P R O F F E S I O N A L P R A C T I C E

Introduction to Real Estate AARSH MALHOTRA | 4A | 180BARCH030

Va l u a t i o n A N A D YA K U K R E J A | 4 A |

JASSIMAR SINGH| 4A | 180BARCH034

R A J AT V E R M A | 4 A | 1 8 0 B A R C H 1 1 8
P R O F F E S I O N A L P R A C T I C E

Definitions
Valuation – a determination of the monetary values at some specified
date of the property rights encompassed in an ownership

Appraisal – stated result of valuing a property, making a cost estimate,

forecasting earnings, or any combination of two or more of these stated
results. It is also an act of valuing, estimating cost or forecasting earnings.

Cost estimation – an estimate of the amount of money that would be

required at some specified date, to construct, produce, replace or
reproduce some tangible and/or tangible thing, without regard to its
ownership

Earnings forecast – an estimate or forecast of the future net monetary

returns, deliverable from something owned or considered as being owned

AARSH MALHOTRA | 4A | 180BARCH030

A N A D YA K U K R E J A | 4 A |

JASSIMAR SINGH| 4A | 180BARCH034

R A J AT V E R M A | 4 A | 1 8 0 B A R C H 1 1 8
P R O F F E S I O N A L P R A C T I C E

Definition of Value
Value– means the worth, usefulness or utility of an object to someone for
some purpose

Market value–defined as the

• Highest price in terms of money
• That real property is acquired
• By a buyer who is willing to buy and a seller who is willing to sell
• Both of whom have adequate knowledge of the actual and potential
use/s of the property
• Which has been offered for a reasonable time in the open and
competitive market

International Valuation Standards (IVS) Definition of Value-

The estimated amount for which a property should exchange on the date
of valuation between a willing buyer and a willing seller in an arm’s length
transaction after proper marketing wherein the parties had each acted
knowledgeably, prudently and without compulsion

Value, Price & Cost-value is the distinct attribute of a thing or

commodity to attract and complement another thing or commodity in the
market while price is the amount paid or offered for a thing or property.
To the seller, the price is subjective value. It is value in exchange.
The objective value of a property may be higher or lower than its current
price.

Land has plottage value when one or more parcels are consolidated so
that its increment in value as a whole is much more than the total sum of
the value of each parcel of land separately ownedRental value refers to the
price fixed for the right to use a certain property for a specific period of AARSH MALHOTRA | 4A | 180BARCH030
time
A N A D YA K U K R E J A | 4 A |

JASSIMAR SINGH| 4A | 180BARCH034

R A J AT V E R M A | 4 A | 1 8 0 B A R C H 1 1 8
P R O F F E S I O N A L P R A C T I C E

Definition of Value
Cash value is the value of the property in an all-out sale. It is synonymous to market value.Investment value is
the present worth of future benefit, or income of the property that the owner, or investor has acquired.Going
concern value is the value of the business in operation, or property that will continue to be utilized. It includes
tangible property such as real estate, equipment and machinery, fixtures and inventories plus intangible assets
such as franchises, patents and goodwill.

In estimating the depreciation in account of the corporate assets, the estimated salvage value is one of the
factors to be considered. The other factors are (1) cost of the assets, and (2) their estimated useful life. Salvage
value is the amount that maybe recovered minus cost of disposal when the assets will be retired or disposed of
at a future time.

Loan value is the maximum level of value, or appraised value, against which a property may be mortgaged to
secure payment of the loan. A loan-to-value rate is usually fixed by the lending institution or bank.The insurance
value is the cost of insurance coverage of the building or improvement to cover its loss due to earthquake, fire
or other calamity. This is done by estimating the cost of replacing the entire building, or the portion thereof that
has been damaged.

Scrap value is the value of a depreciated building or the materials recovered from it.Condemnation value is the
estimated value of a property that is the object of expropriation for public use. Just compensation is the fair and
full equivalent, in money, for the loss sustained.Assessed value is the value of land and/or improvements for ad
valorem tax purposes. The assessed value is multiplied by the tax rate to produce the amount of tax due to
payment. It is synonymous to taxable value.

Utility – ability of the property to satisfy human needScarcity. Land is not scarce. It is the use for which it is
intended or actually established that is becoming scarce. The scarcity, however, is not absolute.Effective
demand. The desire coupled with the financial capacity of the buyer/s to acquire a piece of real property
Transferability – refers to the quality of the property to be transferred or covered.

AARSH MALHOTRA | 4A | 180BARCH030

A N A D YA K U K R E J A | 4 A |

JASSIMAR SINGH| 4A | 180BARCH034

R A J AT V E R M A | 4 A | 1 8 0 B A R C H 1 1 8
P R O F F E S I O N A L P R A C T I C E

Bundle of Rights
Bundle of rights - rights which are encompassed by ownership of real estate
The right to possess and enjoy the use of the property
The right to dispose
The right to exclude any person from the enjoyment and disposal of the property
The right to recover
The right to convey by inheritance

Types of Appraisals
Informal Appraisals –made by almost everyone. They are usually based on a combination of knowledge,
experience and intuition
Formal appraisals – usually made by people especially trained for this work and are used in:
Business and finance
Litigation
Taxation
Insurance

AARSH MALHOTRA | 4A | 180BARCH030

A N A D YA K U K R E J A | 4 A |

JASSIMAR SINGH| 4A | 180BARCH034

R A J AT V E R M A | 4 A | 1 8 0 B A R C H 1 1 8
 P R O F F E S I O N A L P R A C T I C E

Economic Principles to Property Value

Anticipation - the perception that value is created by the expectation of

benefits to be derived in the future. Value is based on market participant’s
perception of future benefits of ownership.

Balance - relates both to the property as well as the environment in which

the property is located. It is related to the property itself, this principle
holds that value is achieved and maintained when all elements are in
proper proportion.

Change -the result of the cause and effect relationship among the forces
that influence real property value. Change in the market for real estate
due to social, economic, governmental, and environmental forces.
Example:

depreciation - loss in property value from any cause.

Competition - holds that profits tend to spur competition. The more

profitable a venture may appear, the more competition will be created. In
other words, success breeds competition, and extremely high success
breeds excess competition.

Conformity - real property value is created and sustained when the

characteristics of a property conform to the demands of its market. Zoning
ordinances establish conformity in basic property characteristics.
Contribution - holds that the value of a component is a function of its
contribution to the whole rather than as a separate component. The cost
of an item does not necessarily equal its contributory value.

AARSH MALHOTRA | 4A | 180BARCH030

A N A D YA K U K R E J A | 4 A |

JASSIMAR SINGH| 4A | 180BARCH034

R A J AT V E R M A | 4 A | 1 8 0 B A R C H 1 1 8
 P R O F F E S I O N A L P R A C T I C E

Economic Principles to Property Value

Externalities - outside forces that effect property values. Economies outside a

property have positive effects on its value, while diseconomies have a negative
effect on value externalities such as the neighbourhood have an effect on value.

Increasing and decreasing returns - relates to the principle of balance as well as

to the principle of contribution. This principle holds that as capital units are
added, a certain point is reached where the added units do not contribute value
commensurate with their costs.

Opportunity cost - the cost of options forgone or opportunities not chosen.

Investors will seek to select investments that provide the highest rate of return at
the lowest level of risk. In other words, investors seek to maximize returns, yet are
risk averse. It is related to the principle of substitution, and is relative to the
income approach

Substitution
when several similar goods or services are available, the one with the lowest price
attracts the greatest demand.a buyer will not pay more for one property than for
another that is equally desirable.property values tend to be set by the cost of
acquiring an equally desirable substitute property.recognizes that buyers and
sellers or real property have other options, i.e., other properties are available for
similar uses.fundamental to all three approaches to value, but is the back bone of
the sales comparison approach.

Supply and demand - the interaction of the supply and demand relationships for
real estate in price determination. It relates to the factors of value - utility, scarcity,
desire, and effective purchasing power.Surplus productivity - the net income that
remains after the costs of various agents of production have been paid. It relates
to the income approach. The agents of production – land, labour, capital and
management AARSH MALHOTRA | 4A | 180BARCH030

A N A D YA K U K R E J A | 4 A |

JASSIMAR SINGH| 4A | 180BARCH034

R A J AT V E R M A | 4 A | 1 8 0 B A R C H 1 1 8
 P R O F F E S I O N A L P R A C T I C E

Approaches to Value Essential concepts in the Cost Approach

Site description Improvement

descriptionBasic construction
designReproduction vs replacement costInformation source

Approaches to Value Cost Approach procedure

Estimate the value of the land as if vacant and available for useEstimate the total cost to build the
existing structure, figured at today’s construction pricesDecide on an appropriate amount to allow for
accrued depreciation, that is, the loss in value of the subject building as compared to a new structure

 Approaches to Value Steps in the Cost Approach

Subtract the estimated depreciation from the cost of the hypothetical new structure, giving a
depreciated cost estimateAdd the value of the land to the depreciated cost of the new structure. The
result is the indicated property value by the cost approach

 Approaches to Value
Income capitalization approach (Income approach) - a comparative approach to value that considers
income and expense data relating to the property being valued and estimates value through a
capitalization process. Capitalization relates income (usually net income) and a defined value type by
converting an income amount into a value estimate.

Essential concepts in the Income capitalization approach (Income approach)

Direct Capitalization Technique – V= I/r Yield capitalization
Technique – Discounted Cash FlowEstimation of income and expensesEstimation of net
incomeCapitalization rates

Obtain annual rent schedules/revenue schedule for the subject property and compare with
competition to arrive at a projection of reasonable rents/revenue for the subjectEstimate annual
vacancy and collection lossesSubtract these from the gross income to arrive at the effective gross
income
AARSH MALHOTRA | 4A | 180BARCH030

Estimate the annual expenses and subtract them from the effective gross income to arrive at the net A N A D YA K U K R E J A | 4 A |

income. Net income is sometimes called net operating incomeAnalyze comparable investments in JASSIMAR SINGH| 4A | 180BARCH034
order to arrive at a capitalization method and rateCapitalize the projected net income into an estimate
R A J AT V E R M A | 4 A | 1 8 0 B A R C H 1 1 8
of value.
 P R O F F E S I O N A L P R A C T I C E

The Appraisal Report Parts of a Narrative Appraisal Report

Introduction - states the purpose (market value, investment value, insurance value, etc.) and function (use
of report, i.e., mortgage, estate, etc.) of the appraisal, identifies and describes the subject property, and
presents the value

Factual Data - contains facts affecting the appraisalProperty identificationLegal descriptionAppraisal

objective
Purpose of the appraisal - answering the value question the client wants to answer i.e. to estimate market
value, insurable value, or some other type of value

Function of the appraisal - client's expected use the appraisal should be clearly stated, i.e. whether the
appraisal is to be used for loan purposes, estate settlement, bankruptcy, or some other use.

Scope - process of collecting, confirming, and reporting data is describedProperty rights appraised

AARSH MALHOTRA | 4A | 180BARCH030

A N A D YA K U K R E J A | 4 A |

JASSIMAR SINGH| 4A | 180BARCH034

R A J AT V E R M A | 4 A | 1 8 0 B A R C H 1 1 8