Chapter 13 ( valuation)

CHAPTER : 13
VALUATION
Introduction
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

Terms used in Valuation
Cost & 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
Value is the price estimated to be realized in a sale
proceed between a willing buyer and willing seller.

Value
In order to have value for commodity, it should posses
the following three essential characteristics;
a) It must possess utility.
b) It must be scare.
c) It must be marketable or transferable.
 In the absence of any one of above qualities, the
commodity may not have any value.
 For eg. Rotten Mangoes though scarce do not have
any value because they have no utility. On the other
hand Land has got value because it satisfies all above
essentials.
Value also depends upon outside factors such as:
 Location of Property
 Time
 Supply and Demand Condition

Price
It is the cost of 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 scare.
Book Value
It is an original investment shown in the account books of a
company on 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.

 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 rateable
value of property,

 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.
 Distress Value:
value at which property is sold at lower price than
that of open market due to difficulties of vendor.
 Annuity
annual periodic payments for repayment of the
capital amount invested.

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

 Salvage Value:
It is the value at the end of the utility period without
being dismantled.
 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.
 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 out
goings from gross income.
Net income = Gross income – Out goings.

 Capitalised 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).
Capitalised value = Net return * Year’s Purchase.
For eg. Let annual rent =Rs 3500
Highest rate of interest = 8%
Capitalized value =3500*1/(8/100)= Rs 43750.

 Return Frontage:
Plots situated at 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.
For Eg. Let life of building = 30 yrs.
Present value of land =50000
The person interested will get the said Rs 50000 after
30 yrs has passed.
Now if he wants its value at present then he gets Rs
15500 which if invested at present in some securities
at 4% compound interest will amount to Rs 50220 in
30 yrs.

 Rent
annual or periodic payment made by the tenants for
use and possession of land and buildings.
 Rental Value:
It is the rent which may reasonably be expected to
be obtained in the open market.
 Ground Rent:
When a piece of land had been leased out, the rent
reserved under the lease is k/a ground rent
 Contractual Rent
rent fixed between the land lord and the tenant by
negotiations.
 Standard Rent
rent which would be permissible under the law to be
charged from a tenant.

Purpose of Valuation and Principles of
Valuation
Purpose of Valuation
Valuation is done for Following Purpose:
 For Buying or Selling:
valuation of the property is always done both by the
seller and prospective buyer so as to arrive at a
reasonable price.
 For Mortgage, Security of loans etc:
While advancing any sum of money on the
mortgage or security of a property, the mortgager

 Determination of Rent:
Valuation of property is also done to work out
the amount of fair rent of a building etc.,
especially when it is requisitioned by the
government or semi government organization.
 Assessment of tax:
The value of the newly built property for the
purpose of assessing the amount of
expenditure incurred is determined by income
tax authorities so as to ensure that the
expenditure commensurate with the known
sources of income of the owner. Similarly, to
determine property tax, house estate duty, gift
tax, etc, valuation of property is done before
levying these taxes.

 Acquisition:
Sometimes property is compulsorily
acquired by the government. Hence
valuation of property has to be carried out
for paying compensation to the owner.
 Other purpose
Similarly there are many other occasions,
when the probable value of the property
is required. Such as:
 Insurance against fire of a building
 Compensation for any lose due to war,
earthquake etc.
 Borrowing Money from Insurance Company,
Bank or such other Institution.
 Auction Bids.

Purpose of Valuation and Principles of
Valuation
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.

Factor affecting the value of the
Property
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.

Property
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.

Property
5. Property Improvements
Property improvements are unquestionably important
factors that affect the property value.
For eg: Improvements like room additions, bedrooms,
bathrooms, 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.

Property
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.

Value Classification (spranger’s classification)
 Theoretical value – mathematical value worked
out for the property
 Economical value - is a measure of the benefit
that an economic actor can gain from either
a good or service & is generally measure in terms
of currency.
 Social and Cultural value-
 Aesthetic value
 Political value
 Religious Value

There are several types and definitions of value sought
by a real estate appraisal. Some of the most common
are:
 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.
 Value-in-use, or use value[3] – The net present
value (NPV)[4] of a cash flow that an asset generates
for a specific owner under a specific use. Value-in-use
is the value to one particular user, and may be above
or below the market value of a property.
 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.

 Investment value - the value of an asset to the
owner or a prospective owner for individual
investment or operational objectives.
 Insurable value - is the value of real property
covered by an insurance policy. Generally it does
not include the site value.
 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.

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 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.
 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 amount of instalment of Sinking Fund can be
worked out as under:
Sn = s[(1+R)n-1]/R
s =(Sn*R)/[(1+R)n-1]
Coefficient of sinking fund (Sc)=yearly instalment of
sinking fund
Taking, Sn=1,
Sc = R/[(1+R)n-1]
Where,
n = Utility period or life of building in years.
Sn = Sinking fund to be accumulated in ‘n’ years
R = Rate of interest in decimal
s = yearly instalment of sinking fund

Sinking Fund
Example 1
The sinking fund amount of a property is estimated to
Rs 50,000 whose future life is 20 yrs. Find the yearly
instalment of sinking fund of sinking fund which
should be set aside @ 5%.
Solution:
Coefficient of sinking fund instalment
Sc = R/[(1+R)n-1] = 0.05/[(1+0.05)20-1]
= 0.0302
Yearly instalment of sinking fund = 0.0302*50000 = Rs
1510 /year

Sinking Fund
Example 2
A property has been purchased by a person at a cost of Rs.
40000 excluding the cost of land. Determine the amount of
sinking fund annually deposited at the rate of 5%
compound interest. Assume the future life of the building
as 30 yrs and scrape value of the building materials as
10% of the cost of purchase.
Solution:
The total amount of sinking fund to be accumulated at the
end of 30 yrs
Sn = (90/100)*40000= 36000
= 36000
Annual instalment of sinking fund ‘s’ = (Sn*R)/[(1+R)n-1]
=(36000*0.05)/[(1+0.05)30-1]
=1800/(4.325-1) = Rs 541.35

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 longivity
of utility period neglect of maintenance etc of a
property.
 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

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

Example 3
A person purchased a property for Rs. 20000.
Assume that its net salvage value after 30 yrs will
be 2000. Determine amount of depreciation each
year considering it to be uniform.
Soln:
Annual Depreciation ‘D’ = (C-V)/n
=(20000-2000)/30
=600 per year

Example 4
 The total cost of machinery including the installation
charges in a factory is Rs 120000. Calculate the
depreciated cost of the above after 15 years. The
salvage value is Rs 8000. The span of life is 40 yrs.
Soln:
Cost of machinery ‘C’ = Rs 120000
Salvage value ‘V’ = Rs 8000
Annual Depreciation ‘D’ = (C-V)/n = (120000-8000)/40
= Rs 2800
Depreciation for 15 years = 2800*15 = Rs 42000
Depreciated cost of the machinery after 15 years =
120000-42000
= Rs 78000

Depreciations
B. Sinking Fund Depreciation Method
In this method the depreciation of a property is
assumed to be equal to the annual sinking fund and
compound interest there on upto that date. The
exact amount to be set aside for the purpose of
reinvestment in the form of depreciation is
calculated in such a way that by depositing the
same at compound interest it will amount to fixed
capital at the end of specified period.
The annual sinking fund to provide for Re 1 in n
years
= R/[(1+R)n-1]
Where, R = rate of interest at which sinking fund
amount is required to be invested.

 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

Year Purchase contd..
 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)
Example: Calculate the value of years purchase for a
property if its life is 20 yrs and the rate of interest is
5%. For sinking fund the rate of interest is 4.5%
Soln:
Here, R=5%, R1 = 4.5%
Y.P =1/(R+Sc)
Coeff. Of sinking fund (Sc) = R1/((1+R1)n-1) =0.0319
Y.P = 1/(.05+.0319)=12.21

Outgoings
 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.
 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.

Outgoings
 Sinking Fund
 Management and collection charges
- 5to 10% of gross income may be taken for this purpose
- For small building it may not necessary to considered it
 Loss of Rent
- As it may not be possible to keep whole of the premises
fully let at all times, in such cases a suitable amount
should be deducted from the gross rent
 Miscellaneous
- These include:
electrical charges for lighting, running lift, etc and are borne
by the owner
- 2 to 5% of gross rent is taken for these charges.

Outgoings
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.
i. Repair @ 10% of the gross income or rent
ii. Municipal taxes @ 20% of the gross rent
iii. Property tax @ 5% of gross rent
iv. Management and collection charges @ 5% of
gross rent
v. Insurance premium @ ½% of gross income
vi. Miscellaneous charges @ 2% of the gross rent.

Qualification of a valuer
Valuer:
- is an expert in his profession and is to
work out the market value of the property
depending upon economic analysis of all
items of the property.
In order to become a good valuer he must
possess good knowledge of the following
topics:
I. Planning, designing and construction work
II. Surveying and levelling
III. Quantity surveying and estimating
IV. Building by laws of the locality
V. Laws of easements (legal right to use another property
generally to get access to
something on the property)
VI. Rent Restriction Act

Qualification of a valuer
VII. Arbitration
VIII.Law of Contracts
IX. Local and Government taxation
X. Fire insurance
XI. Rate of market interest and rate of interest
on gilt edged securities
XII. Present market rate of land and other items
concerning valuation of property
XIII.Report Writing, etc

Valuation of land
 Cost of the land is approximately determined by
taking the average of the sale deeds (act or action) of
the near past.
 Suitable increase or decrease is allowed to the
cost arrived according to the location of plot, its
topography, shape and ratio of its length to
depth, mode of payment etc.
 Sinking fund deposited is also taken as
depreciation for the purpose of calculation of net
value of a property. Calculation of value of
property by taking sinking fund as depreciation is
also k/a replacement cost of method of valuation.

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

Example 5
A building in an A class city is let out @ Rs. 5000
PM .( per month) The total outgoings of the property is
estimated to be 15% of the gross income, calculate
the capitalized value of the property if the present
rate interest is 6% and life of the property is 50
Years.
Soln:
Gross rent = 5000*12 = Rs 60000 P.A (per year)
Outgoings = 15% of gross rent
=60000*15/100 = Rs 9000 P.A
Net Rent = 60000-9000 = Rs 51000

Since the life expectancy is quite lengthy therefore,
the income is considered to be perpetual
(identifying long time) hence
Y.P = 1/R = 16.67
Capitalized value = 51000*1/0.06 = Rs 850000
In case sinking fund allowance is also to be
accounted for
Sc = (R/[(1 + R)n – 1] = 0.06/[(1+0.06)50-1] = 0.0034
Y.P = 1/ (R + Sc) = 1/ (0.06+0.0034) = 15.77
Capitalized value = 51000*15.77 = Rs 804270.

Method of Valuation
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.

Method of Valuation
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.

Method of Valuation
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.

Method of Valuation
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.

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 table below
S.N Life of Building rd value
1 75 – 100 1
2 50 – 75 1.3
3 25 – 50 2
4 20 – 25 4
5 <= 20 5

 Example: a) the Present estimate of a building is Rs
200000. it is 20 yrs old and maintained in a good condition.
The life of the structure is assumed to be 80 yrs. Work out
the present value of the building for acquisition.
b) With the present value of the building calculate the
standard rent, the rate of interest may be assumed 6%.
Solution:
a) The depreciated value of the building is:
D= P*((100- rd)/100)n
Where,
D= Depreciate value
P = Rs 200000 (i.e Cost of a present Market Rate)
rd= 1 (assumed) – fixed percentage of depreciation (r stand
for rate and d for depreciation)
n=20
Therefore, D=163581.0

b) Annual rent @ 6% = 163581*6/100
= 9815.0
Rent per Month or Standard Rent = 9815/12
= Rs 818.
Note: The value of rd may be taken as 1 for
building having life 80 yrs.

Example 18.12
# An RCC framed structure building having estimated
future life 80 yrs, fetches a gross annual rent of Rs
2220 per month. Work out its capitalized value on the
basis of 6% net yield. The rate of compound interest
for sinking fund may be taken 4%.
The land Plot of above building measures 1400 sqm
and cost of land may be taken to be Rs. 120 per sqm.
The other Outgoing are:
i) Repair and maintenance 1/12th of the gross income.
ii) Municipal taxes and Property tax – 25% of gross
income.
iii) Management and Miscellaneous charges – 7% of
gross income
The Plinth area of the building is 800 sqm and plinth
area rate of the above type of building may be taken

Soln:
Gross income per year = 2220*12 =Rs 26640.
Out going Per Annum:
i) Repair and Maintenance 1/12 of Gross income =
26640/12= Rs 2220
ii) Municipal taxes and property tax @ 25% =
26640*25/100=Rs 6660
iii) Management and Miscellaneous charges @ 7% =
26640*7/100= Rs 1864
Sinking fund Coeff. (Sc)=R/((1+R)n-1) =
0.04/((1+0.04)80-1)
= 0.0018
iv) Sinking Fund Req to accumulate the cost of the
building (which is at the rate of Rs 150 / sqm of plinth
area = 800*150=Rs 120000 in 80 years @ 4% intrest
= 120000*0.0018= Rs 216.0

 Total Out going per annum = Rs 10960.8
 Net annual Return = 26640-10960.8 = Rs
15679.20
 Capitalised value of the Building = Net income *
YP
= 15679.20*100/6 = 261320
Cost of land @ Rs 120 per Sqm (1400*120) = Rs
168000.0
Total = Rs 429320.0
Total value of whole property = Rs 429320

Valuation Report
 ..Valuation.doc
 ..Wokil Bom Valuation.xls

Chapter 13 ( valuation)

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