4. 1. Cost:- Original cost of construction
2. Price :- Cost of production
3. Value:- Worth /utility
4
5. 1.Cost:
It is the original cost of construction which comes by
adding day to day expenditure from the day of planning
till construction is completed.
2. Price:
• Amount worked out by adding cost of production,
interest on investment, reward to the producer for his
labor and risk
3. Value:
• It means worth or utility.
• It varies time to time
• It also depends on its supply and demand.
• Cost of a property value depends on its utility, scarcity
and events
5
7. What is valuation?
Valuation is the technique of estimation or
determining the fair price or value of property
such as building, a factory, other engineering
structures of various types, land etc.
By valuation the present value of a property is
defined.
The present value of property may be decided by its
selling price, or income or rent it may fetch.
The value of property depends on its structure, life,
maintenance, location, bank interest, etc.
Cost: means original cost of construction of
purchase.
7
8. Purpose of valuation?
1. Purchase for investment or for occupation
2. Buying or selling property: when it is required to buy or to sell a
property, its valuation is required.
3. Taxation: To assess the tax of property its valuation is required.
Taxes may be municipal tax, wealth tax, property tax, etc., and all
taxes are fixed on the valuation of the property.
4. Rent fixation: in order to determine the rent of a property, valuation
is required. Rent is usually fixed on certain percentage of valuation
(6% to 10% of the valuation).
8
9. 5. Security of loans or mortgage: when the loans are taken against the security of
the property, its valuation is required.
6. Compulsory acquisition: whenever a property is acquired by law compensation
is paid to the owner. To determine the amount of compensation valuation of
property is required.
7. Valuation of a property is also required for insurance etc.
8. Betterment charges: Value of property may increase as a result of making new
roads, developing of land and by providing other amenities. To fix up betterment
charges of fees valuation becomes necessary before and after completion of
development
9. Partition: In case of partition of a property, market value of the same is
determined to divide the shares on the owners.
10. Assessment of income or stamp fees: Income tax authority need to determine
the total expenditure incurred to construct a new property for comparison of the
income tax return by the owner. To verify stamp fees provided during purchase of
a property.
11. Gift tax
12. Speculation
13. AssessingCapital gains tax
14. Capital gains tax
9
10. Qualification of valuer
A GOOD VALUER IS AN ENGINEER OR ARCHITECT WHO MUST HAVE SOUND
KNOWLEDGE ON
1. Estimating and costing
2. Surveying and levelling
3. Planning and designing
4. Experience in construction work
5. Building bye laws of local bodies
6. Law of easements
7. Law of contracts
8. Land acquisition and town planning act
9. Arbitration
10. Fire insurance
11. Central and local govt taxation
12. Money market and rate of interest
13. Zonal importance of land and buildings
14. Writing reports
10
12. • Gross income: Gross income is the total income
and includes all receipts from various sources. The
outgoings and the operational and collection
charges are not deducted.
• Net income or net return: This is the saving or
the amount left after deducting all outgoings,
operational and collection expenses from the gross
income or total receipt.
• Net income= Gross income – out goings
12
13. Outgoings
1. 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 or 1-
1.5 % of total cost as annual repairs.
2. 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 10 to 15% of gross income.
13
14. 3. 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
4. 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
5. 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.
6. Insurance premium
7. Ground Rent: Building constructed on lease hold property
7. Sinking Fund
14
15. Sinking Fund:
It is the amount which has to be set aside at fixed intervals of
time(annually) out of the gross income so that at the end of the
useful life of the building or property the fund should accumulate
to the initial cost of the property.
A building, machine or vehicle becomes useless after a period of
time after its utility period.
It enable owner to accumulate to a sum required for rebuilding
the premises or can replace the article.
A periodical deposition of fund is made in the bank to get highest
compound interest or sinking fund.
Not needed for land
15
16. • 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.
16
21. 1. Scrap Value:
It is the value of dismantled materials of a property at the end of
its utility period and absolutely useless except for sales as scrap.
In case of old building after its useful life certain amount can be
got by selling old useful material like bricks, steel, wooden
articles etc.
Scrap value of 10% to total construction is considered.
It is also called as junk value or Demolition value.
In rare occasions it may become zero or negative in case if
demolition or dismantling cost is equal or higher than Scrap
value
Types of Values
21
22. 2. Salvage value:
• It is the estimated value of a built up building at the end of its
useful life without being dismantled.
This is obtained by deducting depreciation from its new cost.
3. Market value:
• The market value of a property is the amount which can be
obtained at any particular time from the open market if the
property is put for sale.
• The market value will differ from time to time according to
demand and supply.
• This value is changes from time to time for various reasons such
as change in industry, change on fashion, means of transport,
cost of material and labour etc
22
23. 4.Book value:
• Book value is the amount shows in the account book
after allowing necessary depreciation.
• The book value of property at a particular year is the
original cost minus the amount of depreciation year.
• The end of the utility period of the property the book
value will be only scrap value.
23
25. 5. Assessed Value:
Value recorded in municipal records to determine the
municipal tax to be collected from owner.
For buildings it is considered as 5% of the total project cost
6. Distress value or Forced sale value:
Property sold at low cost that the market value it is said to
have distress value .
This may be due to Financial difficulties to seller, on order of
court, Insufficient knowledge of seller, quarrel among
partners, panic due to war or riots.
7. Replacement values:
Present value of property or portion have to be replaced under
market rate
25
26. 8. Potential value:
Property capable of fetching more returns due to its alternative
use or by advantageous planning or providing some
development works such increased value is called potential
value
9.Monopoly Value:
• In case of scarce remaining for sale or certain portion
possess special advantage with respect to adjoining property
due to location, frontage, size shape owner may demand for
fancy price.
10. Speculative value:
Investment in agricultural land, building development, will
cause values to raise, even before roads are made ad
services installed. Speculators purchase such property at
low price as far as possible and sell it to gain profit after
short duration with out spending any further amount on it
26
27. 11. Accommodation value:
Value of surrounding agricultural land of a city
which is expanding will be more if the land is
converted into accommodation land after
obtaining approval from concerned authority.
Owners of this land will be offered more price for
accommodation which will be higher than the
market value
12. Occupation Value:
Occupation value is When the purchasers are
attracted to own a property for personal uses as
necessity and there will not be any substitute for
this.
13. Sentimental value.
27
28. Factors that affects the value of a property
Forces of demand and supply.
Rise of population.
Cost of construction.
Rent control act.
Imposition of control of price of building
materials.
Improvement of public schemes.
Interest of banks and govt securities.
Abnormal conditions.
28
30. Sinking Fund:
It is the amount which has to be set aside at fixed intervals of
time(annually) out of the gross income so that at the end of the
useful life of the building or property the fund should accumulate
to the initial cost of the property.
A building, machine or vehicle becomes useless after a period of
time after its utility period.
It enable owner to accumulate to a sum required for rebuilding
the premises or can replace the article.
A periodical deposition of fund is made in the bank to get highest
compound interest or sinking fund.
30
31. What is a Sinking Fund?
• ANNUAL Sinking Fund required (I)= S* IC
• S= Total amount of sinking fund needed
• Where cofficient of annual sinking fund
IC = i/[ (1+i)n - 1]
• i= rate of interest on sinking fund expressed in decimal
• N= Number of years
• There fore
• I = Si/[ (1+i)n - 1]
31
35. Year’s purchase(Y.P):
• The capital value which needs to be paid once 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.
• Years purchase in perpetual:- Years purchase for a very
long period or perpetual period is worked out by dividing
100 by rate of interest for capital investment. ( as the
income is perpetual provision of sinking fund for
redemption of capital is not required in this case.
• Therefore, YP = 100/ rate of interest =1/Ip
• Ip rate of interest on capital in decimal
•
35
36. EXAMPLE
• *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
36
37. • Years purchase for terminal income:- when the
income from the property is limited by a duration
period then interest on capital investment is required
as well as regular accumulation of sinking fund
within the limited period is necessary to rebuild the
property . The regular deposit of sinking fund aslo
gains interest.
• Years Purchase (Y.P) = 1/ (Ip + Ic)
• Ic is sinking fund co-efficient
• Ip rate of interest on capital in
decimal
37
38. • Single rate: When calculating Y.P when
the rate of interest on capital and sinking
fund are same.
• Dual rate:- When calculating Y.P when
the rate of interest on capital and sinking
fund are different.
38
39. • 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/(IP+IC)
• Coeff. Of sinking fund (Ic) = 0.0319
• Y.P = 1/(.05+.0319)=12.21
39
40. Capitalized value
• The capitalized value of a property is the amount of
whose annual interest at the highest prevailing rate of
interest will be equal to the net income from the property.
• Capitalized value= Net annual return X Years
Purchase.
40
46. • Depreciation: is the loss in the value of the property due to is
use, life, wear, tear, decay and obsolescence.
• The general annual decrease in the value of a property is
known as annual depreciation.
• Usually, the percentage rate of depreciation is less at the
beginning and generally increase during later years.
46
47. Types of depreciation
1. Physical depreciation
a) Wear and tear from operation eg:- rails, motor car
b) Decrepitude (action of time) eg:- building plastering. Prestress loss
2. Functional depreciation
a) Inadequacy or suppression
b) Obsolescence
3. Contingent depreciation
a) Accidents (due to negligence's, the elements and structural defects)
b) Diseases ( parasites , pollution of water etc)
c) Diminution ( natural gas, water etc.)
47
48. Obsolescence:
• Loss in value of property due to change in fashion, in design,
in adequacy to present or growing needs, necessity for
replacement due to new inventions
An apartment which becomes increasingly difficult to rent is said to
suffer from obsolescence
Obsolescence may be due to
• 1. Internal is due to poor odd design, change in type and kind of
construction, utility demand
• 2. External is due to poor original location, change in character
of district, specific influences such as due to construction of
factories, stock-yards, proximity of public building, traffic
locations and noises and Zoning laws
48
52. 1. The cost of a new building is Rs 150000. Work
out the depreciated cost of the building after
20 years by SLM if the scarp value is Rs
15000/- assuming the life of building is
80Years?
52
53. Annual Depreciation
= (Original cost – scrap value)/ Life in years
= (150000-15000)/80=Rs 1687.52
Depreciation for 20 years= 1687*20= Rs 33750
Depreciated cost of building after 20 years
= 150000-33750
= Rs 116250/-
53
55. 2. The present value of a machine is Rs 20000/-
Workout the depreciated cost at the end of 5
years. If the scrap value is Rs 2000. Assume life
of machine is 16 years.
55
56. • The percentage rate of annual depreciation
for constant percentage method
P=1- (sc/c)1/n
= 1-(2000/20000) 1/5
=0.134 %
Value of property at the end of 5 years= C(1-p)n
= 20000(1-0.134)5
=Rs 9741.35/-
56
57. • 3. Sinking Fund Method:
• In this method the depreciation of the property is
assumed to be equal to the annual sinking fund plus the
interest on the sinking fund for that year.
• A= Annual sinking fund
• b,c,d,…etc. = interest on the sinking fund for the
subsequent years.
• C= original cost
57
59. • 3. The cost of construction of a new building
according to present market rate is Rs 80000/-
having a life of 70 years. But if the building is
15 years old determine the depreciation
amount which should be deducted from the
cost of the new building at 6% compound
interest.
59
60. • In this case the depreciation is assumed to be annual sinking
fund plus interest of the accumulated sinking fund.
• ANNUAL Sinking Fund required (I)= S* IC
• Sinking fund co-efficient (Ic) for 70 years=i/[(1+i/)n-1]
= 0.06/(1+0.06)70-1
= 0.0010
• ANNUAL Sinking Fund required for RS 80000 for 15 years @
6% interest =
• (I) = S* IC =80000 * 0.001=RS 80
• An amount of Re 1 /- per annum in “n” years gives=
[(1+i/)n-1/i
• An amount of Re 1 /- per annum in “15 ” years gives=
(1+0.06)15-1 / 0.06=23.25
• Total depreciation in 15 years f= 80*23.25 = Rs 1860
• Deprecated cost = 80000-1860= Rs 78140
60
63. 4) Quantity survey method
• In this method the property is studied in detail
and extend of physical deterioration worked
out to calculate the depreciation.
63
69. Valuation of real property:
• Valuation of building is depends on the type of building.
Its structure and durability, on the situation, size, shape, width of road
way, quality of material used in the construction and present day prise of
material.
•Also depend on the locality if it is in market area having high value
then the residential area.
depending on the specialities in the building like sewer, water supply,
and electricity etc.
The value of the building is determined on working out its cost of
construction at present day rate and allowing a suitable depreciation.
The age of the building is generally obtained from record if available or
by enquires or from visual inspection.
69
70. Cost may be determined by the following
methods:
• Cost from record: cost of construction may be
determined from the estimate, from the bill of
quantities, from record at present rate. If the actual
cost of the construction is known, this may increase
or decrease according to the percentage rise or fall
in the rates which may be obtained from the public
work department (PWD) schedule of rates.
70
71. • Cost by detailed measurements: If record is
not available, the cost of construction may be
calculated by preparing the bill of quantities of
various items of works by detailed
measurements at the site and taken the rate for
each item as prevalent in the locality or as
current PWD schedule of rates.
71
72. • Cost by plinth area basis:
• the above methods are lengthy, a simple
method is to calculate the cost on plinth area
basis. The plinth area of the building as
measured and the present day plinth area rate
of similar building in the locality is obtained
by enquiries and then the cost is calculated.
72
73. Method of valuation
• 1) Rental method
• 2) Profit based method
• 3) Depreciation method
73
74. • 1. Rental method of valuation:
In this method, the net income by way of rent is found out by
deducting all outing goings from the gross rent.
NET INCOME = GROSS INCOME – OUT GOINGS
A suitable rate of interest as prevailing in the market is assumed and
year’s purchase is calculated.
Capitalized value or Valuation of the property = Net income x Y.P
This method is applicable when the rent is known or probable rent is
determined by enquiries.
74
75. PARTICULARS CONSIDERED IN RENRAL
METHOD
• 1. LAND & TENURE (ie shape of land, whether
freehold or lease hold)
• 2. Cubic content of building.
• 3.future life of building.
• 4.Gross rent.
• 5. Outgoings.
• 6.Years purchase.
• 7. Capital repairs if needed.
• 8.Value of land from records.
75
85. • This method of valuation is suitable for buildings like
hotels, cinema theatres etc. for which the capitalized
value depends on the profit.
• In such cases the net annual income is worked out after
deducting from the gross income all possible working
expressions, outgoings, interest on the capital invested
etc.
• Capitalized value or Valuation of the property = Net
profit x Y.P
• .
• In such case the valuation may work out to be too high
in comparison with the cost of construction.
2. Valuation based on profit:
85
92. Valuation of landed properties
1. Belting method
2. Development method
3. Hypothecated building scheme method
92
93. 1. Belting method
• Value of a plot of land greatly depends up on road
frontage.
• Frontage land has greater value than back land.
• So in order to find out a more realistic value of land the
entire plot is divided into a number of conventional
strips.
• Each strip is known as a belt.
• Multiply the area of belt by respective related rate
per unit area.
• After summing up the value of each belt the value of
the entire plot of land can be known.
93
104. 2. Development method
Steps
• 1. Find the net area of land = Total area - area of land required
for essential amenities like roads, parks, water supply pumping
stations( 30 % of total area).
• 2. Calculate Gross income= Net area of land available
for sale x avg sale price
• 3. From gross income find out PRESENT VALUE.
• 4. Value of plot i.e value of land
before development= PRESENT
VALUE - outgoings
104
105. Outgoings
• 1. Cost of development – roads, water , lights etc- deferred
cost
• 2. Payment for easement rights.-
• 3.Engineering and supervision charges. (4- 7.5 % of
deferred cost of development
• 4.Stamp cost and incidental charges- 10% of present value
• 5.Developers profit:- 15 – 20% of present value
105
109. 3. Hypothecated building scheme
method
• Calculate the assumed rent that can be
obtained from the building and deducting
the cost of development and building.
109
110. Procedure
1. From the total area of land find out the permissible covered area=
Total area – 1 / 3 of land as required for compulsory open space
under municipal byelaws.
2. Find out the rentable area= Total covered area – 20% for walls and
wastes.
3. Calcualte the net rent per month = Gross rent – outgoings. (unless
mentioned total outgoings be 30% of gross rent)
4. Find out the Y.P for perpetual (since land) with interest on capital
at current bank rate
5. Capitalize the net rent by multiplying Y.P deferred for development
and construction.
110
111. • 6. Consider the current plinth area rate and find out the
cost of the building from the total covered area (for multi
storeyed buildings the covered area shall be worked out
for all the stories)
• 7. Work out the development cost of land. (if required)
• 8. Find out the total cost of the building and development
cost of land.
• 9.Deduct the total cost of building and development from
the deferred rental value of the building to find the cost
of land
111
117. Fixation of rent:
• The rent of building is fixed upon the basis of certain
percentage of annual interest on the capital cost and all
possible annual expenditure on outgoings. The
capital cost includes the cost of construction of the
building, the cost of sanitary and water supply work
and the cost of electric installation and alteration if any.
The cost of construction also includes the expenditures
on the following: a) raising, levelling and dressing of
site b) construction of compound wall, fences and gates
c) storm water drainage d) approach roads and other
roads within the compound.
117
118. Net return is worked out based on
Capita cost / Year’s purchase
If the capital cost is not known, this may be
worked out by any method of valuation.
The owner experts about 2% higher interest than
the prevalent interest to cover up the risk of his
investment.
To this net return, all possible expenditures on
outgoings are added to get gross annual rent.
Gross rent = net rent + out goings.
118
128. • Valuation of leasehold interest: there are two types
of properties namely
• A) Free hold property b) lease hold property
• A free hold property:
• The free hold is inherent the absolute owner of the
property , he holds it without any pavement in the
nature of the rent. He may sell the property, dived it or
donate or grant it on lease at his sweet will.
• The freehold or owner who grants the lease known as
‘lessor’ and leaseholder is known as ‘lessee’.
• • In common practice it give as for 15, 21, 25 or 50
common in practice. When a lease is granted for a
period of 99 it is known as long term lease and when it
is for 999 years it is said to be perpetuity or for endless
duration.
128
129. • A leasehold property: The leaseholder is
known as lessee and holds the physical
possession(under) of the property for the
definite period under terms and condition
specified in the lease document.
The different types of leases:
Building lease
Occupation lease
Sub-lease
Life lease
Perpetual lease
129
