VALUATION OF IMMOVABLE

PROPERTY
Professional Practice – II

Prepared by:
Rishit Kakkad (06)
Akshay Fadadu (016)
Rushi Savsani (017)
Jay Tank (018)
VALUATION OF IMMOVABLE PROPERTY
INTRODUCTION

 Banks and financial institutions lend money to the borrowers against mortgage of their fixed assets
which are kept as collateral security. These banks and financial institutions require a valuation of the
collateral securities, which are in the form of both – Immovable property, more commonly known as land
& building assets, as well as plant & machinery.
 Valuation of real estate involves determining the value of the real property (land & building).
 Real estate deals with either sale or purchase that require a ​valuation of immovable property because
each property has intrinsic attributes which are distinctive from others and need to be factored in for
determining its value.
 It involves aspects of legal interests in the real estate, demand/supply, the suitability of location, site
characteristics, etc. Real estate fulfils the needs of users or only as an investment for the owner.
 However, in both cases, the potential for growth of value is the key driver for purchase. The location and
the up-gradation or improvements of real estate have a direct bearing on its value.
TYPES OF PROPERTY

Personal Property
Money, cash deposited in bank, Gold and Silver Bullion, jewelry and personal belongs.

Real property
Real property or Real Estate like land with or without building. Whole or part rights arising out of land and
buildings are also real property.

Real Estate property

Income fetching marketable properties
 Rented properties, Hotels, Cinemas, Malls fall under this group
Non-Income fetching marketable properties (Market Approach)
 Owner occupied bungalows, flats, shops, offices, factories fall under this category
Non income fetching – non marketable properties (Cost Approach)
 Temple, Church, School, College, Public buildings, Museum, Fire station and Govt. buildings fall in
this category.
WHAT IS PROPERTY VALUATION?

Property valuation is the process in which the economic value of a real estate investment is determined,
which often seeks to determine the fair market value of a real estate property, or the price at which an
informed seller willingly sells his/her real estate property to an informed buyer. In other words, both parties
have all the relevant information, and neither side is forced to sell or buy. However, it is important to point
out that a property’s value is not always equal to its price.
For example, in some cases a seller is distressed and must sell the property right away even if the price is
below its fair market value.
WHY IS PROPERTY VALUATION IMPORTANT?

Property valuation is a very important concept in real estate investing because it is the main factor that
determines how much property taxes and property insurance to pay. In addition, mortgage lenders require
a home appraisal before providing a loan. The reason for this is to protect the potential buyer from paying
too much for a real estate property, as well as protecting the bank from financing a property that is worth
less than the amount it invests in. Home appraisals are also required to settle down legal matters such as
divorce, real estate settlement, or a lawsuit.
CALCULATION OF VALUATION OF BUILDING/PROPERTY:

Age of property affects the valuation of the building, so the age of the property should be known from the
records or by enquiries or from visual inspection and the future life of the building should be ascertained. 
The valuation of the building is calculated by finding the present-day cost of the building and allowing a
suitable depreciation. The present-day cost of the building can be calculated by:

1. Cost from the Record

The cost of construction can be determined from the estimations, the bill of quantities and using the
present-day rate of building materials and labors.
If the actual cost of construction of the building is known, this cost can be manipulated by using the
percentage of increase or decrease to the present-day rate of materials and labors.
2. Cost by Detailed Measurement
If the old record is not available, then the cost of construction can be calculated by a detailed measurement
of the building and preparing the bill of quantities of various items of works.
The present rate of materials and labors are used to calculate the cost of the building.
CALCULATION OF VALUATION OF BUILDING/PROPERTY:

3. Cost by Plinth Area Method

Plinth area method of calculating the cost of a building is simpler than the detailed measurement method
which is laborious and lengthy. In this method, the plinth area of the building is measured and calculated
and plinth-area rate of a similar building in the locality is obtained by enquiry and cost is calculated.
The plinth area method may not be accurate if the building is not thoroughly examined and compared with
the reference building of the locality. To fix this problem, different parts of the building such as foundation,
structure, floor, roof, doors, windows, finishing etc. should be thoroughly examined.
If the plinth area method is judiciously used, then the cost calculation will be precise and sufficient to suit
practical purposes.
MARKET VALUE

International Valuation Standard Council (IVSC) has defined market value as follows,
“Market Value is estimated amount for which an asset to exchange on the date of
valuation, between a willing buyer and a willing seller, in an arm’s length transaction
after proper marketing, where in the parties have each acted knowledgeably, prudently
and without compulsion”.

Types of Values in Valuation

- Annual Letting Value (Annual Ratable Value) - Forced Sale Value
- Accommodation Value - Hope Value
- Auction Value - Mortgage Value
- Book Value - Potential Value
- Breakup Value - Prestige Value
- Environmental Value
- Scrap Value
- Fair Market Value
- Special Value…
- Fear Value
DIFFERENT APPROACHES OF ESTIMATING VALUE OF THE PROPERTY:

(A) Income Approach – This approach is generally useful to value income fetching marketable properties
like tenanted premises.
(i) Rental Method of Valuation
(ii) Profit Method
(iii) Discounted Cash Flow Technique
 
(B) Market Approach – This approach is generally recommended for all marketable properties, whether
income yielding or not. Land, Ownership flats, Shops, Showroom and Offices (Not Tenanted) are valued by
this approach.
(i) Belting Theory of Land Valuation
(ii) Hypothetical Plotting Scheme Method
(iii) Front Foot Rule Method
(iv) Sales Comparison Method
DIFFERENT APPROACHES OF ESTIMATING VALUE OF THE PROPERTY:

(C) Cost Approach – This approach is generally adopted for a non-income fetching and non-marketable
as well as marketable property. Schools, Temples, Bungalows, Factories are valued by this approach.
(i) Land and Building Method
(ii) Book Value Method of Building Valuation
(iii) Flat rate Method of Building Valuation
(iv) Cost Index Method of Building Valuation
(v) Quality Survey Method of Building Valuation.
DIFFERENT APPROACHES OF ESTIMATING VALUE OF THE PROPERTY:

Type of Properties
There are four main types of properties:
 Residential (landed houses, apartments and condominiums)
 Commercial (shop lots, offices, retail lots in shopping centers and etc)
 Industrial (factories and warehouses)
 Lands (agricultural, orchards and raw lands)

Apartment: Landed Properties Commercial Properties

a) Low Cost Apartments a) Terrace/Linked Houses a) Office Lot
b) Medium Cost Apartments b) Semi-Detached Houses b) Retail Lots
c) Medium/High-End Condominium c) Bungalows c) Landed Shop Lots
d) Serviced Apartments/Suites d) Townhouses

Industrial Properties
a) Agricultural / Plantation Land
b) Orchards/Homesteads
c) Raw Land
TYPES OF SITUATIONS WHERE IN RENTAL METHOD IS USED:

(A) Land is fully developed and building on plot is fully tenanted.  Only Rental Method is applicable.
(B) Land is fully developed but building is partly let out and partly owner occupied.
- Rented portion to be valued by rental method and owner-occupied portion by market
approach. 
(C) Land is partially developed with surplus available F.S.I. Rented building is in one side of the plot,
- Rented portion by Rental Method. Surplus F.S.I. to be valued by comparing with rate of open
plot prevalent in the locality. Separate building in plot is possible to consume F.S.I.
(D) Land is partially developed with surplus available F.S.I. But only vertical development is possible over
rented building.
- Rented portion by rental method. Surplus F.S.I. to be valued after deducting cost of
strengthening building or extra cost of structural frame work provided from outside.
(E) Land is only partially developed but rented ground floor structures in the plot occupy entire plot.
- Rental Method may or may not be used depending upon market trend. Balance potential to be
valued by Development Method. This is the case where total demolition of rented building existing in the
plot is necessary for optimum use of land.
TYPES OF SITUATIONS WHERE IN RENTAL METHOD IS USED:
EXAMPLE
• A luxurious bungalow is built by an enterpreneur in his home town, a very small village having population
of hardly 9,000 persons. Area of plot is 4000 Sq.Mts. Bungalow built-up floor area is 400 Sq.Mts. on
ground floor and 400 Sq.Mts. on 1st floor. Total cost of land and bungalow in year 2010 was Rs.6 lacs and
Rs.44 lacs respectively. Value the property as on 2018 if no one in village has capacity to pay even 10
lacs for the property and small rented premises are available in village at rate of Rs.10/SM/Month.
• Solution:
There is no paying capacity of buyers in the village. We can therefore value property by rental
method. Assume two tenants . One paying net rent of Rs.4000/Month for ground floor and second one
paying Rs. 2000/Month for 1 floor.
Gross Annual Receivable Rent = (4000 + 2000) x 12 Rs.72,000/-
Capitalising net rent at 6%, in perpetuity, we get, Value of property = 72,000 x 100/6 = Rs.12,00,000/-
It will be seen that property having a cost of Rs 50 Lacs in 2010 had value of only Rs. 12 lacs after
eight years.
Even owner/occupied or vacant flats in urban area can also be valued by rental method instead of
sales comparison method. However, we will have to first arrive at fair rental value of flat with the help
of sales comparison method.
COMPARATIVE METHOD OF VALUATION

• Comparative method is used as a basis in all methods of valuation and compares like with like.
• Works on the basic assumption that the price paid for a property at a given point in time is evidence of the
market value of that property and all other factors being equal is a good indicator of the market value of a
similar property.
• Information holds the key to better decision-making via more reliable analysis.
• Reliable information is the foundation for good decision-making, but does not come easily.
• Information is based on an assimilation of data - things known or granted as a basis for inference.
• Accurate data provide both the foundations and the building blocks for good property advice.
COMPARATIVE METHOD OF VALUATION

Application of the method

- Involves carrying out a valuation by directly comparing the property with similar properties which have
sold in the past and using evidence of those transactions to assess the value of the property.
- Analysis should encompass every attribute of a transaction that was different from every other attribute in
selected comparable transactions.
- The more comparables that are available to the valuer, the easier it is to derive an estimate of value with
substantive evidence.
- Most suitable for residential property where there is a freehold interest or a long leasehold interest.
- Units of comparison can include per sqm, per hectare, per unit, per room. Several should be used as a
cross check.
- A competent valuer will be able to quantify the differences between properties and those at more distant
locations.
DEPRECIATION

With the passage of time, the value of building decreases and after economic life of the building, its value
becomes equal to its salvage value. Normally reproduction cost of building is worked out with the help of
Plinth Area Rates published by C.P.W.D. After working out the cost of building as new on the situation date
with the help of CPWD-PAR a deduction termed as depreciation is allowed to arrive at the reproduction
cost of the building at its present form.
 
The depreciation can be worked out by any one of the three methods indicated below.

- Straight Line Method

DEPRECIATION

- Sinking Fund Method : A sinking fund is an amount set aside every year and invested at compound
interest so that on expiry of economic life one gets the cost of building less salvage value Annual
sinking fund to provide Re 1 in n years.

- Written down Value of Equal percentage or declining Balance Method:

BIBLIOGRAPHY

• Scarrett, D. ( 1991) Property Valuation, The 5 Methods. E&F. Spon.

• https://cpwd.gov.in/Publication/GuidelinesProperties2009.pdf
• https://pvaivpo.org/lib_docs/books/valuation.pdf 
• https://www.mypropertyverified.com/?page_id=233
• https://www.cevindia.org/wp-content/uploads/2018/10/25.-Valuation-Practice-of-Immovable-Pr
operties.pdf