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Chapter 10: Valuation

10.1 Statement: The role of an Architect in the valuation of Land/ Property as an immovable
Asset is that of an Expert.

Before we begin this discussion we must understand a few economic terms

1. Cost-The Amount that is required to produce, create or acquire.

2. Price-The Amount which includes the cost and other miscellaneous expenses.
3. Value- The cost and additional amount that one is willing or not willing to pay for an
intangible reason or worth of something.

10.2 Definition: Valuation is defined as the determining process of a fair value of a certain
specific property for specific /certain purpose on a certain specified date.
•
A property may mean a piece of land or a land only or a piece of land with a building. It
becomes necessary to adopt and establish an appropriate method of evaluation.
•
Valuation is done in the local monetary unit. As in India the valuation would be in Rupees.
•
Valuation is done by specially qualified Valuers who have received training and gathered
experience in this field.

10.3 Purposes of Valuation:

1. Valuation for sale or purchase:

A prospective buyer wants to know the reasonable value he must offer to the seller and
vice-versa. In most such cases after a series of meetings and deliberations a mutually
acceptable sum is arrived at for the deal.

2. Valuation for Legal Purposes.

Properties are valued for a number of legal purposes.

• •
Obtaining Probate of a will through a court of law. Division of Assets among the owners
•
Determine the value of stamp duty.
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•
Determine the court fee
•
Reserve Bid in terms of Auction of Properties

3. Valuation for Taxation

Properties are required to be valued for •Tax Liability of the owner. •Assessment in the
event of gifting of property or sale of property. In many cases when an Individual owns
properties beyond certain limits he or she may have to pay Wealth Tax.

4. Valuation for Land Acquisition.

Any land that needs to be acquired by the local governing body as per the Land Acquisition
Act 1894 needs to be valued so that adequate compensation may be paid to the owner in
actual money or land elsewhere as valued on the date of issue of ordinance.

5. Valuation for Accounting Purposes.

Properties are periodically valued to determine the assets of an Individual or Companies.

6. Valuation for Insurance Purposes.

Buildings are insured against any calamity like fire or earthquakes etc. In any such untoward
incidents and the owner claims the insurance, the buildings need to be valued and adequate
compensation be paid to the owner.

7. Valuation for Loan against property.

8. Valuation for Fair Distribution of Wealth in case of inherited property and its division
amongst inheritors.

10.4 Market Value.

Market value of a property is the value a purchaser is willing to pay to the seller in a free and
un-restricted environment. This value is arrived after a series of mutual discussions and
bargaining. The numbers of transactions that have taken place determine the market value of
an area. There must be demand and supply. The land must be trade-able and transferable.

Characteristic of Market Value are

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1. Vendor: Seller Should be willing to sell

2. Purchaser: Purchaser must be willing to buy.
3. No compulsions on either of the parties in the Transaction.

4. Urgent necessity of purchase or sale to be discarded. (Distress Sale or Purchase)

5. Disinclination of Vendor Seller to be ignored.
6. No sentimental Value.
7. Present and Future potentials are taken into account.

Accordingly Market Values are classified as

1. Fair Value: Fair Value is that value which is fair and reasonable to the seller and
purchaser both. This is determined by an expert Valuer taking into account all related
features like Utility, Satisfaction, Ability, and Availability.
2. Rate-able Value: This value is determined by the civic officials, Local Authorities for
levying of Municipal Tax, Property Tax, and Education Tax. This value is determined with
the first occupancy of the premises and remains unchanged unless there is change of use
of premises or some improvements are made to the premises.
3. Book Value: Depreciation: Every building grows old due to wear and tear and this
reduces or depreciates the value of the building. Depreciation is the value by which the
property reduces in value every year. Normally a building depreciates 5 – 10 % every year.
The BOOK VALUE is this deprecated value of the building.
4. Capitalized Value: A Building has some income value. The income yielding capacity is
the basis of working out the Capitalized Value. It is multiplied by a factor based on current
rate of interest for capitalization.

Another Term of Importance here which could be another Market Value (but I have excluded it
and mentioned it separately) that is Distress Value of Property

5. Distress Value. Property that is under a foreclosure order or is advertised for sale by its
mortgagee. Distressed property usually fetches a price that is much below its market
value.
In real estate terminology, "distressed property" is when the loan amount on a property
is greater than the Market Fair Value

10.5 The Mathematics of Valuation.

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1.
Valuation of Buildings. This is a relatively simple task. Precise Govt. rates are available in a
ready reckoner. This Multiplied with the area would give us the value of most properties.
However one has to depreciate the value depending on the age of the building.
To arrive at the actual market value one must also take into consideration factors like

function of the Building, importance of the Building, and most important the locality of the
building
2.
Valuation of Land. This is much more complex and numerous tangible and intangible
factors are involved. Land is said to be a scarce commodity.

Factors Affecting Valuation of Land:

1. Volatile Market Scenarios. ( Wars/Riots/Socio-economic Situations)

2. Annual Escalation. (Unlike Building Depreciation)
3. Demand and Supply (Shortages and Surplus)
4. Location and Topography. (Prime location, Terrain/Slope)
5. Tenure and Transferability. (Ownership/Tenants, Lease etc.)
6. Neighborhood and Locality. ( Class/Culture)
7. Physical Encumbrances. (Trees, Wells, Poles, H.T lines)
8. D.C. Rules and Regulations. (Land Use/Zoning)
9. Government Policies. (Reservations, Proposed Roads, Canals, Rivers.) 10.
Sentimental/Emotional Issues. (Ancestry/ Heritage)

10.6 Methods of Valuation.

a. Government Method.
State Government prepares a ready reckoner for market values, which are updated
periodically and made available to the government departments, municipal authorities, to
levy taxes and stamp duty accordingly. This forms the basis of land evaluation.

b. Comparative Sales Method.

All Transactions have to be registered with the registrar of properties. This is done on a
payment of Stamp Duty for legalizing and recording the sale. The payment of Stamp Duty is

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subject to the property rate and Transactions. A Comparison with similar sales/purchase
shall help determine the value of a property.

c. Hypothetical Lay-Out Method.

When the value of a large plot are to be determined, small lay-outs are made of
comparable sizes and access and values are made similar to all of them.

d. Residual Method.
In case of valuation of properties with existing buildings, the land value component can be
isolated from combined land + building value of the property. The values can be derived
from similar sales in the neighborhood. This method involves estimation of building values
by established method of making B.O.Q with quantities, rates and amounts.

With Regards to Valuation two other important terms that frequently is brought to our
notice are

•
Freehold and Leasehold Land Tenure
•
Sinking Fund.

The second term is more to do with running of co-operative or otherwise Societies.

10.7 Freehold and Leasehold Land Tenure

Freehold Property
If you have purchased a Freehold Property, then you own the land it is built on and also the
house. In the case of Apartments the owner of the house becomes a share holder in the
property. You can live there as long as you desire. You have the right to make alterations in the
house or redo some parts of the house obviously subject to local byelaws and permission from
the local authorities specially if you want to make structural changes (particularly with old
buildings). In India independent houses are sold as free hold property and Apartments are
mostly on lease. However many Apartments are also now being sold as freehold properties.

The freeholder of a property owns it outright, including the land it’s built on. Generally, most
houses are freehold properties although some might be leasehold – usually through shared
ownership schemes.

If you buy freehold, you are responsible for maintaining your property and land, so you’ll need
to budget for these costs.
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The main benefit of freehold is that you don’t have to:

•
worry about the lease running out, as you own the property outright
•
deal with the freeholder (often known as the landlord)
•
Pay ground rent, services charges and any other landlord charges.
However you have the pay out to maintain your piece of land and also the Property Tax.

Leasehold Property
Most flats and properties are owned leasehold

With a leasehold property, you own the property and its land for the length of your lease
agreement with the freeholder. When the lease ends, ownership returns to the freeholder
unless you are able to extend the lease.

When you buy a leasehold property, you’ll take over the lease from the previous owner, so
before making an offer you’ll need to consider:

•
how many years are left on the lease
•
how it may affect getting a mortgage and the property resale value
•
how you’ll budget for service charges and related costs
Charges for leasehold properties
If you own a leasehold property, you don’t own the land. This means that you won’t be
responsible for maintaining and running the building. The landlord will do this or appoint a
managing agent to do so for them.

However, the leaseholders share the costs of this by paying a service charge to the landlord.
You may also be asked to pay into a sinking fund, to help cover any unexpected maintenance
work needed in the future. Service charges vary from property to property and are pay for
things like maintaining large communal gardens, electricity bills for communal areas, repair and
maintenance of exterior walls, roofs and lifts.

As a leaseholder you have rights that prevent the landlord from taking advantage of you
financially. For example, you can ask to see:
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•
a summary of what the service charges are being spent on
•
how they have been calculated
•
any supporting paperwork, such as receipts for work carried out The landlord must also

consult you:

•
about any building work that will cost more than a certain value
•
before doing any work lasting more than a year
•
before doing any work that will cost you more than a certain amount annually

If you own a leasehold property, the repairs and maintenance in your property are your
responsibility. But you’ll usually need to get the landlord’s permission to make any significant
changes.

Other charges may include:

•
ground rent
•
buildings insurance (arranged by the landlord)
•
administration charges

Before buying a leasehold property, ask about all of these charges. Use our Budget planner to
check that you’ll be able to afford them on top of your mortgage payments. If you want to
challenge your landlord’s charges, you can do this through the Leasehold Valuation Tribunal.

How important is the length of a lease?

If the lease is for less than 70 years you may struggle to get a mortgage. Lenders will normally
need it to run for 25-30 years beyond the end of your mortgage. This means if you want to get
a 25-year mortgage the lease needs to have at least 50-55 years before it ends. As a result it
can also be difficult to sell a property if the lease is for less than 80 years. If you want to sell a
leasehold property you’re buying think about how many years will be left on the lease by that
time.

Extending the lease

You can ask the landlord to extend the lease at any time. And once you’ve owned your home
for two years, you have the right to extend your lease by 90 years provided you are a qualifying
tenant.

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As a general rule you will qualify if your original lease was for more than 21 years. The
freeholder will charge for extending the lease.

If you and the freeholder can’t agree on the cost of extending the lease, you can appeal to the
Leasehold Valuation Tribunal. You may need to hire a solicitor and surveyor, which will
increase the cost.

Advantages of a Leasehold Property

1. Relatively cheaper priced than a Freehold plot as the land cost to the developer is invariably
less.
2. Leasehold Properties are safer to buy as they have clear titles and the Developer’s
credentials are also verified.
3. The responsibility to maintain the project usually lies upon the developer of the project

10.8 Sinking Fund:

1. In a Society:

Definition: In a Society, A Sinking Fund consists of contribution from all Members, at a rate
fixed at the General Body Meeting from time to time, subject to the minimum of 0.25
percent per annum of the construction cost of each flat.

Utilization: On the Resolution passed at the meeting of the general body of the society, the
Sinking Fund may be used by the society for reconstruction of its building/buildings or for
carrying out such structural additions or alteration to the building/buildings, as in the
opinion of the Society’s Architect, would be necessary to strengthen them or for carrying

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out such heavy repairs as may be certified by the Architect and on approval of General
Body.

This is per the Model By-Laws of Maharashtra.

2. In Real Estate

A fund set aside from the income of a property along with its accrued interest that will be
enough to replace components of an improvement as they wear out

3. In Property

A sinking fund is an amount of money which is set aside to cover any major work which is
needed on a property in the future. Such funds are quite common with leasehold
properties.

4. FAQs about Sinking Fund

Definition:

A sinking fund is a long-term savings account that homeowners contribute to every month
through service charges. This builds up every year and should pay for any major works that
are required over a period of time - such as the painting of communal areas or replacement
of a roof.

Why do we need to have a sinking fund?

If a sinking fund is not set up, payment for any required works that are due are to be paid
by a homeowner on completion of the works. This can mean that homeowners will receive
large bills that they need to pay. A sinking fund should mean that no additional payments
are due when major works are required.

How do you work out how much I have to pay towards the sinking fund?
Every Property has some parts which get worn out or need to be repaired. The cost of the
repair or replacement of each part and sum total of these amounts divided into a number
of years till such repair will have to be carried out will decide the sinking fund to be set up.

What if no works are required?

No works are started until a qualified surveyor has inspected the property and assessed the
condition. If it is deemed no works are required a reassessment will be scheduled for the
following year. Alternatively, if a component such as a pump fails and is beyond repair this
will be replaced when required.
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What happens if there is not enough money in the sinking fund to pay for the works? Then
the society can in its general body meeting get passed a resolution wherein every member
requires to pay a certain amount towards the sum total cost of repair works either equally
or on pro rata basis.

What if some member does not pay into a sinking fund?

All new build properties have a sinking fund set up as a matter of course. Older properties,
particularly those transferred as part of stock transfers from local authorities do not
normally have a sinking fund. This means that no monies have been put aside by
homeowners for works that will be required and full payment will be invoiced once works
have been completed. Full consultation on the works will be carried out and payment
options will be available after the final bill is known.

Can I start a sinking fund at our property?

Yes, if everybody is agreeable in the building some agency or the society will work out
suitable contributions for remaining life expectancies on parts of the building that will
require work in the future

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Chapter IX A: Arbitration

1
9.a. Definition: Arbitration means resolution of disputes between Parties. It is a Quasi=
Judicial Process to fairly and impartially resolve disputes between parties in accordance with
Indian Arbitration and Conciliation Acts 1966 before seeking Redressal in courts of Law.

2
9.a. Arbitration in Architectural Practice could be between
1. Between the contractor and the client
2. Between a Petty Contractor (and a recommended Vendor) and the Main Contractor. 3.
Between the Architect and the Client

9.a.3 Types of Arbitration: An Architect is the sole Arbitrator in the first and the second
cases.
I
Joint Arbitration: If in case of dispute both the parties and either party reject the sole
arbitration of the architect, he may call for joint arbitration.
II
Third Expert: If two Architects do not reach on a final award in case of Joint
Arbitration, they may appoint a third expert or umpire to decide and declare an award.
III
Court of Law. If the dispute does not get settled in any of the above cases, then the
dispute is taken to the court of Law.

9.a.4 Salient Features

1. It is a quasi-judicial with the backing of the law in the form of the Indian Arbitration and
Conciliation Acts 1966. Hence Arbitration awards are accepted in all courts of law as “Legal”.
The process involves that both parties enter into an Arbitration Agreement.
2. Arbitration involves solving disputes which may be too small to be taken into court.
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3. Arbitration makes sure that justice is given in the least possible time and yet the project
work continues which may not happen in a court of Law.
4. It is good to make Arbitration a pre-condition in Litigation.

5. Arbitration is relatively less time consuming and less expensive compared to courts of
law.

6. If an Architect has been asked to Arbitrate upon a dis-agreement he shall charge

separately apart from his regular fees for the project (as mentioned in the contract). The
expense is generally borne by the party calling for the Arbitration or the party in whose
favor the judgment is given.

7. Although the Architect is the sole Arbitrator either or both parties may not accept his
ruling.

8. Arbitration is practiced by Lawyers, Architects, Engineers and many qualified and

experienced persons to settle disputes out of courts

9. Minutes or record of the Arbitration Proceedings are to be maintained as evidence in case

the matter is taken to a court of Law. Also the Award given by an Arbitrator is a Legal
Document that is acceptable in any court of Law.

10. In case of Joint Arbitration the expenses of each Arbitrator are to be paid by the
respective parties.

11. For the Expert or Third Umpire Arbitration, the expenses are to be borne by both parties.

12. The Award of the Arbitration is Final and Binding on both the parties although one or
both may seek Redressal in court.

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