ELEMENTS OF

VALUATIONS

PROFESSIONAL PRACTICE

SUBMITTED BY :
SHAH ZAIN
12/AR/008
IX SEM
B.ARCH

What do you mean by valuation ?

Valuation is an adventure in economic research, leading to an
economic decision of a valuer which indicates the conclusions
arrived at after taking into consideration all factors like economic,
social, political, legal and physical which affect the value one way
or another.
Valuation is the process of determining the current worth of an asset
or a company; there are many techniques used to determine value.

Explain Value, Price and Cost ?

A price is a fact and a Value is an estimate of what the price ought to
be.
Value, price and cost do not come into existence unless and until an
exchange of commodities or services takes place and the exchange
usually takes place depending upon utility, satisfaction,
transferability and the extent to which a commodity is scarce.
Essential Characteristics
Value
In order that a commodity can have value, it must possess three
essential qualifications, namely :
i. It must possess utility.
ii. It must be scarce.
iii. It must be transferable or marketable.
. Price
It is the cost of a commodity plus additional reward to the
producer for his labour and capital.
. Cost
Expenditure to produce a commodity having a value.

Explain market value ?

The market value has been defined as the amount which
might be expected to realize from a willing purchaser on a
sale of a property by a willing seller in the open market.
i. In the open market means the property is offered for sale
in such a manner that every person who desires to purchase
can make an offer.
ii. A willing seller is a person who will not sell the property
unless he obtains something more than his reserve price.
iii. Might be expected to realize refers to the expectations of
the purchasers after they have been supplied with all the
necessary data, etc. and after they know the conditions of
the market.

Explain essential characteristics of market value ?

iv. Vendor must be willing to sell.
v. Purchaser must be willing to purchase and must be a
prudent one who can put the land to the most beneficial
use.
vi. No compulsion on either in the transaction.
vii. Urgent necessity of purchase or sale to be discarded.
viii.Disinclination of vendor to be ignored.
ix. Sentimental value to the vendor will have no place.
x. Present and future uses known as potentials are to be taken
into account.

What is open market ?

In the open market means the property is offered for sale in such
a manner that every person who desires to purchase can make an
offer and that the necessary steps are taken to advertise its sale
in papers and all necessary means are adopted to bring to the
notice of all the purchasers that the property is for sale in the
market under the most favourable condition.
The term open market is used generally to refer to an economic
situation close to free trade.

Explain value classification.

o Assessed Value: The value of a property which is recorded in
the register of a local authority and used for the purpose of
determining the amount of property taxes to be collected from
the owner of the property.
o Book Value: It is also known as book cost which shows the
original investment of a company on its assets, including
properties and machineries less depreciation for the period
passed.
o Salvage Value: Value of a machinery realized on sale when its
useful span of life is over but it has not become useless.
o Scrap Value or Junk Value: Value of machinery realized
when it becomes absolutely useless except for sale as junk. It
also applies to built-up properties which have outlived their
useful span of life and in such cases the value of the old
materials of such buildings less cost of demolition will
represent the scrap value or break up value. It is also known as
Demolition Value.

o Replacement Value: It indicates the value of a building or

portions thereof if these have to be replaced in the form of
acceptable substitutes, at the current market rates. If the
substitutes form substantially identical new ones, in other
words constructed or manufactured to order, the value in
such a case will be known as Reproduction Value.
o Earning Value: It is the present value of a property which
will start yeilding an income in future.
o Potential Value: The land has got an inherent value which
may go on increasing due to passage of time or due to some
alternative use fetching more return. This inherent value is
known as Potential Value.
It includes the following:
i. Beneficial present use of land.
ii. Future usefulness.
iii. Special suitability for a definite purpose.
iv. Better lay out.
o.Distress Value: When a property is sold at a lower price
than that which can be obtained for it in an open market, it is
said to have Distress Value.
It may be due to the following:
i. Financial difficulties of vendor.
ii. Indirect benefit to vendor or purchaser.
iii. Part consideration paid otherwise.
iv. Panic due to war and riots.
o.Speculative Value: When the property is purchased so as to
sell the same at a profit after a short duration, the price paid
is known as speculative value and the chief aim behind the
purchase is not that of development so as to earn rent but
that of speculation.

o Monopoly Value: Following the law of supply and

demand as the number of available plots in a locality
goes on decreasing, the value of the land goes on
increasing and a time comes when very few plots
remain in the market. The fancy price demanded by
the vendor for those few remaining plots will be
known as monopoly value.
o Sentiment Value: The fancy price which is demanded
by a vendor when he attaches some sentimental value
to his property is known as sentimental value having
no relationship with the market value.
o Accommdation Land and Accommodation Value:
The land on the outskirts of a town used for the
purpose of play grounds, gardens, etc. is known as
accommodation land. It has a value greater than that
of agricultural land and less than that of building land.

Classification of ownership for building/land.

There are two forms of ownership, namely, freehold

and leasehold and this qualification of the property is
designated by the word Tenure.
Tenure:
It indicates the terms and conditions under which a
property consisting of land or land with building can
be owned. In wider sense there are two types of
tenures, namely; (a) freehold, (b) leasehold.

Freehold Tenure
This type of tenure indicates that the land can be owned
without any restrictions whatsoever so far as its use is
concerned. It does not require payment of any charges or
ground rent.
However, the rules and regulations of the Government or
local authority will have to be complied with, for its
development as the freehold tenure is not exempted from the
said restrictions which are meant for the welfare of citizens in
general.
It is the highest form of ownership of land. The freeholder has
got:
i. Right to its occupancy and use.
ii. Right to sell in whole or in part.
iii. Right to gift.
iv. Right to contract for its use to others for a period of time.
Leasehold Tenure
. The property is a Bundle of Rights which can be retained as
it is; or can be divided by a lease or leases so as to create two
or more interests in the property like lessors interest, lessees
interest, sub-lessees interest, etc.

Duration of Lease Period.

. It is normally of 21, 50, 98 or 999 years or even short of
duration than 21 years with different terms and conditions and
also as regards ground rent and renewal periods.
. When the lease is granted for a period of 98 years, it is known
as long-term lease and when it is for 999 years, it is said to be
the lease in perpetuity or for endless duration. Sometimes the
lease of the property can be for the lifetime of an individual
and such lease is known as Life lease.

Two common types of leases in our country are

Building lease and Occupation lease.
Building Lease
Open plot of land is leased out on payment of periodic
consideration known as Ground rent (unsecured
ground rent).
The lessee to develop the land at his own cost by
putting up the construction work whose minimum cost
at times is specified in the deed so that the ground rent
reserved under the lease becomes a secured one and is
known as secured ground rent.
Period of lease is usually 50, 98 or 999 years or may be
for different period but of long duration: (a) One can
find B.P.T. leases for periods of 30 years, 50 years or
more than that. (b) Formerly the lease period of 99
years is now adopted at 98 years.
Covenants and conditions setting forth the rights and
obligations of each party to the lease including
covenant on the part of the lessee to deliver up the
premises on the determination of the terms.
Occupation Lease
The lessor has the right of Re-entry that is a right to
eject the tenant and again become possessed of the
property himself, subject of course to the protection
that may be available to the lessee under the Rent
Control Act or under the Transfer of Property Act,
1882.

Purpose of Valuation.
1. Purchase for investment or for occupation
2. Sale
3. Mortgage
4. Rent Fixation
5. Land acquisition
6. Betterment charges
7. Auction bids
8. Probate
9. Speculation
10.Insurance
11.Wealth tax
12.Capital gains etc.
13.Stamp duty
14.Gift tax
15.General court purpose in order to determine the amount of
Court Fee Stamp in a suit, etc.
. The purpose of valuation plays an important part in
determining the market value of a property.
o.For Mortgage: In case of a mortgage proposal, the valuer has
to advise the mortgagee as to what sum can safely be
advanced on the property. Thus, the function of the valuer
here is to safeguard the position of the mortgagee, his client.
o.For Sale or Purchase: In the case of purchase, the valuer
desires that his client should get a bargain proposal, whereas
in case of sale, he will value at a price that could be obtained
in the market depending upon the conditions of the money
market and rate of interest on securities.

o For Acquisition Proceedings: For acquisition proceedings,

the valuer is likely to take a liberal view as the seller is an
unwilling person and due to acquisition he may have to
undergo a lot of trouble and expense.
o For Government Taxes: For the purpose of Government
taxes the valuer determines the market value of the property
that is what a willing buyer would pay to a willing seller.

Factors affecting the Value of a Property.

Supply and Demand: A number of properties having the
same rent fetching capacities available for sale as compared
to few buyers will result in low prices for the properties and
vice versa.
Cost of Replacement: When a built-up property is
available for sale with vacant possession for the beneficial
occupation of a purchaser, he will always consider the cost
of replacement of the same building at present.
Occupational Value: When a property is required for the
purpose of residential occupation, the price paid is generally
more than its market value arrived at by rental method.
Interest and Security of Capital: Every person expects
some reward in return if he allows the use of his capital.
The reward is known as interest. The amount of reward
expected by an individual depends upon a number of
factors, the most important being interest available in
general investment market and security of his capital.

 Rent Restriction Act: The value of a property

depends upon its annual rental and in case of an old
building let out prior to 1.9.1940 the same is not
allowed to be increased under the Rent Act except for
permitted increases.
Abnormal Conditions: The value of properties may
go down due to abnormal conditions like war, riots or
due to insecure conditions.
Town Planning Act: Due to declaration of a Town
Planning Scheme in a particular area whereby the said
area is proposed to be provided with all civic amenities
like roads, gardens, drainage, etc. the value of open
plots in that locality will go up.

Methods of Valuation.
Rental Method
The main principle of this method is the Present
worth of future benefits and since the receipt of
benefits is the receipt of net income and as such true
basis upon which to judge the value would be net
income. This method of valuation calls for a detailed
study of a number of factors like rent, outgoings and
factors on which the years purchase will depend.
Years purchase: It is a figure which shows how many
times the net annual income is secured for its value. It
can be obtained by dividing 100 by the rate of interest
for an indefinite period that is in perpetuity.

Land and Building Method or Physical Method

Applied for valuing such properties where there is no
direct evidence of rent, e.g. schools, welfare centres,
owner occupied properties, purpose built industrial
buildings, etc.
Steps: (a) Determine market value of land, (b) Cost of
construction of building (depreciated or otherwise)
Market value of Land:
Market value based on the sale price of very property
under consideration
By comparing the land whose market value is to be
determined with the instances of sales of similar lands
in the neighbourhood
Depreciation:
Defined as the loss in capital value of a building, a
machine or an equipment on account of any cause,
may be of the internal nature leading to Physical
depreciation and Functional obsolescence or may be
of external nature leading to Economic obsolescence.
Methods of computing Depreciation:
i. Straight Line Method
ii. Sinking Fund or Present Worth Method
Development Method
. In this method, sub-division of the complete holding is
done into small units. The effective area of small units
(excluding 15 % garden area, area in access, area for
sub-station and other amenities) will form the base.
Other important factors requiring consideration will be:
(a) Easement rights, (b) Tenancy encumbrances.

Profit Method
This method deals in working the profit from a
property and subsequently capitalizing the same at
appropriate rate of return depending upon a number of
factors:
The net profit to be adopted should be an average of
last three years of profit.
Part of the profit is due to goodwill which should be
properly reflected in the rate of return.
Applicable to cinemas, hotels, etc.

Thank You !