VALUATION OF REAL

PROPERTIES

Properties
That can be owned, held, used and
enjoyed
Types:
Land / Immovable property / Real estate /
Real property
Everything firmly fixed to the soil
Subject to real action by court of law
Ex: building, foundation, trees etc.

Types of properties cont.

Other than Land -> personal property / Chattel
Which can easily be moved
Subject to personal action by court of law
Ex: vehicle, jewelry, building materials, furniture

Confusion? Coal? Oil?

Till they lie hidden under earth real
When mined out chattel

Estate
Derived from the Latin word estate
meaning status
Indicated status of a person in the society
in olden days in Europe and France
Person holding land estate holder

Real Property
Classified to
Corporeal
From LATIN corpus meaning body
Property of having a body that can be seen
Physically transferable

Incorporeal

That can not be seen or possessed physically

Intangible thing
Can be enjoyed, used or controlled
Can be transferred by document in writing
Ex:: rights, easements, legal obligations

VALUATION
Defined as a basic process by which the
estimated price of a specific real property
at a specified time and place and
assuming a specific use/purpose can be
worked out by considering the prevailing
economic factors.

Specialties of Valuation Process

Valuer shall clearly observe and identify
the peculiarities of the property
Valuation is the art of judgment and
forecast, based on data obtained and
organized scientifically
Need experience

Cost
Actual amount incurred in producing a
commodity, which possess some value
Used to compute loss of value due to wear
and tear
Includes charges for quantitative and
qualitative labour + capital for production
Total cost = prime costs + supplementary
costs

Cost cont.
Prime cost
Expenditure/charges directly represented in
the commodity produced

Supplementary costs
Charges represented indirectly in the
production ex: rent, salaries, services,
depreciation, management charges

PRICE
Used to indicate the cost of the commodity
plus profit of the manufacturer
Commonly determined by the supply and
demand conditions prevailing in the
market
Price may be below or above the cost

VALUE
Defined as the corresponding exchange of
one commodity into any other commoditythis system being called barter system
an old system

In modern time the relative values of

various commodities are expressed in
terms of recognized medium of exchange
known as money

PRICE and VALUE

Price indicates a fact that has already
been occurred in practice.
Value indicates the estimate of a probable
price of a commodity
(Estimation of probable price of property is
valuation)

If all the fair data are available to the

valuer and if his judgments are correct,
value might be very close to current price

COST and VALUE

Cost with the addition of ordinary profit will not
be becoming the value of a commodity
An element of scarcity may make lot of
difference between cost and value
Exact cost of qualitative labour can not be
arrived at
ex: work of a skilled painter making beautiful paintings

Misdirected capital and labour may not add up to

the value
ex: if a machine made by spending heavy capital and
labour does not work, its value??

DIFFERENT FORMS (TYPES) OF

VALUES
1. Accommodation Value

Land adjoining to a city boundary might be

converted from agricultural and to buildable
(accommodable) land and hence possess a
value between that of agri-land and built-up
land

2. Annual Value

Fixed by local authority to calculate taxes

based on estimated rent
Fixed by observing the principles of rating
valuation

DIFFERENT FORMS (TYPES) OF

VALUES cont.
3. Book Value

The value / amount shown in the account

books of a particular year after making
provisions for depreciation of the previous
years.
Not affected by market conditions

DIFFERENT FORMS (TYPES) OF

VALUES cont.
4. Distress Value

A property is said to have distress value

when it can bring lower value than market
value
Distress value is developed due to

Fear of war, riot, earthquake etc.

Financial problems of seller
Intention to favor purchaser

MARKET
Market is a place / region / a commercial
activity where buyers and sellers
exchange their commodities
Type of market might be local, national,
international or electronic type now
Real property market may be now local in
strong form and slightly weak in other
types

MARKET cont.
Collection of information regarding real
property may take long time since
Legal & environmental issues are to be
considered
Many functionaries like broker, surveyor,
lawyer, document writer etc are involved in the
transaction process

Correct information on transaction is not

easily available.

MARKET- cont.
Supply and demand can not be easily adjusted
in real property market
Three types of buyers are present in the real
property market :
Investor for income: individuals or groups invest for
regular income
Investor for capital gain: individuals or groups buy for
resale in near future
Investor for use: individuals or groups who buy for
their own use like residential, commercial, industrial
etc.

5. MARKET VALUE
Defined as that sum of money, which a willing
wise buyer, buying with out any restriction or
essentiality or any physical, sentimental
influence, gives for a particular piece / parcel of
real property with all interests there in, with all
advantages and disadvantages in existing
condition to an offering willing wise seller, selling
with out any restriction or essentiality or any
physical, sentimental influence, the aforesaid
real property, as on date on which the value is to
be ascertained.

MARKET VALUE cont.

Thus market values will be
Fair & reasonable sum of money
At a particular time
In hypothetically ideal market

DIFFERENT FORMS (TYPES) OF

VALUES cont.
6. Monopoly Value
A fancy price demanded by the owner of a
property due to its advantages with respect
to adjacent properties due to its size, shape,
frontage, location etc.

7. Potential Value
Indicates the potential possibilities of the
property when developed in its most
advantageous manner.

Ex: future potential of agri-land in outskirt of city

DIFFERENT FORMS (TYPES) OF

VALUES cont.
8. Replacement Value
This is the cost to be incurred to replace the
property fully or partly at the prevailing
market rates for materials and labour.

9. Salvage Value
After the utility period of a property, it might
be sold as it is without breaking into pieces,
and the amount realized over and above the
cost of removal and sale, is called salvage
value.

DIFFERENT FORMS (TYPES) OF

VALUES cont.
10. Scrap Value

At the end of utility period, the property might be

broken into suitable units scraps for disposal;
the amount obtained by the sale of such units
being called scrap value.

11. Sentimental Value

Even when a fancy price is offered by a buyer,

the owner of the property might not be ready to
sell his property due to his sentimental
attachments with it. Such a fancy price not
having any relation to market price is called
sentimental value.

DIFFERENT FORMS (TYPES) OF

VALUES cont.
12. Speculative Value
Certain buyers purchase property to sell
after a short time with profit. They are not
interested in developing the property. Thrice
offered y such buyers is called speculative
value of the property. In general speculative
value will be less than market value.

Factors Affecting Changes in

market value

Changes in building technology

Changes in fashion and taste
Changes in quality of surroundings
Changes in density and constitution of
population ex: number of families, age
group etc.
Migration possibilities
Zoning

Qualities of An Ideal Investment

Capital appreciation prospects
Ease of purchase and sale
Minimum or no cost for purchase and sale
process
Divisibility of holdings
Regular secured income
Security of capital

Interests in Real Property

A real property can not be owned in absolute
terms.
The law grants only a right in property called
interest.
It is possible to create many interests in the
same property, as per law, for many persons.
Several interests in the same property at a time,
each interest may have its own value different
from other.

TYPES of INTERESTS
Free Hold Interest
Absolute and perpetual possession of the
property
Recipient of all rents arising from leases /
tenancies
Highest form of ownership
Power of owner controlled by court of law and
right of others

TYPES of INTERESTS cont.

Lease Hold Interests
Granting property on lease
Freeholder gives permission to another
person to use his property for a certain
number of years, on certain conditions
The lessor gives his property on lease to the
lessee/lease holder

Reasons for lease

Large extent of land in possession unable to
look after himself or sell out immediately
Due to sentimental value, owner is not ready to
part with his property
Legal restrictions imposed ex: will of a
deceased make transactions impossible
Owner is forced to pay capital gain tax on
property [calculated based on sale price] or
income tax based on rental value

Why a lessee takes up a lease?

Lease holder finds his interest to be going
up with time, as the property develops,
tempts him to make long period lease
On paying the agreed lease rent, the
lessee can enjoy most of the benefit of
land less capital more return

Renewal/ Extension of lease

Old rent increased & new agreement
signed
No enhancement of old rent but a
premium is paid at the start of new lease
period by the lessee
Mutual agreement basis

Sinking fund by lessee

Lease holder may set aside some fixed amount
annually from his income from the property so
that at the end of the long lease period, he might
be able to purchase another similar property
(with similar income flow)
To recoup the capital invested in a wasting asset
Some time not practical as income might be low
Rate of inflation may outfit another new
purchase of similar property

Liabilities of lessor
Disclose all material defects with respect
to the intended use of property
Should hand over the possession to the
lessee when demanded
So long as the lessee goes on paying rent
and performs the conditions of lease, he is
entitled to enjoy the property

Rights of lessee
During the lease period, if there is an
extension of the property, this extension
shall be deemed to be comprised in the
lease
if the lessor fails to pay taxes, lessee can
recover it from lessor
If the lessor is not carrying out repairs,
lessee can give notice, then conduct such
repairs, and recover from the lessor

Rights of lessee (cont.)

If the property under lease suffer from
injury /destruction due to natural
calamities, riot, fire, war etc. lessee can
avoid lease, provided, the damage is not
caused by his acts.
The lessee has right to mortgage, transfer
or assign right to another person (subject
to prior conditions of lease)

Liabilities of Lessee
Bound to disclose the extent / nature of interest he is
going to take in the leased property
Bound to keep & restore the property as it was when lease
was granted (unless specified otherwise) except for
reasonable wear and tear
Shall allow lessor to enter the property for inspections
Shall pay agreed rent in time & place specified
Shall not cause any permanent injury to the property
Shall deliver back the possession at the end of lease
period
Shall not allow any other person to use the leased
property
In case of encroachment by a third person, lessee should
immediately inform the lessor

Forms of Lease
Building lease
Owner has a good piece of land
Unable to develop or construct
Gives on lease to lease holder, who constructs, maintains in
good condition, use / rent out for the period of lease ( B O T)
Ground rent = rental value of open plot at the time of granting
lease
Lease holders profit = available rent from developed property
ground rent
Periods of building lease 99, 999 years etc.
Rent review might be included at every 5-10 years intervals
Ground rent get secured by constructions made on lease land

Forms of Lease (cont.)

Occupation lease
Owner of land constructs suitable structure(s) and
together with land, then lease out for specified
occupation (residential, commercial)
Period of lease depends on type of occupation
(residential 2-5 year; commercial 20-30 years
etc.)
Rack rent = rent fixed is equal to prevailing rent in the
locality for similar use or land / structure
Head rent = rent fixed is less than the prevailing rent
in the locality for similar use or land / structure

Forms of Lease (cont.)

Why head rent differs from rack rent?
Lease holder carried out extensions / additions /
improvements on property result increase in rent
At the start of lease, the lessee might had given
some premium, so that the lease rent had been
reduced
developments of adjoining areas caused income
in rental value of leased property

Forms of Lease (cont.)

Sublease
Subject to and depending on the terms and conditions of original
lease, the leaseholder may grant a sublease to other person (s)
Original lease holder becomes head lessee for sublease holder
Sublease period shall be less than original lease period ( by at
least few days)
If lease holder transfer lease for the same conditions of original
lease, it is assignment of lease and no sublease occurs
The sublease holder is bound by all conditions of original lease
Interest of sub-lessee is less secured compared to that of
original lessee

Forms of Lease (cont.)

Life lease
Lease is granted for the life period of one or more persons
Two types:
Lessee for life
Tenant for life

Perpetual lease
Lease is granted for one year or number of years; but, it can be
renewed by the lease holder at his will or desire
As long as there is no violation of lease document, lessor can
not terminate the lessee
Mostly, lessor is relieved from the burden of repairs,
maintenance, payment of taxes etc.

Mortgage
When the owner of freehold or leasehold
property grants an interest in his property to
another person, against the security of a loan
advanced by that person, he is said to perform a
mortgage deed.
Mortgager = person who grants such interest
Mortgagee = Person who advances loan for such
interest
Equity of Redemption: the power of the
mortgager to recover his property from the
mortgagee on repayment of full loan amount as
agreed

Mortgage ( cont.)
Amount of loan
Depends on capitalized value of the property
[70-80%; 50-60% is safer; OR net income
from the property shall be just sufficient to
cover up the interest of advanced loan]

Insurance
It is desirable to have insurance coverage of
the property in the names of both mortgagee
and mortgager; mortgager shall pay the
premium, and show the receipt to mortgagee

Mortgage on leased property

Possible to have mortgage deed on
leasehold property
Property shall be revalued periodically to
ensure that amount of remaining loan
does not exceed the current value of the
property

DEPRECIATION
Derived from Latin depretiatum meaning
fall in value
Meaning in general sense is getting
consumed, decayed, damaged, worn out
It is the charge for consumption of long
lived assets
Two ways of expressing depreciation:
Depreciation as cost in operation
Depreciation as decrease in worth

Depreciation as cost in operation

In business enterprises, assets in the
forms of building, machinery are used for
carrying out productive activities.
These assets wear out in productive
activities, and the loss has to be recovered
from product selling
For accounting this loss, depreciation as
cost in operation is to be computed.
It is also useful for tax discount calculation

Depreciation as decrease in worth

Here depreciation is used to convey the
decline / lessening in worth.
Value of an asset depends on its capacity
to render satisfying services during its
estimated future life period
Hence depreciation is in crude the
decrease in value with age/time

Depreciation as decrease in worth

(cont.)

Main causes of depreciation:

Physical conditions
Due to general wear and tear
Due to natural elements like heat, rain, wind etc.
Due to structural deterioration

Functional obsolescence

Inadequacy & over adequacy

Lacking in utility
Obsolete necessities
Outmoded design

Economical obsolescence due to

Changes in character and use
Changes in neighborhood

Changes in law
Zoning laws changed

Nearness to nuisance
Over supply
Too many assets are in sale

Social changes

Methods of Estimating Depreciation

Straight Line Method
Slowest system
Most acceptable
Property losses its value by same
amount every year

CS
Annual Depreciati on D
n

N- No of years of life
C-Original cost
S- salvage/scrap value

Methods of Estimating Depreciation

(cont.)
Constant Percentage Method
Lose a constant percentage (p) of its present value at starting of
every year
Value at the end of n years = C(1-p)n = S
or p = 1-(S/C)1/n
Value of property at the end of m years = C(S/C)m/n ; S0
When s/c is very small, depreciation for first year will be very
large
Method also named :method of declining balance
Though % is constant depreciation amount declines

Methods of Estimating Depreciation

(cont.)
Quantity Survey Method
Most widely used
More realistic
Property studied in detail and loss of value
due to physical deterioration worked out
Amount to be spent towards removing
obsolescence and modernization computed
based on actual data

Methods of Estimating Depreciation

(cont.)
Sinking Fund Method
Depreciation assumed to be equal to annual
sinking fund set aside by the owner
Usefulness of property or consumption of asset
not considered
Sinking fund allows recovery of capital while
depreciation does not
Valuation table (VIII) available
Annual SF
m

i
1 i 1
Ic
A
n
i
1 i 1
depreciati on % I c A 100

OUTGOINGS
Expenses to be met with in connection with property to
maintain revenue from it
Valuer shall estimate the outgoings to find net income
from a property
Types of outgoings
Municipal tax
Government taxes
Annual repair/maintenance
Varies with type of repair, age of building, climate, specification of
work items, use
To be worked based on
Average cost over years
% of cost of construction (1to 5)
% of gross rent received (10 to 15)

OUTGOINGS (cont.)
Management and collection charges
for large properties
To attend and dispose complaints of tenants
Labour for contacting tenants and collection

Insurance for fire

Premium depending on

type of construction
Locality and transport facility
Proximity to other buildings
Fire fighting systems present in property

Cost of reconstruction of superstructure and loss of rent during

reconstruction

Vacancies and bad debts

Not occupied at all time
irregularities in payment of rent
Sinking fund

miscellaneous

METHODS OF VALUATION
Properties classified as
Open land
Land with buildings

Open land classified in to

Urban land
Industrial
Residential
Commercial

Farm land

Value of urban land depends on development

potential
Farm land produces earnings as such

METHODS OF VALUATION of
URBAN LAND
Comparative method
Transactions of near by lands studied
Fair rate of the land arrived at
Possible and useful for only active market
case
Market shall be sufficiently stable
Existing use as well as re-development
potential to be considered

METHODS OF VALUATION of
URBAN LAND (cont.)
Factors to be considered in analysing sale
instances:
Situation (busy locality, easy access)
Size (particular sizes will be of demand in various
locations)
Shape - regular shape has advantages
Frontage and Depth
Frontage if not less than rear width will be better
Street frontage is better
Depth of good property is equal or slightly greater than
standard depth

METHODS OF VALUATION of
URBAN LAND (cont.)
Return frontage
Available for corner plot- better architecture value
for residential; better approach/access for
commercial; more light and ventilation

Level
Natural level shall be slightly above abutting road
level for higher value
Easy drainage
Less earth work

Good foundation soil at reasonable depth

Land locked land will fetch very minimum

METHODS OF VALUATION of
URBAN LAND (cont.)
Restriction on development
Due to FSI limitation
Minimum distance from main road abutting

Encumbrances
Easement of right for air, water, light, passage
Unauthorized hut dwellers

Special advantages
View to sea, lake, river
Nearness to school, shopping centre
Essential services

Disadvantage of method- actual price of transaction is

not disclosed!

METHODS OF VALUATION of
URBAN LAND (cont.)
Abstractive method
Useful when no information on nearby recent
transactions available
Method (Land value Abstraction):
A nearby similar property fetching rent is identified
and studied in detail
Its capitalized value C is worked out based on net
rent received
Estimated cost of replacement of building (s) S is
computed
If area of land is A, rate for land is (C-S)/A per sqm

METHODS OF VALUATION of
URBAN LAND (cont.)
Belting Method
Suitable for large area of plot
In general value of land decreases as depth from road
increases
Plot divided into various belts of unequal widths
(depth of next is 50% more than previous)
Suitable rate for first belt arrived at
For second belt 2/3 rd value of first
For third half of first etc.
Recess land portions if any shall be assessed with
less rate