VALUATION

CHAPTER 13.0
 Introduction
• Valuation is the technique of assessing the present fair value of the
property.
• Valuation is an art of determining actual unbiased, legal and logical
value of the property
• Property may be the land, building, both land and building, factory,
machineries, jewelries and other engineering structures of various
types.
• The value of the property depends upon its structure, life span,
location, maintenance etc
 Cost and Value
• Cost:
– Cost is the original cost and the original cost may
be either construction cost or a purchase cost.
• Value:
– Value means the present (current) salable value of
the property.

Note: Value may either less than or greater than the

cost
 Purpose of Valuation
• The main purpose of the valuation are listed as
follows:
– Buying and selling of property
– Taxation (local bodies tax , property tax and wealth
tax)
– Rent fixation
– Security for loan or mortgage
– Compulsory acquisition
– For insurance
– To determine the court fee
– To prepare the balance sheet of company
– Partition of the property
– Reinstatement (to get the original value)
 Principle of valuation
• Costs depends upon supply and demand
• Costs depends upon its design, specification and
location
• Costs varies with the purpose
• Costs depends upon age and condition of
property
• Costs depends upon the psychology of the buyer
and seller
• Depends upon the present and future use of the
property
• Costs analysis must depends upon the statistical
data
 Factors affecting the value of the
property
• Here are some factors that affects the value of
the property
– Location
– Climatic condition
– Population census
– Supply and demand function
– Rate of interest
– Topography
– Rent restriction act
– Security on capital
– Abnormal condition
– Purpose
 Terms used in Valuation (value
classification)
• Gross income
• Net income
• Outgoings
• Municipal taxes
• Scrap value
• Book value
• Salvage value
• Market Value
• Distress value
• Monopoly Value
• Assessed value
• Speculative value
• Gross income:
– Gross income is total income and includes all receipts from
various sources
• Net income:
– Saving left after deducting all outgoings from gross
income.
– Net income = Gross income – outgoings
• Outgoings
– Outgoings are the expenses required to maintain the
revenue of the property.
• Taxes: Taxes are fixed on the basis of annual rental value and
includes municipal tax, property tax, wealth tax which are to be
paid by the owner after deduction of annual repairs.
• Repairs: annual repairing cost of property. Usually 10-15 % of gross
income or gross rent.
• Management and Collection Charges: 5 to 10 % of gross rent.
• Sinking fund: it is the fund where certain amount of gross rent is
accumulated to reconstruct or to replace the property
• Loss of rent
• Miscellaneous
• Book Value
– Amount shown in the account book after allowing
depreciations.
• Book Value = original Cost- Depreciation
• Salvage Value
– It is the value of the property at the end of its utility
period without being dismantled.
• Scrap Value
– It is the value of dismantled property (materials) after
deducting labor charge to dismantle. Usually 8-10 %
of total cost of construction.
• Distress value:
– Distress value is the value of the property at financial
difficulties. It is always lower than the market value
due to insufficient knowledge of property valuation.
• Monopoly Value:
– Value of monopoly in nature and is always greater
than the market value.
• Assessed value:
– Value recorded for the municipal taxes.
• Speculative Value:
– Value Based on opinion on guesswork rather than
knowledge.
• Obsolescence:
– It is the loss in the value of property due to old
design, out of fashion, out of date.
• Capital Cost:
– It is the total cost of construction including land or the
original total amount required to posses a property.
• Capitalized Value:
– It is the amount of a money whose annual interest at the
highest prevailing rate of interest will be equal to the net
income from the property. This value is equal to the
forecasted net income for the specified time period.
• Capitalized value = Net income * Years purchase
Years Purchase(Yp):
Yp is defined as the capital sum required to be invest in order to receive an annuity
of Rs. 1.0 at certain rate of interest.
The YP reflects the time value of money in converting a flow of income into a lump
sum.
For 4 % interest rate per annum, to get Rs 4 it requires Rs 100 to be deposited in a
bank
To get Rs 1.0 per year it will be required to deposit 1/4th of Rs 100 i.e. Rs 25
Therefore,
For in-definite period (based on single interest),

where ‘ ip’ highest prevailing rate of interest for capital in decimal

For definite period (based on decimal interest),

Where, ‘ ic ‘ is coefficient of sinking fund

where, ‘ i ‘ is rate of interest for sinking fund (for redemption of capital) and ‘ n
‘ is life of structure
• Sinking Fund
– Accumulation of fund to replace the structure

Where S is total Sinking Fund to be

deposited
• Depreciation
– It is the gradual reduction in the value of property due to wear
and tear, decay, obsolescence. It depends on the longevity of
the structure, physical condition, usage etc. Accumulation of
fund to replace the structure
• Types of depreciation
– Physical depreciation (wear and tear)
– Function depreciation (inadequacies, obsolescence)
– Location depreciation (up or below and at the road level)
• Methods of Calculating Depreciation
– Straight line Method

– Constant Percentage of Depreciation

– Sinking Fund method of Depreciation

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+b+c 3A+b+c C- (3A +b+c)

Where A is annual sinking fund, a,b,c are rate of interest on

sinking fund and C is original cost of construction

- Quantity Survey Methods

 Qualification of valuers
• Planning, Designing and Construction works
• Surveying and leveling
• Estimating and quantity surveying
• Knowledge on market rate of land
• Rate of interest
• Knowledge regarding rent act, and other
prevailing acts and regulations
• Building codes and bye-laws
• Knowledge on Vastu Science
• Report writing skills
• And other required computer skills
 Various methods of valuation
• Cost based method of valuation
• Depreciation method of Valuation
• Plinth area method of Valuation
• Rental method of Valuation
• Profit based method of Valuation
• Capital value comparison method of Valuation
• Development method of Valuation
 Cost based method of valuation

• Most accurate Method of valuation

• Cost estimates is required from the drawings

Value of property = value of building by detailed cost estimate – total depreciation +

value of land

Where,
 Depreciation Method of Valuation

Value of property = Depreciated Value of building + value of land

 Plinth Area Method of Valuation
• Most Popular Method of valuation

Value of property =
Total plinth area or built up area in meter square * prevailing plinth
area rate per meter square – total depreciation + Value of land

Where,
 Numerical for method2 and 3
• A freehold residential property consisting of a
house having plinth area of 300 square meter
constructed 20 years ago on a plot of land
measuring 900 square meters is proposed to be
purchase by Mr. Ganesh for his use. The present
rate of construction of similar building is Rs.
25,000 per square meters and the cost of land is
Rs 1000 per square meters. Life of a building is
75 years and salvage value is 10 %. Advise Mr.
Ganesh on what cost he should purchased the
property (use method 2 and 3)
 Rental Method of Valuation
• Value of property = Capitalized value + Value of Land
• Capitalized Value = Net rent/income * Years Purchase
• Net rent/income = Gross rent/income - outgoings

Where, Years purchase

Where :
‘ ip’ highest prevailing rate of interest in decimal
ic ‘ is coefficient of sinking fund
‘ i ‘ is rate of interest for sinking fund and ‘ n ‘ is life of structure (for redemption
of capital)
Profit Based Method of Valuation
• Use in valuation of commercial property like cinema hall, hotel, complex etc

• Value of property = Capitalized value + Value of Land

• Capitalized Value = Net rent/income * Years Purchase
• Net rent/income = Gross rent/income- outgoings
 Numerical for Method 4

• A R.C.C framed structured 4 storied building having a

cubic content of 1400 square meters was constructed 15
years ago on a freehold land (measuring 1100 square
meters). The building fetches a rent of Rs. 14000 per
month. What amount will you recommend for a
advancing a loan to the owner against the mortgage, if
the rate of land in that area is Rs 500 per square meters.
Insurance premium Rs 900 per annum, repair and
maintenance 8 % of gross rent, Mgmt and Collection
charges 8 % of gross rent, Taxes 30 % of gross rent.
Assume future life to be 60 years. Rate of interest be 8
% and redemption of capital is 5%. Loan advice 50 -60
% of value
A R.C.C framed structured 4 storied building having a cubic content of 1400 square meters was
constructed 15 years ago on a freehold land (measuring 1100 square meters). The building fetches a rent
of Rs. 14000 per month. What amount will you recommend for a advancing a loan to the owner against
the mortgage, if the rate of land in that area is Rs 500 per square meters. Insurance premium Rs 900 per
annum, repair and maintenance 8 % of gross rent, Mgmt and Collection charges 8 % of gross rent, Taxes
30 % of gross rent. Assume future life to be 60 years. Rate of interest be 8 % and redemption of capital is
5%. Loan advice 50 -60 % of value
Value of property = capitalized value + value of land

= 10,84,413 + 1100 * 500 = 16,34,413

Loan recommendation = 55% of 16,34,413 = 8,98,927
Capitalized value = net rent * YP = 89,820 * 12.073 = 10,84,413
Net rent = gross ret – outgoings
Gross rent : 14000 * 12 = 1,68,000
Outgoing / deductions: a) Insurance = 900
b) repair and maintenance = 8% of gross rent = 8%* 168000 = 13,440
c) mgmt. and collection charges = 8% of gross rent = 8%* 168000 = 13,440
d) taxes = 30% of gross rent = 30% * 168000 = 50,400
Total outgoings = 78,180
Net rent = Gross rent – outgoings = 168000 – 78,180 = 89,820

1 / (0.08+0.00282) where, ic can be calculated as = 0.05/ ((1+0.05)^60-1) = 0.00282

Now yp = 12.073
 Numerical for Method 5
• Workout the valuation of cinema hall from the following data:
– Cost of land Rs 1,20,00,000
– Gross income Rs. 75,00,000
– Expenses as follows:
• To Run cinema including staff salary, electricity charge,
municipal tax, stationeries, etc. 30 % of gross income
• Repair and maintenance cost of machineries and
equipment is 5 % of capital cost which is Rs. 9,50,000
• Sinking fund for machineries whose life period is 25
years at 4 % after allowing 10 % scrap value
• Insurance premium Rs. 10000 per annum. Assume yp for
60 years at 5% and redemption of capital at 4 %. Assume
repair of hall is 2 % of gross income
Workout the valuation of cinema hall from the following data:
– Cost of land Rs 1,20,00,000
– Gross income Rs. 75,00,000
– Expenses as follows:
• To Run cinema including staff salary, electricity charge, municipal tax, stationeries, etc. 30 % of
gross income
• Repair and maintenance cost of machineries and equipment is 5 % of capital cost which is Rs.
9,50,000
• Sinking fund for machineries whose life period is 25 years at 4 % after allowing 10 % scrap value
• Insurance premium Rs. 10000 per annum. Assume yp for 60 years at 5% and redemption of capital
at 4 %. Assume repair of hall is 2 % of gross income
Value of property = capitalized value + value of land = 9,26,53,114.64 + 1,20,00,000 = 10,46,53,114.64
Capitalized value = net income * YP = 50,21,969.77 * 18.45 = 9,26,53,114.64
Net income = gross income – outgoings
Gross rent = 75,00,00
Outgoings:
a) To Run cinema ……………………all , etc. 30 % of gross income = 30% * 75,00,000 = 22,50,000
b) R&M of machineries = 5 % of 9,50,000 = 47,500
c) SF for machineries, ASF = (100-10%)* 9,50,000 * 0.04 / ((1+0.04)^25 -1) = 20,530.23
d) Insurance = 10,000
e) Repair of hall = 2 % of 75,00,000 = 1,50,000
Total outgoings = 24,78,030.23
Net rent = 75,00,000 – 24,78,030 = 50,21,969.77
Now, YP =

ic = 0.04 / ((0.04+1)^60 -1) = 0.0042 Now, Yp = 1/ (0.05+0.0042) = 18.45

 Capital Value Comparison Method of Valuation
• Use in valuation of land by comparing the adjacent and nearby
land value

Development Method of Valuation

• Land Plotting
• Use by Planning authority
• Commonly use in commercial basis by private entrepreneur
• Developed Value = Cost of Land + Cost expenses in development
• A town planning authority has to acquire an area of 3500
square meters for the development of new colony. After the
developing the area it is proposed to be sold at Rs 45 per
square meters. Workout the maximum compensation which
can be given to the land owners whose land is to be acquired
for the development, assuming
– The authority establishment charge is 15 % on sale price
– 40 % area is to be provided for roads, parks and other
public utilities
– Colony improvement expenses Rs 7 per square meters
– Engineer fee for whole works is 4 % on sale price
• A town planning authority has to acquire an area of 3500 square meters for the
development of new colony. After the developing the area it is proposed to be sold at
Rs 45 per square meters. Workout the maximum compensation which can be given to
the landowners whose land is to be acquired for the development, assuming
– The authority establishment charge is 15 % on sale price
– 40 % area is to be provided for roads, parks and other public utilities
– Colony improvement expenses Rs 7 per square meters
– Engineer fee for whole works is 4 % on sale price

Total land area = 3500 sq.m

Total land area to sale = 60 % * 3500 (40% land is required for public utilities) =
2100 Sq.m
Total sale price = 2100 * 45 = 94500
Cost of development:
a) 15 % of sale price = 15 % * 94500 = 14,175
b) 7 * 3500 (whole area) = 24,500
c) Engineer’s fee = 4 % of sale price = 4 % * 94500 = 3780
Total = 42,455
We have,
Developed value of land = cost of land + cost land development
94500 = cost of land + 42,455
Cost of land = 94500 – 42455 = 52045 (maximum compensation to the landowners)
A farmer has a land of 4 hectare adjacent to the newly developed small
town. A business person wants to include the farm land into the
town after developing it into a new colony having plot area each
with 200 square meter. The current sale price of land near vicinity is
Rs.2500 per square meter. The business person is thinking of 25
percent net profit after selling the developed plots. Work out
maximum price of the land at which the business person may
purchase from farmer. The expenses during the colony development
are as follows:
• Cost of leveling and dressing of land @ Rs. 20 per m2
• Cost of providing public facilities like road, sanitation drain, drain,
water supply and electricity (covers 30 % of gross land) @ Rs. 30
per m2
• Architects, planners and Engineer’s Fee @ 2 % of Sale Price
• Land Registration and Local bodies Fee (Tax) @ Rs. 6 per m2
• Other Miscellaneous Expenses @ 0.5 % of sale price
 Report Writing
• After completing all calculations works and measurement if necessary the
valuation report is prepared and submitted to the concerned
departments. The valuation report is prepared and submitted in the
standard format approved by the concerned department.
• It consist of three parts
– Part I
• Deals with all details about property
– Part II
• Calculations and final value as curtained by valuator
– Part III
• Valuator’s declaration
Finally Annexure is attached as a supporting documents