ValuationEr. Gurbakshish Singh AntalLect Civil Engg.

Property valuation

Valuation is both aScience and an Art!

Valuation Methods

Need of Valuation

Value Theory

Valuation is both a Science and an Art!

Valuation includes componentsand knowledge of:

-mathematics-statistics-physical (land) planning

-urban planning

-rural planning/agriculture

› -building construction› -sociology/human behaviour

› -common sense/feeling

Valuation components

Valuation

Valuation is the technique of estimating and

determining the fair price or value of a

property such as a building, a

factory or other engineering structures of various types, land

etc.

Valuation of a building depends on

•type of the building, •building structure and durability, •on the situation, •Size of building, •Shape of building, •Frontage of building,

Valuation of a building depends on

width of roadways, the quality of materials

used in the construction present day prices of

materials

The valuation of a building is

determined on working out its cost of construction at

present day rate and allowing a suitable

depreciation.

Purpose of valuation

1.Buying or Selling Property When it is required to buy or sell a

property, its valuation is required. 2.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.

3.Rent Function In order to determine the rent of a

property, valuation is required. Rent is usually fixed on the certain percentage of the amount of valuation which is 6% to 10% of valuation.

4.Security of loans or Mortgage When loans are taken against the

security of the property, its valuation is required.

5.Compulsory acquisition Whenever a property is acquired by

law; compensation is paid to the owner. To determine the amount of compensation, valuation of the property is required.

6.Insurance,Betterment charges, speculations Valuation of a property is also required for Insurance,Betterment charges, speculations etc.

Information needed• Information about the property:

– Land use– Land area– Building: size, age, standard etc.– Yearly costs and incomes– Other special conditions

Information needed• Information about the purchase

– Price– Date of sale– Seller– Buyer

• Information about the real property– Land use– Land area– Building: size, age, standard etc.– Other special conditions

Seller : Mr ABuyer : Mrs BDate: 04-09-15Price: 1 200 000etc.

Information needed

• General information – Average replacement costs– Depreciation - time and percent– Average value of land

• Information about the real property– Land use– Land area– Building: size, age, standard etc.– Other special conditions

The cost approach

SEK/USD

Age (years)0 10

Depreciation 3.5 %/year

Replacementcosts

Replacement costs 1 000Depreciation 10 years 3,5 % - 350Cost of land 200

Cost value 850

Cost of land Costvalue

Types

of Valu

e

Market value

Scrap value

Salvage value

Liquidation value

Insurable value

Book Value

Market Value

The market value of a property is the amount

which can be obtained at any particular time from the open market if the

property is put for sale. The market value will differ

from time to time according to demand and supply.

Market Value

The market value also changes from time to time for various

miscellaneous reasons such as changes in industry, changes in fashions, means of transport, cost of materials and labour

etc.

Scrap value- Scrap value may be defined as

the value of materials of dismantle buildings. After the

completion of utility period the dismantled materials such as

Steel, timber ,bricks and furniture will fetch a certain amount which is called scrap

value of building. Scrap value of building is about 10 % of its total cost of construction.

Salvage value - The value of building at the end

of utility period without being dismantled is called the Salvage Value. Another example is a machine after the completion of its usual span of life , may be sold or purchased by some one for other use. The sale value of that machine is called Salvage value.

Salvage value of a property or an asset may be positive, zero or negative. For example the salvage value of RCC structures is negative ,because dismantling and removal will be costly. Scrap value of machine is Positive because it will be used for other purpose.

Insurable value

Liquidation Value

Book Value

Book value is the amount shown in the account book after allowing

necessary depreciations. The book value of a property at a

particular year is the original cost minus the amount of depreciation

allowed per year and will be gradually reduced year to year and at the end of the utility period of

the property, the book value will be only scrap value.

Sinking fund:

Sinking Fund may be defined as the fund which is gradually accumulated by way of periodic on account deposit

for the replacement of building or structure at the end of its useful life. Main function of creating Sinking

fund is to accumulate sufficient to meet the cost of construction or maintenance or replacement of

structure after its utility period.

Depreciation 

Depreciation is the gradual

decrease in the property with

time due to structural

deterioration , wear and tear ,

decay and obsolescence .the

value is reduced due to

gradually used reduced due to

its use, life ,wear & tear.

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, life wear and tear, decay and obsolescence.

Definition

HKSSAP defines depreciation as the

‘allocation of the depreciable amount of an asset over its estimated

life’.

Rateable Value

Rateable Value is net annual letting value of a property , which is obtainable after deducting the amount of yearly repairs from gross income. Municipal and other taxes are charged at a certain percentage on the rateable value.

Obsolescence Obsolescence is defined as the

overall decrease in the value of property or structure due to becoming outdate in style, in structure or in design.

i.e an old dated building with massive walls, arrangement of rooms not suited in present days becomes obsolete even iif it is well maintained.

Reasons of Obsolescence

Progress in Art

Change in Fashion

Change in planning idea

New trends in Market

New invention

Improvement in Design

Inadequate Space

Annuity

Annuity is the annual periodic payments for repayment of the capital amount invested by the party.

These payments are either paid at the end of year or at the start of year.

Capital cost

Capital cost is the total cost of construction including land, or the original total amount required to possess a property.

It is the original cost and does not change while the value of the property is the present cost which may be calculated by methods of Valuation.

Capitalized Value of a Property

The capitalized value of a property is the amount of money whose annual interest at the highest prevailing rate of interest will be equal to the net income from the property. To determine the capitalized value of a property, it is required to know the net income from the property and the highest prevailing rate of interest.

Capitalized Value = Net income x year’s purchase

Year’s Purchase

Year’s purchase is defined as the capital sum required to be invested in order to receive a net receive a net annual income as an annuity of rupee one at a fixed rate of interest.

Year’s Purchase

The capital sum should be 1×100/rate of interest.

Thus to gain an annual income of Rs x at a fixed rate of interest,

the capital sum should be x(100/rate of interest).

But (100/rate of interest) is termed

as Year’s Purchase.

Factors Kept in Mind During Valuation Area where

Property Situated Present Cost of

Material Heritage value of

Building Condition of scrap

Land value Gross income On situation Road width frontage

Qualities of a Good valuer He must know the deep knowledge of the

concerned field or subject area. He must posses Analytical and Computer Skills. He should know the tolerances for wastage

incurred during construction. He should be know the Present rates of

material used. He should be well experienced He should know the bye laws of that area. He should posses the leadership and soft skills. He must know the deep knowledge about the

latest materials and their cost.

Methods of Valuation

Rental Method of Valuation

Direct comparison with the capital Value

Valuation based on cost

Rental Method of Valuation

In this method, the net income by way of rent is found out by deducting all outgoing 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 enquiries.

Direct comparison 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.

Valuation based on 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 Year’s 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 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.

According to this method of Valuation, the building should be divided into four parts:

Walls

Floors

Doors and

Windows

Roofs

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.

Thanks…

…

guri02@gmail.com