Valuation

Definitions – Various types of valuations – Valuation
methods - Necessity – Capitalized value –
Depreciation – Escalation – Valuation of land –Depreciation – Escalation – Valuation of land –
Buildings – Calculation of Standard rent – Mortgage
– Lease

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, orpresent 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, legal control etc.
It depends on supply on demand and the purpose for which
valuation is required.

Cost:
It means original cost of construction of purchase.
Value:
It means the present value(saleable value)which may be higher
or lower than the cost.
For example:
A building whole cost of construction is Rs.1 lakh, when
put for sale may fetch Rs.1,10,000.This sale price is the value
of the building. sometimes value may be less than the original
cost.

1. Buying or selling property: when it is required to buy or to
sell a property, its valuation is required.
2. 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.etc., and all taxes are fixed on the valuation of the property.
3. 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).

4. Security of loans or mortgage: when the loans are taken
against the security of the property, its valuation is required.
5. 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.amount of compensation valuation of property is required.
6. Valuation of a property is also required for insurance etc.

1) Supply and demand
2) Increase in population
3) Cost of construction
4) Purpose of purchase
5) Interest and security of capital5) Interest and security of capital
6) Rent restriction act
7) Improvement of public schemes
8) Abnormal conditions

1) Supply and demand:
If there are few buyers compared to the number of
properties available for sale in a particular locality, this will
result in low prices and vice versa.
2) Increase in population:
Sudden increase in population due to the growth
of new industries or influx or due to multiplication will result
in heavy demand for land, buildings and properties.
3) Cost of construction:3) Cost of construction:
The present cost of construction affects the value
due to rapid change in price index of materials compared to
depreciation.
4) Purpose of purchase:
The value of property is usually more if the
property is for occupational purposes.

5) Interest and Security of Capital:
If the interest in scheduled banks and government securities are
lowered, it will result in making more money available for
investment in land and property and thereby the market value
increases.
6) Rent restriction act:
The value of a property is calculated from the probable annual
income through rent and so due to certain enactment of a rent
restriction act by the government, it may cause slump in property
market.market.
7) Improvement of public schemes:
Any public service scheme like sewer line, water line,
electricity supply etc to an area which is lacking in such amenities
will make the land value go up.
8) Abnormal conditions:
The value of property may go down due to abnormal
conditions like war, riots or due to insecure conditions.

Gross income: Gross income is the total income and includes
all receipts from various sources the outgoing 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 expensesafter deducting all outgoings, operational and collection expenses
from the gross income or total receipt.

Outgoings:
Outgoings or the expenses which are required to be
incurred to maintain the revenue of the building.
Various types of outgoings are-
a) Taxesa) Taxes
b) Repairs
c) Management and collection charges
d) Sinking fund
e) Loss of rent
f) Miscellaneous

a) Taxes:
To be paid by the owner of the property annually i.e.
municipal, property , wealth 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.
b) Repairs:b) Repairs:
It is required to be carried out every year to maintain a property
in fit condition.
The amount to be spend on repairs depends on
Age
Construction
Nature of the building etc

It is usually 10 to 15% of the gross income or 1 to 1 ½
months rent is allowed for repairs.
For annual repairs 1 to 1 ½ % of the total cost of construction
may also be taken.
c) Management and collection charges:
It includes the expenses on rent collector, chaukidar , liftman ,
pump attendant ,sweeper etc about 5 to 10% of the gross rentpump attendant ,sweeper etc about 5 to 10% of the gross rent
may be taken on these account.
For small buildings none of these may be required and there
will be no outgoings on these account.

d) Sinking fund:
A certain amount of the gross rent is set aside annually as
sinking fund to accumulate the total cost of construction
when the life of the building is over.
Annual sinking fund is also taken as outgoings.
e) Loss of rent:
The property may not be kept fully occupied in such a case a
suitable amount should be deducted from the gross rent undersuitable amount should be deducted from the gross rent under
outgoings.
f) Miscellaneous:
It includes electric charges for running lift , pump , for
lighting common places and similar other charges which are
to be borne by the owner.
2 to 5% of gross rent is taken for these charges

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 rentiii. 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.

1) Scrap value
2) Salvage value
3) Market value
4) Book value
8) Replacement value
9) Potential value
10) Monopoly value
11) Sentimental value
5) Rateable value
6) Assessed value
7) Distress value
12) Speculative value
13) Reversionary value

1) SCRAP VALUE:
Scrap value is the value of the dismantled material. That
means after dismantle we will get the steel, brick, timber etc.
in case of machines the scrap value is metal or dismantle parts.
In general the scrap value is about 10 % of total cost of
construction.
Scrap value = (sale of useable material – cost ofScrap value = (sale of useable material – cost of
dismantling and removal of the rubbish material.)

2) SALVAGE VALUE:
It is the value of the utility period without being
dismantled. we can sale it as a second handle.
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 fromthe 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 labor etc

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.
5) RATEABLE VALUE:5) RATEABLE VALUE:
Rateable value is the net annual letting value of a
property, which is obtained after deducting the amount of
yearly repairs from the gross income. Municipal and other
taxes are charged at a certain percentage on the rateable value
of the property.

6) ASSESSED VALUE:
It is the value of property which is recorded in the
registers of the municipality, in order to determine the amount of
property taxes to be collected from the owner.
7) DISTRESS VALUE:
When a property is sold at a lower price than the
market value at that time, it is said to have a distress value.
Replacement value: It is the present value of the property, if has to
be replaced at the current market rates.
8) MONOPOLY VALUE:
If land is scarce in a particular area or if certain properties have
some distinct advantages over others, then the owner may demand
fancy prices.

9) POTENTIAL VALUE:
When a property is capable of fetching more
return due to its alternative use by advantageous planning or
developing it.
10) SENTIMENTAL VALUE:
The fancy price demanded by the vendor when he
attaches some sentimental value to his property.
11) SPECULATIVE VALUE:11) SPECULATIVE VALUE:
When a property is purchased with an idea to sell
it off at a profit after a short duration.
12) REVERSIONARY VALUE:
Present value of an amount deferred for a certain
period at a fixed rate of interest.

OBSOLESCENCE:
The value of property or structures become less by its
becoming out of date in style, in structure in design, etc. and
this is termed as Obsolescence.
ANNUITY:
It is the annual periodic payments for repayments of the
capital amount invested by a party. Annuity is either paid atcapital amount invested by a party. Annuity is either paid at
the beginning or at end of each period of installment.
1) Annuity certain
2) Annuity due
3) Deffered annuity
4) Perpetual annuity

1) Annuity certain- if the amount of annuity is paid for a
definite no of periods or years.
2) Annuity due- if the amount of annuity is paid at the
beginning of each period of year and payments continued
for definite no of periods.
3) Deffered annuity- if the payment of annuity begins at some
future date after a no of years.
Perpetual annuity- if the payments of annuity continue for4) Perpetual annuity- if the payments of annuity continue for
indefinite period.
Annuity- annual payments, it is paid by twelve monthly
installments or half yearly or quarterly installments.

SINKING FUND:
The fund which is gradually accumulated by way of periodic
on annual deposit for the replacement of the building or
structure at the end of its useful life is termed as sinking fund.
The sinking fund is created by regular annual or periodic
deposits in compound interest which will form the amount ofdeposits in compound interest which will form the amount of
replacement at the end of the utility period of the property.
It is created by taking a sinking fund policy with an insurance
company or by depositing in bank to collect highest compound
interest.

It depends on-
Life of the building
Scrap value-cost of old materials
Sinking fund may be found out by the formula,
I = Si
(1+ i)n -1
Where, S= Total amount of sinking fund to be accumulatedWhere, S= Total amount of sinking fund to be accumulated
n= no of years required to accumulate the sinking
fund
i= rate of interest in decimal(eg. 4%=0.04)
I= Annual installment required.

1.A pumping set with a motor has been installed in a building at
a cost of Rs.2500. Assuming the life of the pump as 15 years,
work out the amount of annual installment of sinking fund
required to be deposited to accumulate the whole amount of
4% compound interest.
Soln.
Annual sinking fund, I = SiAnnual sinking fund, I = Si
(1+ i)n -1
= 2500×0.04
(1+0.04)15-1
I = Rs. 125

2. An old building has been purchased by a person at a cost of Rs.30,000/-
excluding the cost of the land. Calculate the amount of annual sinking
fund at 4% interest assuming the future life of the building as 20 years
and the scrap value of the building as 10% of the cost of purchase.
Soln.
Total amount of sinking fund to be accumulated at the end of 20 years,
S= 30,000×90 = Rs. 27,000.
100100
Annual installment of sinking fund, I = Si
(1+ i)n -1
= 27000× 0.04
(1+ 0.04)20-1
I = Rs. 907.20

Capital cost:
It is the total cost of construction including land or the original
total amount required to possess a property.
It is the original cost and does not change, while value of a
property is a present cost which may be calculated by methods of
valuation.
Capitalized value:
The amount of a money whose annual interest at the highestThe amount of a money whose annual interest at the highest
prevailing rate of interest will be equal to the net income from
the property.
To determine the capitalized value of a property it is required to
know the net income from the property and the highest
prevailing rate of interest.
Capitalized value= Net annual income × Year’s purchase

Year’s purchase:
The capital sum required to be invested in order to receive an
annuity of Re.1 at certain rate of interest.
For 4% interest per annum, to get Rs. 4 it requires Rs.100 to
be deposited in a bank.
To get Re.1per year it will be required to deposit ¼ of Rs.100
i.e., 100/4= Rs.25.
Years purchase = 100Years purchase = 100
Rate of interest
= 1
i
Where, i= rate of interest in decimal

In the case of a property whose period of utility is limited to a
number of years a certain amount is required to be set aside in
the form of sinking fund, to accumulate the amount of original
capital cost at the end of the utility period of the property.
Otherwise the owner of the property will lose both the capital
and income at the end of the utility period.
Hence the year’s purchase will be reduced in such a way that
income of the property will provide both for interest on theincome of the property will provide both for interest on the
capital and accumulation of the sinking fund to replace the
capital.
In such cases, year’s purchase = 1
i+ s

1. A property fetches a net annual income of Rs. 900
deducting all outgoings. Workout the capitalized value of
the property if the rate of interest is 6% per annum.
Given:
Net income = Rs.900 (deducting all outgoings)
Rate of interest ,i = 6%Rate of interest ,i = 6%
Soln:
Capitalized value= Net annual income × Year’s purchase
Year’s purchase = 100/ i= 100/6 = 16.67
Therefore , capitalized value = 900 ×16.67
= Rs.15003.00/-

A three storied building is standing on a plot of land measuring 800 sq
m. The plinth area of each storey is 400 sq m. The building is of R.C.C.
framed structure and the future life may be taken as 70 years. The
building fetches a gross rent of Rs.1500 per month. Workout the
capitalized value of the property on the basis of 6% net yield. For
sinking fund 3% compound interest may be assumed. Cost of land may
be taken as Rs.40 per sq m. Other data required may be assumed
suitably.suitably.
Soln:
Gross income = Rs.1500/ month
Gross income per year = Rs. 1500 × 12
= Rs.18,000.
Capitalized value = Net annual income × Year’s purchase.
Net annual income= gross income per annum – outgoings per annum.
Outgoings per annum: (assuming suitable data)

Outgoings per annum: (assuming suitable data)
Repairs at 1/12 of gross income = 18000/12 = Rs.1500
Municipal tax 20% of gross rent = 18000× 20 =Rs.3600
100
Property tax 5% of gross rent =18000 × (5/100) =Rs. 900
Insurance premium @ ½% of gross rent=18000×(0.5/100)=Rs.90
Management charges @ 6% of gross rent=18000×(6/100)=Rs.1080
Miscellaneous charges@ 2% of gross rent= 18000×(2/100)=Rs.360
Sinking fund :
I = Si
(1+i)n-1
=18000×0.03 = Rs.78
(1+0.03)70-1
Therefore ,
Total outgoings = Rs.1500+Rs.3600+Rs.900+Rs.90+Rs.1080+Rs.360+Rs.780
per annum = Rs.8310

Net annual income = Gross income – Outgoings
=18000 – 8310
=Rs.9690
Year’s purchase = 100 = 16.67
6
Capitalized value = Net annual income × Year’s purchase
= 9690 × 16.67= 9690 × 16.67
Capitalized value of the building = Rs. 1,61,532.3
Cost of land @ Rs.40 sq m = 800× 40
=Rs.32000
Total value of the whole property = Rs.1,61,532.3+ Rs. 32000
= Rs.1,93,532.3/-

Depreciation:
It is the gradual exhaustion of the usefulness of a property. 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.during later years.
Factors that causes depreciation are
* Wear and tear
* Fall in market value
* Accidents like fall of a tree
* Obsolescence

* Decay
* Changes in demands
* Changes in Arts and fashion
* Calamity like flood, lightning etc.
* Actions of elements of Nature like heat, cold, wind etc.,
* Structural deterioration.
Method of calculating depreciation:
Straight line method
Constant percentage method
Sinking fund method
Quantity survey method

Straight line method:
In this method it is assumed that the property loses its
value by the same amount every year. A fixed amount of the
original cost is deducted every year so that at the end of the
utility period only the scrap value is left.
D = C−S
n
Where, D = Annual depreciationWhere, D = Annual depreciation
C = original cost
S = scrap value
n = life of the property in years.
Depreciation of the property after m years
= C − S × m = m × D
n
Book value after m years= original cost – D= C – m × D

Example:
Cost of New Building = Rs. 4,00,000
Scrap Value 10% at the end of life = Rs. 40, 000
Life assumed = 60 years
Annual Depreciation=4,00,000 - 4,000
60
= Rs. 6,000
Depreciation value after 10 years = Rs. 60,000
Depreciation value after 60 years = Rs. 3,60,000

Constant percentage method
In this method it is assumed that the property will lose its
value by a constant percentage of its value at the beginning of
every year.
Annual depreciation ,D = 1- S 1/n
C
Where, D = percentage rate of annual depreciation
S = scrap valueS = scrap value
C = original cost
n = life of years.
The value of the property or the depreciated = C S m/n
cost at the end of the m years C

Example to calculate the depreciated value:
Replacement Value of the Building = Rs. 20,00,000
Age of the Building (n) = 15 years
Depreciation assumed = 2 %
Depreciated value = 20,00,000 1 - 2 15
100
= 20,00,000 (0.98)15= 20,00,000 (0.98)
= 20,00,000 (0.73857)
= Rs. 14,77,140
Depreciation factor = 1 – 0.73857 = 0.26143
Depreciation value =(20,00,000 – 14,77,140)
= Rs. 5,22,860
Depreciation Percentage = 26.143%

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
LIFE
IN
YEARS
ANNUAL
SINKING
FUND
INTEREST
IN
SINKING
FUND
DEPRECIATION
FOR THAT
YEAR
TOTAL
DEPRECIATION
BOOK VALUE
FUND
1 A - A A C-A
2 A b A + b 2A+b C-(2A+b)
3 A c A + c 3A+b+c C-(3A+b+c)
4 A d A + d 4A+b+c+d C-(4A+b+c+d)
So on…

If i is the rate of interest, annual sinking fund installment
to accumulate 1 Rs. in n years.
p = i
(1+i)n
−1
If i is the rate of interest and 1 Rs. is deposited every year
total sinking fund accumulated at the end of n years is
q = (1+i)n
−1q = (1+i) −1
i
Rate of depreciation in n years = (p × q) %

Quantity survey method:
In this method the property is studied in detail and loss in
value due to life, wear and tear , decay , obsolescence etc,
worked out.
Each and every step is based on some logical ground without
any fixed % of the cost of the property.
Only experienced valuer can work out the amount of
depreciation and present value of a property by this method.depreciation and present value of a property by this method.

1. The cost of newly constructed building was Rs. 150000. the life of
building is 75years. Determine the depreciation in the 30th year of life
by straight line method , constant % method, and sinking fund method
at the 8% compound interest. The scarp value of building is 10% of its
construction cost.
Given:
C = Rs 150000
S = 0.10×150000 = 15000 Rs.S = 0.10×150000 = 15000 Rs.
N= 75 years and i = 8%
Soln:
(i) Straight Line Method
D = C − S = 150000 – 15000
n 75
D = Rs.1800
Total depreciation after 30 years=Rs. 1800 × 30 yrs
DDDD @@@@ 30303030 yrs=Rsyrs=Rsyrs=Rsyrs=Rs.... 54000540005400054000

(ii) Constant Percentage Method:
D = C S m/n
C
= 150000 15000 (30/75)
150000
=Rs.59715
(iii) Sinking Fund Method:
Sinking fund coefficient for 75 years life,
p = i = 0.08 = 2.498× 10 -4
(1+i)n
−1 (1+0.08)75 – 1
q = (1+i)n
−1 = (1+0.08)75 -1 =113.28
i 0.08
Rate of depreciation for 30 years=(p × q )%= 2.498 × 10−4 × 113.28
= 0.02829

Total depreciation in 30 years =(C – S)×0.02829
= 135000×0.02829
= 3819.15 Rs.
Difference between Depreciation and Obsolescence:
Depreciation Obsolescence
1)This is the physical loss in the value of the
property due to wear & tear, decay etc.
1)The loss in the value of the property is
due to change of design, fashion, in
structure of the other, change of utility,
demand.
2) Depreciation depends on its original
condition, quality of maintenance and mode
of use.
3) This is variable according to the age of the
property. More the age, more will be the
amount for the depreciation.
4) There are different methods by which the
amount of depreciation can be calculated
demand.
2) Obsolescence depends on normal
progress in the arts, inadequacy to present
or growing needs etc.
3) This is not dependent on age of the
building. A new building may suffer in its
usual rent due to obsolescence.
4) At present there is no method of
calculation of obsolescence.

Valuation of building depends on-
Type of building
Its structure and durability,
On the situation,
Size,Size,
Shape,
Width of road way,
Quality of material used in the construction and
Present day price of material.

It also depend on the locality if it is in market area having
high value then the residential area.
And depending on the specialties 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.suitable depreciation.
The age of the building is generally obtained from record if
available or by enquires or from visual inspection.

Present day cost may be determined by the following
methods:
Cost from record
Cost by detailed measurements
Cost by plinth area basis
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.

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.
Cost by plinth area basis: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.

Determination of depreciation:
After deciding the cost of the building or structure by any one
of the above method it is necessary to allow a suitable depreciation
on the cost. The depreciation depends on the ultimate use of the
building, the present age of the building, nature of maintenance etc.
Depreciation increases with the life.
For a building whose life is considered as 80 years, if well
maintained the following may be reasonable depreciation.
Depreciation per year Total DepreciationDepreciation per year Total Depreciation
0 to 5 yrs - nil
5 to 10 yrs @ ½ % 2.5%
10 to 20 yrs @ ¾ % 7.5%
20 to 40 yrs @ 1 % 20%
40 to 80 yrs @ 1 ½ % 60%
Total = 90%
The balance 10% represents the net scrap value on
dismantling at the end of utility period.

The following are the different methods of valuations:
1. Rental method of valuation
2. Direct comparison with the capital value
3. Valuation based on profit3. Valuation based on profit
4. Valuation based on cost
5. Development method of valuation
6. Depreciation method of valuation

1. Rental method of valuation:
In this method, the net income by way of rent is
found out by deducting all outgoings from the gross rent. A
suitable rate of interest as prevailing in the market is assumed
and year’s purchase is calculated. This net income multiplied
by Y.P gives the capitalized value or valuation of the property.
This method is applicable when the rent is known or probable
rent is determined by enquiries.
2. Direct comparison with the capital value:
This method may be adopted when the rental
value is not available from the property concerned, but there
are evidence of sale price of properties as a whole. In such
cases the capitalized value of the property is fixed by direct
comparison with capitalized value of the similar property in
the locality.

3. Valuation based on profit:
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. the
net profit is multiplied by Y.P to get the capitalized value.
In such case the valuation may work out to be too high inIn such case the valuation may work out to be too high in
comparison with the cost of construction.
4. Valuation based on cost:
In this method the actual cost incurred in
construction the building or in possessing the property is
taken as basis to determine the value of property. In such
cases necessary depreciation should be allowed and the
points of obsolescence should also be considered.

5. Development method of valuation:
This method is used to evaluate such property where there is a
development potential, so that the value of the property after
development will be increased more than the expenditure
incurred.
For example, a large portion of land can be divided into smallFor example, a large portion of land can be divided into small
plots and developed fully so as to provide plots of land for a
residential Colony or a large complex of multi-storied
buildings, housing ownership flats in a Co-operative Housing
Society.

6. 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 rateP – 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.

S.No. 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 :
1. A building is situated by the side of a main road of Chennai city on a
land of 500 sq m. the built up portion is 20 m ×15 m. the building is
first class type and provided with water supply, sanitary and
electrical fittings, and the age of the building is 30 years. Workout
the valuation of the property.
Soln.
Plinth area of the building= 20 ×15 = 300 sq m.
Assuming plinth area rate as Rs.200 per sq m including water supply,
sanitary and electrical fittings.sanitary and electrical fittings.
Cost of building = 300 × 200 = Rs.60,000
Assume life of building as 100 years.
D = P[(100 – rd)/100]n = 60000 100- 1 30 = 44,280.
100
Cost of land assuming Rs.60 per sqm = 500 × 60 = Rs. 30,000.
Total valuation of property = 44,280 + 30,000
Total valuation of property = Rs. 74,280.

Mortgage:
A owner can borrow money against the security of his property,
and for that purpose he is required to grant an interest to the
party advancing the loan.
The loan is required to be returned in specified time.
Mortgagor – the person who takes the loan
Mortgagee – the person who advances the loan
Mortgage deed – the relevant document for the mortgageMortgage deed – the relevant document for the mortgage
transaction .
Equity of redemption - When the loan is fully repaid together with
interest the mortgagor has got the right to
free his property from the mortgagee.

The amount of loan will depend on the valuation of the
property, usually 50 to 70 percent of the valuation is advanced
as loan.
The interest should be paid by regular installments and the
loan also be repaid by regular installments spread over the
specified period of the mortgage.
If the mortgagor fails to pay the installment of loan as per
condition of the mortgage deed, the mortgage can take overcondition of the mortgage deed, the mortgage can take over
possession of the property and sell it to recover the amount of
loan, the interest and other expenses.

Freehold property:
It means that the owner is in absolute possession of the
property, and the owner can utilize the same in any manner the
way he wants( within the limits of rules and regulations of the
government & local authorities). The owner can use the property
by himself or may grant leases for a short period or any period.
Leasehold property:Leasehold property:
It indicates the physical possession of the property and the
use of it may be allowed by the original owner as per lease
document.
Lease holder or lessee – the person who takes lease
Lessor – the person who grants lease

Types of lease
Building Lease Occupation Lease
Sub Lease Life Lease
Perpetual Lease

Building lease :
Freehold is want to give the open plot for lease to some
person lessee on an agreement of premium or ground rent
or a combination of a both.
The lease holder can erect a building there up to a
specified amount in a specified period and he maintains
the property and earn through that property.
These types of leases are generally grand for a long
period of 50, 99, 999 years . At the termination of the
lease, the lessor becomes the full owner of the land.

Occupation lease:
In this case the building or the structure is built by the owner
and the built up property is given on lease for the purpose of
occupation for a specified period on payment of certain
amount of annual rent.
Occupational lease may be for residential, commercial ,factory,
office, etc. lease period will depends on the purpose for which
the structure or building has been constructed.
Sub Lease : Leaseholder may grant a sub lease to other personSub Lease : Leaseholder may grant a sub lease to other person
depending on the terms & conditions mentioned in the original
lease.
Life Lease: Lease is granted for duration of life of the
leaseholder.
Perpetual Lease: Endless years and endless time.

Easement:
Easement are the rights and privilege which the owner of a
property enjoys through or over the property of another.
Dominant owner – the person who enjoys the easements over a
property.
Servient owner – the owner over whose property the easements
are enjoyed.
The following are some of the main easements:
1. Right to use light and air from and over the property of the1. Right to use light and air from and over the property of the
adjoining owner’s land.
2. Right to access from the adjoining owner’s land.
3. Right to run and maintain water and drainage pipes through the
neighbour's land.
4. Right of flow of rain water over other’s land.
5. Right of support for a building from the adjoining owner’s
land.

Valuation of land is done by one of the three methods as
and where applicable.
1. Comparative method1. Comparative method
2. Belting method
3. Hypothetical building schemes

1. Comparative method:
This is simplest and most direct method. The method is based
on instances of other sales with dates of open comparative like
lands in the neighbourhood. So there are two main factors on
witch this method is based
1) Sale prices and
2) Similar neighbourhood lands.
Sale prices should be recent.Sale prices should be recent.
The method is based on the comparison of like to like.
Properties may be similar but each property is unique so they
can never be like. But we can assess by using the following
factors.

Situation: position of the land means locality,availability, type
of people, nearby schools, market, office, hospital etc.
Size:
Return Frontage:
Front road width:
Nature of soil:
2. Hypothetical building scheme:2. Hypothetical building scheme:
In this system value of a vacant plot of land is
estimated by capitalizing the assumed rent that can be
obtained from the building, if erected on the land after
developing the same, and then deducting the cost of
development and building

PROCEDURE:
From the total area of land find out the
permissible covered area = total area – one third area of land
as required for compulsory open space under municipal by
laws.
Find out rentable area = total covered area – 20% for area of
wall and wastes.wall and wastes.
Calculate net rent per month = gross rent – outgoings. Usually
consider total outgoings be 30% of the gross rent.
Find out years purchase for perpetual (changing) with interest
on capital at the current bank deposit rate (should be minimum
10%)

Capitalize the net rent by multiplying the year’s purchase
deferred for the development and construction period.
Consider the current plinth area and find out the cost of the
building from the total covered area. For storied buildings the
covered area shall be worked out all the stories.
Work out the development cost of land.( if required)
Find the total cost of building and development cost of land.
Deduct the total cost of building and development from theDeduct the total cost of building and development from the
deferred rental value of the building to find the cost of land.

3. Belting method of valuation:
It is based on the road frontage. Frontage land has a greater
value than back land. So in order to find out the realistic value
of land the entire plot is divided into a number of convenient
strips by lines parallel to the centre line of the road.
Each such type of land is known as belt.
Then a relationship regarding the value and the depth of each
belt to the front belt is fixed up. Then calculate the valves ofbelt to the front belt is fixed up. Then calculate the valves of
each belt in terms of first belt. Then summing up the value of
each belt.

Normally the plot of land is divided in to three belts. The
depth of second belt is taken as 1 ½ times that of front belt and
the depth of the third belt at 1 ½ times the depth of the second
belt or depth remaining after second belt is considered as the
depth of third belt.
Value of recessed land not lying within the perpendiculars
drawn on belting lines from the end point is valued at three
fourth value in that particular belt of land.fourth value in that particular belt of land.
Value of the front belt is maximum. The second belt is valued
at 2/3 rate of the first belt and third belt value at half the rate
of the first belt

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.cost of electric installation and alteration if any.
The cost of construction also includes the expenditures on the
following:
a) Raising, Leveling 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.

Net return is worked out based on Capital 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.added to get gross annual rent.
Gross rent = net rent + out goings.

1. In a plot of land costing Rs.20,000 a building has been newly
constructed as a total cost of Rs.80,000 including sanitary,
water supply works and electrical installations etc. the building
consists of four flats for four tenants. The owner expects 8
percent return on the cost of construction and 5 percent return
on the cost of land. Calculate the standard rent for each flat of
the building assuming:-the building assuming:-
i. The life of the building as 60 years and sinking fund will be
created on 4% interest basis.
ii. Annual repairs cost at 1% of the cost of construction.
iii. Other outgoings including taxes at 30% of the net return on the
building.

Soln:
Net return required on land per annum = 20,000 × 5 = Rs.1000
100
Net return required on building per annum = 80000 × 8= Rs.6400
100
total net return per annum = Rs. 7400
Outgoings:Outgoings:
i) Annual sinking fund installment, I= Si
(1+ i)n- 1
S = 80000 × 90 = 72000
100
I = 72000× 0.04 = Rs. 304.50
(1+0.04)60 - 1

ii) Annual repairs cost at 1% of the cost of construction.
= 80000 × 1 = Rs. 800
100
iii) Other outgoings including taxes at 30% of the net return on
the building.
= 6400 × 30 = Rs. 1920
100
Therefore, total outgoings = 304.50 + 800 + 1920
= Rs. 3024.50= Rs. 3024.50
Gross rent per annum = net rent + outgoings
= 7400 + 3024.50
= Rs. 10424.50
Gross rent per month = 10424.50 / 12 = Rs. 868.70
Gross rent for one flat = 868.70 / 4 = Rs.217.175
Standard Rent = Rs. 217.715 /-

Rent statement- For every government residential building the
rent, the occupant has to pay is normally calculated on a
statement .
The rent statement is prepared under following conditions,
i) When a residential building is newly constructed.
ii) When a residential building is acquired by purchase, lease orii) When a residential building is acquired by purchase, lease or
transfer.
iii) When there are additions and alternations to a residential
building, costing beyond certain limit fixed by the government
iv) When whole or part of a building or other non residential
building is to be used for residential purposes.

The rent is reassessed normally every fifth year even though
there is no additions and alternations to the building.
Revised rent statement – If there is any additions and
alternations to the building, costing more than the limit fixed by
the government concerned, the rent is reassessed.
Fixation and calculation of rent:
The rent of building is fixed upon the basis of certain percentage
of annual interest on the capital cost and all possible annualof 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 land is not included in the capital cost.
The standard rent is fixed as per rules framed by the government,
which differs to some extent from state to state.

the standard rent is calculated by the following two methods and
the lesser amount is taken as standard rent:
Method – I : According to this method,
Annual standard rent = 6% per annum of total capital cost.
Method – II : According to this method,
Standard rent is calculated at 6% interest on the capital cost and
in addition the expenditure on annual and special maintenance
and repairs and municipal and other taxes are added.
For annual repairs = 1 ½% of cost of building
Water supply works = 1%
Sanitary works = 1%
Electrical installations = 1 ½%

For quadrennial & special repairs,
For annual repairs = 0.6% of cost of building
Water supply works = 3 ½ %
Sanitary works = 3 ½ %
Electrical installations = 3 ½%
Municipal and property taxes are based on % basis of rent as
per rules of municipal board or government.
Rent fixed by the above method is maximum rent or standardRent fixed by the above method is maximum rent or standard
rent for building.
Method III :
But for government official occupying a government building
has to pay 1/ 10 of salary as rent. In addition has to pay water
tax, normal as well as excess sewerage charges and EB bill.
House tax, maintenance cost property tax paid by government
or owner.

1. Calculate the standard rent of a government residential
building newly constructed from the following data –
i) Cost of land = Rs. 10,000
ii) Cost of construction of the building = Rs.40,000
iii) Cost of roads within the compound, and fencing = Rs. 2000
iv) Cost of sanitary and water supply works = 8% cost ofiv) Cost of sanitary and water supply works = 8% cost of
building.
v) Cost of electric installation including fans= 10% of cost of
building.
vi) Municipal house tax = Rs.400 per annum
vii) Water tax = Rs. 250 per annum
viii)Property tax = Rs. 140 per annum

Soln:
Total capital cost –
cost of building = =Rs. 40,000
Cost of roads and fencing= = Rs. 2000
Cost of sanitary & water supply works =8 × 40,000= Rs. 3200
100
Cost of electric installations = 10 ×40,000=Rs. 4000
100100
Total Capital Cost = Rs.49,200
Note - Cost of land is not included

Method I:
Annual Standard Rent = 6 × 49200
100
Annual Standard Rent = Rs. 2952/- per annum.
Method II:
Interest on total capital cost @ 6% = 6 × 49200 = Rs. 2952
100
For annual repairs = 1 ½% of cost of building = 1.5 × 40,000 = Rs.630For annual repairs = 1 ½% of cost of building = 1.5 × 40,000 = Rs.630
100
Sanitary and Water supply works = 1% of cost of sanitary and sanitary works.
= 1 × 3200 = Rs.32
100
Electrical installations = 1 ½% of cost of electric installations
= 1.5 × 4000 = Rs. 60
100

Special Repairs-
For annual repairs = 0.6% of cost of building =0.6 × 40,000 = Rs. 252
100
Sanitary &Water supply works = 3 ½ % of cost of sanitary and water supply
works.
= 3.5 ×3200 = Rs. 112
100
Electrical installations = 3 ½% of cost of electrical installation
= 3.5 × 4000 = Rs. 140
100
Municipal house tax = Rs. 400
Property tax = Rs.140
Total Standard Rent = Rs. 4718

Water tax has not been added as this will be paid by the
occupant.
By comparing method I and method II , standard rent will be
taken as the lesser rent.
standard rent per annum = Rs. 2952
Standard rent per month = Rs. 2952 = Rs.246
12
Standard Rent Per Month = Rs. 246 /-

Escalation :
It is the provision in the cost estimate for increases in the
cost of equipment, material, labor, etc., due to continuing
price changes over the time.
Escalation is used to estimate the future cost of a project
or to bring historical costs to the present.
Escalation Relationships:
Escalation in cost estimating has two main uses:
To convert historical costs to current costs (historical
escalation index)
To escalate current costs into the future (predictive
escalation index) for planning and budgeting.
The historical escalation index is used to bring the
historical cost to the present and then a predictive
escalation index is used to move the cost to the future.

Valuation

More Related Content

What's hot

Similar to Valuation

Recently uploaded

Valuation