Valuation

ESTIMATING COSTING & VALUATION

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Valuation
Valuation is an art of judgment based on experience and relevant statistical data to forecast the value of a
property at present.

 Purpose of valuation -

 Taxation

 Rent fixation

 For sale and purchase

 Mortgage

 For insurance premium

 For Assessment of stamp duty. (To pay tax to Government at the time of purchasing)

Important Term in Valuation

 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.

 Price - It is the cost of a commodity fixed depending upon the demand from consumers as compared to
their other wants, and for sale purpose taking into account its utility, durability, cost of production,
satisfaction and the extent to which it is scarce.

 (Price = Cost + profit)

 Value - Value is the price estimated to be realized in a sale proceeding between a willing buyer and
willing seller.

 The present value of property in the open market means its utility. It varies from time to time and
place to place.

 Book Value - The value of property shown in an account book in that particular year is known as Book
value.

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 Its assets including properties and machineries, less any allowance for the period passed.

 It will be reduced year to year depending upon depreciation and will be only scrap value at the
end of the utility period.

 Book value = Original cost – Depreciation

 Market Value - The value of property at which it can be sold in the open market.

 Depreciation - It is the loss of value due to wear and tear, use etc

 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 of the property.

 Replacement Value - Value of a property or its services calculated on the prevailing market rate to
replace the same.

 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 the rateable value of property.

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

 Distress Value - Some time due to fear of war or riot the value of a property cannot fetch full market
value. Then this value of property is called distress value.

 Annuity - Annual periodic payments for repayment of the capital amount invested. (it is annual
installment of sinking fund)

 Annuity certain - Paid at end of each year

 Annuity due - Paid at beginning of year

 Deferred annuity - It begins at some date in future

 Perpetuity It continues for an indefinite period.

 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 known as Obsolescence.

 It is very difficult to predict obsolescence. Loss due to natural calamities are included in
Obsolescence.

 Scrap Value - After a property loses its utility, the value of dismantled material less the cost of demolition
is known as Scrap value. Normally 10% of its estimated cost or present value is considered as scrap value.

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 Salvage Value - It is the value at the end of the utility period without being dismantled. Gross Income -
The total income of all Sources without deducting the outgoings.

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

 Net Income - Net amount left with the owner after deducting outgoings from gross income.

 Net income = Gross income – Outgoings.

 Capitalized Value - amount of money whose interest at the highest prevailing rate of interest will be
equal to the net income or net return in perpetuity (for specific period).

 Capitalized value = Net return × Year’s Purchase.

 Return Frontage - Plots situated at the junction of two roads having the frontage on these two roads are
said to have return frontages. Such plots usually have more monetary value than other plots in the same
area.

 Reversionary value of Land - It is present consideration for the full value of land obtainable after the
specified period is over.

 Monopoly value - When the property possesses a special advantage with respect to adjoining property
due to its location, Frontage, size and shape. The owner may demand any fancy price such that the value
of property is known as monopoly value. (eg - Highway land)

 Accommodation value - The value of surrounding agricultural land of a city which is expanding
considerably will be more if the land is converted into accommodation land. In this case sometimes the
owner of the adjoining property may offer more price for accommodation purpose, such a price will be
more than market value and it is known as accommodation value.

 Sentimental value - When property is sold or purchased at higher value than the market value due
sentimental attachment with the property is known as sentimental value.

 Speculative value - Purchasing the property at lower price and selling it at higher price for gain of profit is
known as speculative value.

 Stigma Effect - A property stigma is an unfavorable quality in a property or one that makes the property
less attractive or unattractive, but that is unrelated to the physical condition or features of the property.
Stigmas may include: a suicide or death that occurred in the property, the property was the scene of a
major crime.

 Mortgage - The owner of property can raise the loan against the property.

 Free hold property - It is in absolute possession of its owner for a period of indefinite duration.

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 Leasehold property - It holds only physical possession of property for a definite period under certain
conditions, known as Leasehold property.

 Easement /Right of easement - It is a non possessory right to use the real property of another owner
without possessing it.

Sinking Fund
 It is the amount which has to be kept aside at the fixed interval of time out of the gross income so that at
the end of the useful life of property the fund should accumulate equal to initial cost of property.

 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 scrap value
of the building when the life of the building is over.

 Calculation of Sinking Fund

 Yearly Instalment of Sinking Fund = Ic x Sinking Fund Amount

I = Annual Installment

S = Amount of sinking fund

i = rate of interest

n = Life span

 Capital cost – Its total amount required to possess the property (Cost of land and cost of constant)

 Annuity - It is annual periodic payments for repayments of capital amount invested by the party.

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

 Year purchase

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

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

Calculation of Depreciations
 Straight line method - This assumes that the loss in the value of the property is the same every year and
at the end of its useful life it is equal to its scrap value.

 Constant percentage method - This assumes that thaw property loses its value by a constant percentage
of its value at the beginning of each year. (n = life of machine)

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

 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.

Note: If the outgoing are not given in the question and are to be assumed, the following percentage may be
taken for solving the problems.

 Repair @ 10% of the gross income or rent.

 Municipal taxes @ 20% of the gross rent.

 Property tax @ 5% of gross rent.

 Management and collection charges @ 5% of gross rent.

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 Insurance premium @ ½% of gross income.

 Miscellaneous charges @ 2% of the gross rent.

Lease
 A legal agreement that allows you to use a building or land for a fixed period of time in return for rent.

 The leaseholder is known as the lessee and holds the physical possession of the property for a definite
period under terms and conditions specified in the lease document.

 Other forms of the lease are as follows:

 Building Lease - In this type of lease, the owner of a freehold open plot of land let out his land to the
lessee on an agreed amount of premium or ground rent or a combination of both.

 The leaseholder may then erect a building over there up to a specified amount and within a
specified time and he maintains the property and can reside or earn income through such
property.

 Occupational Lease - In this type, the lease is granted against premium or rent or a combination of the
two by an owner of property consisting of land and building or other structures for occupancy for a fixed
period to another person.

 Sublease – A leaseholder may render sub-lease of his leasehold property to other persons subject to the
terms and conditions in the original lease and be allowed by Local regulations or Court of Law.

 Perpetual Lease – When the lease of a property is given for a number of years providing a condition that
lease is renewable from time to time, even for endless time according to the desire of the leaseholder.

 When a lease is granted for a period of 99 years, it is known as long term lease.

 When it is for 999 years it is said to be perpetuity or for an endless duration.

 A short-term lease generally refers to a lease with a duration of fewer than six months. Often,
they are based on a month-to-month rental agreement, which may or may not be renewed at the
end of each month.

 PATTA - It is a document giving details of the ownership of property and is maintained by the Revenue
Department in India. It may be called Title deed in English. Patta is a document which shows the
ownership entity of the property. It comes under the Revenue Department.

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