Valuation

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.
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).
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.

Insurance: 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 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
expenses from the gross income or total receipt.

Sinking fund: A certain amount of gross rent is set aside

annually as sinking fund to accumulate the total cost of
construction when the life of the building is over. This annual
sinking fund is also taken as outgoings.
Scrape value: scrape 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 scrape value is metal or dismantle parts. In general
the scrape value is about 10 % of total cost of
construction. Scrape value = sale of useable material –
cost of dismantling and removal of the rubbish
material.

Salvage Value: is the estimated resale value of an asset

at the end of its useful life.
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, labour etc.
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 of
that year. At the end of the utility period of
the property the book value will be only
scrape value.
Depreciation: is the reduction in the value of
the property due to its use, wear and tear, etc.

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.
Methods of calculating depreciation:

1) Straight line method

2) constant percentage method
3) Sinking fund method.
Valuation of real property:
• Valuation of a building 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 price of material.
• Also depend on the locality if it is in market area
having high value than the residential area.
• And depending on the specialities in the building
like sewer, water supply, and electricity ect.
• 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 enquiries or
from visual inspection.