

This method of Valuation is used for the properties which are in the underdeveloped stage or partly developed and partly underdeveloped 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 additional changes, alterations or improvements, the development method of Valuation may be used.

DEPRECIATION METHOD OF VALUATION :

According to this method of Valuation, the building should be divided into four parts: Walls Roofs Floors Doors and Windows And the cost of each part should first be worked out on the present day rates by detailed measurements. The present value of land and water supply, electric and sanitary fittings etc should be added to the valuation of the building to arrive at total valuation of the property.

VALUATION OF BUILDING

Valuation of a building depends on the type of the building, its structure and durability , on the situation, Size, shape, frontage, width of roadways, the quality of materials used in the construction, and present-day prices of materials. This also depends on the height of the building plinth, thickness of wall, nature of floor, roof, doors, windows, etc. A building, located in the market area will have higher value than a similar building in the residential area. Building in the area having sewer, water supply and electricity will have increased value. Building on free hold , land will have higher value than building on leasehold land. The value also depends on the demands for purchase which varies from time to time. The valuation of building mainly depends on the income it will fetch if let out. Usually 6%, interest per annum of the capital cost is taken as annual rent , it may be more or less according to the prevalent market rate. The valuation of building is determined on working out its cost of construction at present rate and allowing a suitable depreciation. Before valuation the age of the building should be obtained from record if available or by enquiries or from visual inspection and its future life should be ascertained. Present-day cost may be determined by the following method :-Cost from record. Cost by detailed measurement Cost by plinth area basis

VALUATION OF LAND

Plot of land are valued as sqm. Main road side plots fetch more value than others. Corner plot also fetch more value. The following are the factor , on which value of land depends. SITUATION : The evening capacity of the building on a plot determines its value. A building situated at the city centre fetches more rent than that in suburbs. Consequently value of land will thus be more in city centre than else where. ORIENTATION : Orientation of the plot is also an important factor. As in northern India, south facing plots are considered best and therefore plots facing south will be costlier. SIZE :Medium sized plots will be the most costly. Very large sized plots do not fetch good cost as number of purchasers will be limited. SHAPE : Irregular shaped plots will be cheaper as there is likely hood of lot of land being going waste. Rectangular plots are good plots and thus costlier. FRONTAGE AND DEPTH : Neither the frontage nor the depth should be too small. For good plots frontage : Depth ratio may be 1 : 1 or 1 : 2

VALUATION OF LAND

CORNER PLOT OR RETURN FRONTAGE :Plots located at the junction of two roads are costly. Frontage of such plots should be on the side of the more important road of the two. NATURE OF SOIL AND TANKS : Solid land plots are costlier as they provide good foundation. Filled plots are taken as half the value of solid land plots.

FACTORS WHICH AFFECTING THE VALUE OF A PROPERTY :

COST OF CONSTRUCTION : Cost of the property gets increased due to increase in cost of construction. DEMAND OF SUPPLY ASPECT : If position of availability of the property is easy its cost will be reduced. If number of buyers is more and available property is less its cost is bound to increase.

POPULATION INCREASE : Due to growth of new industries or due to any reason if there is lot of influx of population, there shall be heavy demand for land buildings and properties and their cost in bound to escalate. If there is any out flow of population from somewhere due to uncertainty of conditions, the cost of properties are bound to go down.

FACTORS WHICH AFFECTING THE VALUE OF A PROPERTY :

PURPOSE OF PURCHASE : Value of a property will be more when purchaser can reside himself even in partly vacant house or speculate to run a business by purchasing the property. RENT RESTRICTION ACT : Value of property is assessed from its probable annual income through rent and therefore due to certain enactment of a Rent- Restriction Act by government, it may cause slump in property value. ABNORMAL CONDITIONS : Values of properties may considerably drop due to insecure conditions like riots, wars etc. IMPOSITION OF CONTROL ON PRICES OF BUILDING MATERIALS : This aspect causes lot of fluctuations the prices of building materials from time to time. IMPROVEMENT BY PUBLIC SCHEMES : Improvement in public service schemes bring lot improvement in the area and cause prices of property to increase. Even a proposal to this effect will car: increase in land prices. Water-line, sewer-line, means of transport widening and improving a road are It public schemes which cause improvement in the area. INTEREST ON BANK OR GOVERNMENT SECURITIES : If interest on bank or government securities lowered more money is invested in property and thus cost of land building or property is likely to increase.