The document provides an overview of professional practice and valuation of properties. It discusses key topics such as: 1) Different types of property ownership including freehold and leasehold properties. 2) Factors that influence property valuation including depreciation, obsolescence, outgoings like taxes and maintenance. 3) Methods for calculating depreciation and determining the value of a property such as market value, book value, and capitalized value based on rental income. 4) Qualities of a good property valuer and purposes of conducting valuations such as for buying/selling, taxation, rent fixation, and more.

1. SUB : PROFESSIONAL PRACTICE &
VALUATION(2170610)
1

2. CONTAIN:
 Introduction
 Free hold property & Lease Hold Property
 Outgoings
 Depreciation & Obsolescence
 Methods of depreciation
 Different forms of value
 Miscellaneous Topics
 Valuation methods for property & land
 Rent & Rent fixation
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3. INTRODUCTION
 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. 3

4. - 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 of the property itself.
4

5. PURPOSE OF VALUATION?
Buying or selling property: when it is required to buy or
to sell a property, its valuation is required.
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.
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).
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6.  Security of loans or mortgage: when the loans are
taken against the security of the property, its valuation is
required.
 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.
 Valuation of a property is also required for insurance etc.
 Gross income: gross income is the total income and
includes all receipts from various sources the
6

7. outgoing and the operational and collection charges are
not deducted
 Betterment charges: when the property comes under
some town planning scheme of the area, its value
increases and consequently ,the owner of the property is
required to pay additional tax, known as the Betterment
charges.
 Court fees: When a case has to be filled with respect to
a real estate , it becomes necessary to affix stamp of
suitable amount. This amount is worked out after arriving
at the value of the property under dispute
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8. CHARACTERISTICS OF A GOOD VALUER
 A valuer is an expert who can workout the market
value of a property based on scientific analysis
and instances of sales.
 A good valuer must possess sound knowledge of
the following subjects:
1.Estimating and costing.
2.Planning and designing.
3.Surveying and leveling.
4. Building bye –laws of the local bodies
.
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9. 7. Experience in construction works.
8. Town planning act.
9. Arbitration.
10. Economic geography.
11. Sociology.
12. Commercial mathematics.
13. Investment principles.
14. Insurance.
15. Money market & rate of interest.
16. Taxation of government.
17. Report writing.
9
5. Law of contracts
6. Land acquisition

10. FREE HOLD PROPERTY & LEASE HOLD
PROPERTY
 Free hold property:
 The free hold is absolute owner of the property ,
he holds it without any payment 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’ .
10

11.  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.
 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.
11

12.  The different types of leases:
-Building lease
-Occupation lease
-Sub-lease
-Life lease
-Perpetual lease
12

13. OUTGOINGS
 The term outgoing is used to indicate the expenses
which are to be incurred in connection with the
property so as to maintain the revenue from it .
 the usual types of outgoings are briefly described
below:
1. Taxes
2. Repairs and maintenance
3. Management and collection charge
4. Insurance
5. Loss of rent
13

14. 7.Sinking fund
8.Ground rent
9.miscellaneous
14

15. 1. 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.
- Annual rental value = gross rent – amount of
yearly repairs
15

16. Repair & maintenance:
- 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 in ordinary case.
- And about 1% to 1.5% of the total cost of
construction is provided for repairs and maintenance.
16

17.  Insurance :
- The amount of actual insurance premium is considered as an
outgoing expense.
- A property may not be insured at all but this does not mean
that no deduction should be made for insurance premium
- The rate of premium depend on various factors such as the
type of construction, nature of occupancy ,facilities for fire
protection and fire fighting etc.
 Loss of Rent:
- Part of a property may remain vacant for some period and
will not fetch any rent for that period .Therefore ,the loss of
rent is considered as outgoing expenses and deducted from
the calculated gross rent
17

18.  Management and collection charges
- An agent collects rents for big building and if
estate is large he will also manage the estate.
- Usually the charges vary from 4 to 5%
- For small building it may not necessary to
considered it.
 Sinking Fund:
- Sinking fund is an amount which has to be set a
side at fixed intervals of time 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.
18

19.  Ground Rent :
- The rent which is paid by the leaseholder
for the use of land usually for the purpose
and the privilege of building on another
man’s land is known as ground rent.
19

20. 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
2. obsolescence depends on normal
progress in the arts, inadequacy to
present or growing needs etc.
3. this is variable according to the age of
the property. More the age, more will be
the amount for the depreciation.
3. This is not dependent on age of the
building. A new building may suffer in its
usual rent due to obsolescence.
4. there are different methods by witch the
amount of depreciation can be
calculated.
4. At present there is no method of
calculation of obsolescence. 20
Difference between Deprecation and obsolescence

21. METHODS OF CALCULATING DEPRECIATION
1. Straight line method
2. Constant percentage method
3. Sinking fund method
4. Quantity survey method
21

22. 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
22

23. 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.
23

24. EXAMPLE 1
 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
24

25. SINKING FUND METHOD
 In this method the depreciation of property is
assumed to be equal to the annual sinking fund
plus the interest on the fund for that year, which
is supposed to be invested on interest bearing
investment.
Sc = i/[(1+i)n-1]
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26. EXAMPLE 1
 The sinking fund amount of a property is estimated to Rs
50,000 whose future life is 20 yrs. Find the yearly
installment of sinking fund of sinking fund which should be
set aside @ 5%.
Soln :
Coefficient of sinking fund installment
Sc = i/[(1+i)n-1]
= 0.05/[(1+0.05)20-1]
=0.0302
Yearly installment of sinking fund = 0.0302*50000 = Rs
1510 /year
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27. 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.
Soln :
The total amount of sinking fund to be
accumulated at the end of 30 yrs
Sn = (90/100)*4000
= 36000
27

28. Annual instalment of sinking fund ‘s’
=(Sf*i)/[(1+i)n-1]
=(36000*0.05)/[(1+0.05)30-
1]
=1800/(4.325-1)
= Rs 541.35
28

29. 3. 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/C)^1/n
Where C- original cost, S- scrap value, n- life of property
in year and D –annual depreciation.
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30. 4.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 percentage of the cost
of the property.
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31. DIFFERENT FORMS OF VALUE1. Market value
2. Book value
3. Scrap value
4. Salvage value
5. Accommodation value
6. Distress value
7. Monopoly value
8. Replacement value
9. Investment value
10. Sentimental value
11. Speculative value
12. Annual value
13. Potential value
14. Occupation value
15. Present Value
31

32.  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.
 Book value : Book value is the amount shown in the
account book after allowing necessary depreciations.
- The book value of a property at a particular year is the
original cost minus the amount of depreciation allowed
per year and will be gradually reduced year to year and at
the end of the utility period of the property, the book value
will be only scrap value.
32

33.  Scrap value : Scrap value may be defined as the value
of materials of dismantle buildings.
- After the completion of utility period the dismantled
materials such as Steel, timber ,bricks and furniture
will fetch a certain amount which is called scrap value
of building. Scrap value of building is about 10 % of its
total cost of construction.
 Salvage Value : The value of building at the end of
utility period without being dismantled is called the
Salvage Value.
- Another example is a machine after the completion of
its usual span of life , may be sold or purchased by
some one for other use. The sale value of that machine
is called Salvage value.
33

34.  Distress Value: In case a property is sold at a
lower price than the market value at that time it is
said to have a distress value.
 Monopoly value: In some cases ,the property
possesses certain advantages with respect to
adjoining property due to its location ,size ,shape
etc. the owner may demand fancy price. Such
value of property is known as monopoly value.
34

35.  Replacement value : It is the present value of a
property or portion there of if these have to be
replaced at the current market rates.
 Investment value: It is the value of a property
indicates the amount offered by a prudent
purchaser by keeping in view the advantages of
possessing the property from investment point of
view.
 Sentimental value: When a property is sold or
purchased at higher value than the market value
due to playing of sentiments in the mind of the
advantages of possessing the property from
investment point of view. 35

36.  Annual value: The local authority has to decide
the annual value of the property so that taxes can
be calculated on that basis. Such annual value of
the property has to be fixed by observing the
principles of rating valuation.
 Potential Value: When a property is capable of
fetching more return due to its alternative use or
by advantageous planning or by providing some
development work, is known as potential value.
36

37. MISCELLANEOUS TOPICS
 1. Annuity: Annuity is the annual periodic
payments for repayment of the capital
amount invested by the party.
 These payments are either paid at the end
of year or at the start of year.
37

38.  Year’s purchase(Y.P):
Year’s purchase is defined as the capital sum required to
be invested in order to receive a net receive a net annual
income as an annuity of rupee one at a fixed rate of
interest.
 The capital sum should be 1×100/rate of interest.
Thus to gain an annual income of Rs x at a fixed rate of
interest,
the capital sum should be x(100/rate of interest).
But (100/rate of interest) is termed as Year’s Purchase.
38

39.  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/i
39

40.  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/ (i+Sf)
40

41. 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% , i = 4.5%
Y.P =1/(i+Sf)
Coeff. Of sinking fund (Sf) = i/((1+i)n-1) =0.0319
Y.P = 1/(.05+.0319)
=12.21
41

42. CAPITALIZED VALUE
 The capitalized value of a property is the amount of
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 income x year’s
purchase(Y.P)
42

43. EXAMPLE:
 A building has a monthly rent of
Rs.1500.Total outgoings are 20% of gross
rent.Rate of interest on capital is 8% .Find
capitalized value of building.
Soln :
Monthly rent=Rs.1500
Annual Rent=12 x 1500 = Rs.18000
Outgoings = .20 x 18000 =Rs. 3600
I = 8% = .08
Y.P = 1/i
43

44. = 1/.08
= 12.5
Capitalized value = Net income x Y.P
C.V =N.I x Y.P
= 14400 x 12.5
=Rs. 1,80,000
44

45. VALUATION METHODS FOR PROPERTY AND
LAND
 The following are the different methods of
valuation:-
1) Rental method of valuation.
2) Valuation based on the profit.
3) Development method.
4)Land and building based method
45

46. 1) Rental method of valuation.
- In this method, the net rental income from a
property is calculated after deducting all
outgoings from the gross rent, and Y.P is
calculated after adopting the current bank
interest.
so, C.V= N.I x Y.P
Net rent = Gross rent – outgoings
- When the rent from a property is known , this
method is useful for valuation
46

47. 2) Land and Building based method:
- The basic principle of valuation by this method
is to determine the individual market value of
land and simultaneously the individual
depreciated value of building Adding this two
value is the valuation of the property.
- Cost of new construction of building
= Total construction area x present rate of
construction
Now, knowing the age of the building ,
Present value of property = cost of land +
depreciated cost of
building.
47

48. 3) Profit based method
- This method of valuation is very similar to the
rental method of valuation and is most
applicable in case of valuation of shops, hotels,
cinemas, etc.
- In this method net profit id worked out after
deducting all usual outgoings including interest
of capital investment and also remuneration of
labour rendered by owner.
C.V = N.I x Y.P ;
N.I = Total income - Outgoings 48

49. 4) Development method:
- Sometime , undeveloped or underdeveloped
property is bought , developed and then offered
for sale.
- The valuation of such properties would depends
on initial investment , development cost and
expected profit. This method of valuation is base
on …
1. Development of building estates
2. Hypothetical building schemes
49

50.  Rent : Rent may be defined as an annual or periodic
payment for the use of land or building and land.
 Types of Rent:
1. Standard rent 12.Monopoly Rent
2. Head rent 13.Lease Rent
3. Rack rent 14.Ground rent
4. Situation rent 15.Fair Rent
5. Sitting Rent
6. Subsidized Rent
7. Improved Rent
8. Profit Rent
9. Contractual Rent
10. Gross Rent
11. Net Rent
50

51. RENT FIXATION OF BUILDING
 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, 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.
51

52.  To net return, all possible expenditures on
outgoings are added to get gross annual rent.
(i)Gross rent = net rent + out goings.
(ii) G.I = N.I + Outgoings
w.k.t; G.I =Annual Income
So ,
Monthly Rent = Annual Rent /12
52

53. 53