Valuation of Immovable property

 

 

What is ‘VALUATION’?

Valuation is an art and science of estimating the value for a specific purpose of a particular interest in property at a particular moment in time taking into account all features of the property and considering all factors of the market.

     DEFINITION OF MARKET VALUE

“The market value of a particular interest in landed property may be defined as the amount of money offered by a willing purchaser to a willing seller of that interest, in the open market, where there is competition, and both parties are being actuated by economic considerations, and where there is no undue pressure on either of them.”

TYPES OF LANDED PROPERTY

1] Residential.

    a) Houses of various types.

    b) Flats and tenements.

2] Industrial.

     a) Factories.

     b) Warehouses and godowns.

3] Commercial.

    a) Shops.

    b) Offices.

4] Agricultural.

METHODS OF VALUATION

1] The Direct Comparison or Comparative Method.

2] The Contractor’s Method.

3] The Profits or Accounts Method.

4] The Residual Method.

5] The Investment Method.

COMPARATIVE METHOD

• Find out consideration actually paid for other similar properties in the same locality and three to five years prior to the date of valuation.

Factors to be taken into consideration:

1] Location of property.

2] Situation.

3] Level of amenities & facilities.

4] User of property.

5] Age of property.

6] Condition of property.

7] Facilities available in the property.

8] Size (floor area) of property.

BELTING METHOD

If the depth of the plot under valuation is more than the depth of the comparable plots in sales considered, this method is adopted to value the land.

Consideration for Different Types of Lands

Land with return frontage:

Give positive allowance depending on the importance of road on which return frontage.

Land with irregular shape:

Carve out regular shape by drawing perpendiculars to road and give negative allowance to remaining land.

CONTRACTOR’S METHOD OR CAPITAL VALUE METHOD

This method is used in assessment of properties not usually sold, not intended to be sold or even incapable of being sold in open market.

Properties classified into three groups:

1] Public properties --

      Museums, Schools, Colleges, Libraries.

2] Properties having potential for profit –

      Stadiums, Theatres, Music halls, Racecourse etc.

      3] Properties of public utility undertakings –

            Railways, Water works, Electricity undertakings, Docks.

Method

1] Estimate value of land in its existing use.

2] Estimate cost of construction of building.

3] Allow for depreciation on account of age, obsolesance etc.

4] Capital value = land value plus depreciated cost of build

Methods to determine replacement cost of building

1.Plinth area rate.

2.Cubical content rate.

3.Item-rate.

Depriciation

Depreciation is calculated for period of present life with due consideration to its future life and total life.

Methods

Straight-line method – Allocates depreciation uniformly throughout its service life

                                           Depreciation=original cost – salvage value

                                                                                total life

Declining balance method – Fixed % of unit cost at the beginning of the year is

                                             allowed to be deducted at the end of year annually.

 

Sinking fund method –             Depreciation=1-Y.P. Future life at certain %

                                                                              Y.P. Full life at same %

Presumes normal and regular maintenance and repairs. If neglected, more allowance should be made, depending on the state of maintenance and repairs.

          

Weaknesses of Contractor’s Method

·         No direct co-relation between cost of property and market value, which depends on forces of supply and demand.

·         Requires assumptions relative to unit costs. More probability of assumption being wrong.

·         Requires assumptions as to original economic life and/or remaining economic life. Greater probability of assumptions being in error.

 

 

PROFIT METHOD

Profits made by an occupier determines the returns the owner would get for the premises.

Method.

1] Estimate the gross average receipts of the occupier.

2] Deduct the expenses incurred for earning those receipts.

3] Deduct the tenant’s share of reasonable profits, which include interest on

    his capital, remuneration of his services and compensation for his risk.

4] The residue will be the landlord’s share of rent.

Note: Bear in mind that what is assessable is the property and not the trade.

RESIDUAL METHOD

·                     This method is used to value property with development potential.

·                     Development potential is also called “latent value”.

·                     Increased value of property after carrying out development will be more than expenditure incurred.

Method

1. Assess optimum development for the property. Estimate gross development value [a].
2. Assess cost of development [b].
3. Assess developer’s risk and profit [c].
4. Residual value= [a] – {[b] +[c]}.

Cost of each item of infrastructure is estimated and allowances are made for each relevant factor, which are deducted from sale value of small plots, carved out from larger plot.

     Cost of development will include

1.Building costs

2.Architect’s fees [% of cost of development]

3.Engineer’s fees

4.Other professional fees [% of proceeds of sell]

5.Advertising and legal fees