VALUATION

Engineer has to work out the value of an existing property for various purpose. Valuation is needed for wealth tax, municipal taxation, etc Valuation is an art of judgment based on experience and relevant statistical data to forecast the value of a property at present.

The estimated value of property depends upon its power to serve man’s need, location, amenities, purpose and supply and demand of a property type. It continuously varies with age, physical state and characteristics.valuation of the property is always done both by the seller and prospective buyer so as to arrive at a reasonable price

Terms used in Valuation

1.Cost and Value:

Cost It is the amount of expenditure incurred to produce or acquire a commodity having a value. To this cost of Product, agents’ commission and stamp duty etc. is also added. Value is the price estimated to be realized in a sale proceed between a willing buyer and willing seller.

2.Rateable Value: net annual letting value of a property obtained after deducting the amount of yearly repairs from the gross income. Taxes are charged on rateable value of property,

3.Replacement Value: value of a property or its services calculated on the prevailing market rate to replace the same.

4.Assessed Value: It is the value of the property recorded in the register of local authority and used for the purpose of determining the various taxes to be collected from the owner.

5.Annuity: annual periodic payments for repayment of the capital amount invested

6.Distress Value: value at which property is sold at lower price than that of open market due to difficulties of vendor.

7.Potential Value: inherent value got by property such as land. Such value may go on increasing due to passage of time or can fetch more return if used for some alternative purpose

8.Scrape Value: After a property losses its utility, the value of dismantled material less the cost of demolition is known as Scrape value

9.Salvage Value: It is the value at the end of the utility period without being dismantled.

10.Investment value - is the value to one particular investor, and may or may not be higher than the market value of a property. Differences between the investment value of an asset and its market value provide the motivation for buyers or sellers to enter the marketplace.

11.Obsolescence: Sometimes a building though physically quite sound yet it becomes outdated because of change in design pattern, fashions living habits of its inhabitants and thus it loses its functional utility. This is knows as Obsolescence. It is very difficult to predict obsolescence. Loss due to natural calamities are included in Obsolescence

12.Gross Income: It is the total revenue realised from a property either as rent or lease money during a year. The out goings and collection charges etc are not deducted.

13.Net Income: net amount left with the owner after deducting out goings from gross income.

                                      Net income = Gross income – Out goings

14.Out-going: expenses incurred to maintain the property by undertaking periodical repairs. It also includes taxes levied by the Govt./local body on that property. Sinking fund, insurance, etc.

Taxes - Include municipal tax, wealth tax, income tax, property tax etc. - Paid by owner of the property annually and are calculated on annual rental value of the property after deducting the annual repairs 15 to 20% of gross income

Repair: - It includes various types of repair such as annual repair, special repairs, immediate repair, etc. - Amount to be sent on repairs is 10 – 15 % of gross income.  

15. Market value:The price at which an asset would trade in a competitive Supply and Demand setting. Market value is usually interchangeable with open market value or fair value. 16.Liquidation value: may be analyzed as either a forced liquidation or an orderly liquidation and is a commonly sought standard of value in bankruptcy proceedings. It assumes a seller who is compelled to sell after an exposure period which is less than the market-normal time-frame. 17Insurable value: is the value of real property covered by an insurance policy. Generally it does not include the site value.

18.Investment value: the value of an asset to the owner or a prospective owner for individual investment or operational objectives.

Purpose of Valuation: Valuation is done for Following Purpose:

For Mortgage, Security of loans etc: While advancing any sum of money on the mortgage or security of a property, the mortgagerØ For Buying or Selling. Auction Bids. Borrowing Money from Insurance Company, Bank or such other Institution. Compensation for any lose due to war, earthquake etc. Insurance against fire of a building, Other purpose Similarly there are many other occasions, when the probable value of the property is required. Such as: Acquisition: Sometimes property is compulsorily acquired by the government. Hence valuation of property has to be carried out for paying compensation to the owner.

Principles of Valuation: Following Principles should be observed at the time of evaluating a fair and reasonable value of property.

1. Cost depends upon supply and demand of the property.

2. Cost depends upon its design, specifications of the materials used and its location.

3. Cost varies with the purpose for which valuation is done.

4. In valuation, a vender must be willing to sell and so the purchaser willing to purchase

5. Present and future use of any property should be given due weightage in valuation.

6. Cost analysis must be based on statistical data as it may sometimes require, evidence in a Court of law

Factor affecting the value of the Property:

1. Supply and Demand (Market Conditions) : Basically the value of a property is determined by supply and demand. For eg: plentiful supply of a commodity and little or no demand, lower the value of commodity, whereas, if there is little supply and a great demand, higher the value of property. In the property market the supply of property is relatively fixed at any one time. In order to increase the supply, more properties need to be built. However, this process takes time. Demand, in contrast, can change relatively quickly. Therefore property values tend to be influenced by demand rather than supply.

2. Location Property proximity to public transportation, train stations, shopping facilities, schools, etc., plays an import factor in determining your property’s market value. Every area has a high end and a low end. The market value of your property is affected by that reality. People that purchase homes in “lower end” areas expect to pay less than they would if they bought the same home in a “higher end” neighbourhood.

3. Features One of the key factors in property’s value is the features it provides. For example, some house styles are more popular with buyers than others. The age and size of your home compared to other available properties also plays a part in affecting your home’s value.

4. Condition The value of Property also depend upon its condition and its functional utility. For eg: A home in immaculate condition has a much higher potential for a top dollar sale than one that is lacking the most basic routine maintenance.

5.Property Improvements: Property improvements are unquestionably important factors that affect the property value. For eg: Improvements like room additions, bed ,bath rooms, kitchens and other items like floor tiles,swimming pools, etc., can increase the value of your home.

6. Age The age of a property can be a factor in value. If a property has historical connections, it can make it more valuable and imperfections such as uneven walls and sloping floors that would not be tolerated in a new property would perhaps be seen as quaint and charming. Some older properties may need more maintenance and repairing than a modern property and a newer property would meet all the latest up to date regulations thus increasing its value.

7. Seller Motivation Seller motivation is also a major factor which affects the offer price made by the buyer. For example, if you bought a home in a new area you may be willing to accept a lower price to quickly complete the sale your current house.

8. Marketing The marketing plan that your agent executes on your behalf will determine the amount of interest that is shown in your property. Your agent’s level of skill and expertise in the negotiating process will affect the amount of money you’ll be able to get for your Property.

There are several types and definitions of value sought by a real estate appraisal. Some of the most common are:

Sinking Fund:
It is the fund which is built up for the sole purpose of replacement or reconstruction of a property when it loses its utility either at the end of its useful life or becoming obsolete.

The calculation of Sinking Fund depends upon the life of a building as well as upon the rate of interest and it is generally calculated on 9/10 of the cost of construction as the owner will get 10% as scrape value of the building when the life of the building is over.

The fund is regularly deposited in a bank or with an insurance agency so that on the expiry of period of utility of the building, sufficient amount is available for its replacement

Depreciations: 

It is defined as the gradual decrease in the value of a property because of constant wear, tear and decay etc

Method of Depreciation Calculation:

A. Straight Line Method: a fixed amount of original cost is lost every year and is deducted from the original cost as long as the useful service life and salvage value remain unchanged. Thus at the end of the utility period only the salvage value remains.

Annual Depreciation (D) = (Original cost – Salvage value)/life of years

The rate of depreciation depends upon the longivity of utility period neglect of maintenance etc of a property.

Depreciations D = (C-V)/n

Where, D = yearly depreciation value C = Original cost,V = Scrap or salvage value

 n = Utility period of life of property in years.

The book value after number of years, say n1 years = Original Cost – n1*D

Year Purchase (Y.P): 
The capitalize value which needs to be paid once for all to receive a net annual income of Re 1 by way of interest at the prevailing rate of interest in perpetuity (i.e for an indefinite period) or for a fixed no. of days. Suppose the rate of interest is 5% per annum. One has to deposit Rs 100 to get Rs 5 per annum Now, to get Re 1 he has to deposit 100/5 = Rs 20 per annum.

 Therefore, YP = 100/ rate of interest =1/R

In case of life of property is anticipated to be short and to account the accumulation of sinking fund and interest on income of the property to replace capital, the year’s Purchase is suitably reduced. - Years Purchase (Y.P) = 1/ (R+Sc)

Method of Valuation

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. Valuation also depends on the height of the building, height of the plinth, thickness of the wall, nature of the floor, roof, doors, windows etc.

The valuation of a building is determined on working out its cost of construction at present day rate and allowing a suitable depreciation.

Six Methods of Valuation

1)Rental Method of Valuation 2)Direct Comparisons of the capital value 3)Valuation based on the profit 4)Valuation based on the cost 5)Development method of Valuation 6)Depreciation method of Valuation

1. Rent Return Method: Capitalised value of the property is worked out as under:

Net rent = Gross rent – out goings

Year Purchase (Y.P) = 1/(R + Sc) where Sc – coefficient of sinking fund

Capitalized value = Net rent * Y.P.

In case there are immediate repairs (capital repairs) to be undertaken then

Net value = capitalised value – capital repairs

2. Land and building basis When rent cannot be ascertained by direct methods for building like schools, clubs etc, the valuation is done on the cost of land to which the depreciated cost of the building is added. Cost of the land is approximately determined by taking the average of the sale deeds (act or action) of the near past. Depreciated cost of the building is arrived at by knowing its life and its age. Sinking fund deposited is also taken as depreciation for the purpose of calculation of net value of a property.

3. Residual or Development Method: A bid Plot is divided into small available units which are planned and provided with best of amenities but at least possible Expenses. About 30% of land should be provided for necessary amenities like roads, gardens, parks, electric sub station and water facility like well etc. In existing building if some improvements are to be made, the development method of valuation may be used. The anticipated capitalized value will be equal to the product of net income and year’s purchase.

4. Valuation Based on Profit Basis: Such valuation generally done for commercial buildings like hotels & cinemas and is based on the profit of business in such properties. Net yearly profit is worked out by reducing all possible outgoings and interest of capital invested by the owner of the business and remuneration of his labor. This net profit is taken as net rent. Capitalised value is determined by multiplying net rent with year’s purchase.

5. Valuation based on Cost: In this method the cost of providing a new construction at the prevailing rate or in possessing the property is taken as the basis to determine the value of the property. In such case necessary depreciation should be allowed. Finally the cost of land and adjusted reproduction cost are added together to get the value of the property.

6.Depreciation Method of Valuation: According to this method the depreciated value of the property on the present day rates is calculated by the formula:

D = P[(100 – rd)/100]n

Where, D – depreciated value P – cost at present market rate rd – fixed percentage of depreciation (r stands for rate and d for depreciation) n – The number of years the building had been constructed.

To find the total valuation of the property, the present value of land, water supply, electric and sanitary fitting etc; should be added to the above value.

The value of rd can be taken as given in below

Life of Building is 75 – 100 years, rd value  is 1 2,
Life of Building is 50 – 75 years, rd value is 1.3  
Life of Building is 25 – 50 years rd is  2 4 , 
Life of Building is 20 – 25 years rd is 4 5 
Life of Building is less than 20 years rd is 5