V - Unit

VALUATION

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 VALUATION of BULDINGS
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.
Cost: means original cost of construction of purchase.

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 VALUATION of BULDINGS
Purpose of Valuation
1. For Buying or Selling
2. For Mortgage, Security of loans etc
3. Determination of Rent
4. Assessment of tax
5. Compulsory Acquisition
6. Other purpose
• Insurance against fire of a building
• Compensation for any lose due to war, earthquake etc.
• Borrowing Money from Insurance Company
• Bank or such other Institution
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 VALUATION of BULDINGS
Factor affecting the value of the Property
1. Supply and Demand (Market Conditions)
2. Location
3. Features
4. Condition
5. Property Improvements
6. Age
7. Seller Motivation
8. Marketing

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 VALUATION of BULDINGS
Qualification of a valuer
1. Planning, designing and construction work
2. Surveying and leveling
3. Quantity surveying and estimating
4. Building by laws of the locality
5. Laws of easements
6. Rent Restriction Act
7. Arbitration
8. Law of Contracts
9. Local and Government taxation
10. Fire insurance
11. Rate of market interest
12. Present market rate of land and other items
13. Report Writing, etc
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 VALUATION of BULDINGS

Following Principles should be observed at the time of evaluating a

fair and reasonable value of property.
1. Cost depends upon supply and demand of the property.

2. Cost depends upon its design, specifications of the materials used and its
location.
3. Cost varies with the purpose for which valuation is done.

4. In valuation, a vender must be willing to sell and so the purchaser willing

to purchase

5. Present and future use of any property should be given due

weightage in valuation.

6. Cost analysis must be based on statistical data as it may sometimes require,

evidence in a Court of law
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 Few Terminology used in
Valuation of Works / Machinery

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 VALUATION of BULDINGS
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: it is the value of the utility period without being

dismantled. we can sale it as a second handle.

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 VALUATION of BULDINGS
Market value:
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 land labour etc

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 VALUATION of BULDINGS
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 year.
The end of the utility period of the property the book value will be only
scrape value.
Annuity:
Is the annual periodic payments for repayments of the capital amount
invested by a party.
Annuity is either paid at the beginning or at end of each period of
installment. 10
 VALUATION of BULDINGS
Rateable value:
Rateable value is the net annual letting value of a property, which is
obtained after deducting the amount of yearly repairs from the gross
income.
Municipal and other taxes are charged at a certain percentage on the
rateable value of the property.
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.
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 VALUATION of BULDINGS
Capitalized Value:

Amount of money whose interest at the highest prevailing rate of

interest will be equal to the net income or net return in perpetuity
(for specific period).

Capitalized value = Net return * Year’s Purchase.

E.g. Let annual rent =Rs 3500

Highest rate of interest = 8%
Capitalized value =3500*1/(8/100)= Rs 43750.

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 VALUATION of BULDINGS
Year’s purchase(Y.P):

The capitalize value which needs to be paid once for all to receive
a net annual income of Re 1 by way of interest at the prevailing
rate of interest in perpetuity (i.e. for an indefinite period) or for a
fixed no. of days.

•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/R

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 VALUATION of BULDINGS
Sinking Fund:
It is the fund which is built up for the sole purpose of replacement or
reconstruction of a property when it loses its utility either at the end of its
useful life or becoming obsolete.
The fund is regularly deposited in a bank or with an insurance agency so
that on the expiry of period of utility of the building, sufficient amount is
available for its replacement.
The calculation of Sinking Fund depends upon the life of a building as
well as upon the rate of interest and it is generally calculated on 9/10 of the
cost of construction as the owner will get 10% as scrape value of the
building when the life of the building is over.
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 VALUATION of BULDINGS
Sinking Fund (Installment) can be worked out as under:

Sn = s * [(1+R)n-1] / R
s =(Sn*R) / [(1+R)n-1]
Coefficient of sinking fund (Sc) = yearly installment of sinking

fund . Taking, Sn=1, Sc = R/[(1+R)n-1]

Where, s = yearly installment of sinking fund
Sc = Coefficient of sinking fund
n = Utility period or life of building in years.
Sn = Sinking fund to be accumulated in ‘n’ years
R = Rate of interest in decimal 15
 VALUATION of BULDINGS
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, which should be set aside @ 5%.

Solution:

Coefficient of sinking fund installment

Sc = R/[(1+R)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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 VALUATION of BULDINGS
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.
Solution:
The total amount of sinking fund to be accumulated
at the end of 30 yrs is Sn = (90/100)*40000= 36000

Annual installment of sinking fund ‘s’ = (Sn*R) / [(1+R)n-1]

=(36000*0.05)/[(1+0.05)30-1]
= 1800/(4.325-1) = Rs 541.35 17
 VALUATION of BULDINGS
Value Classification (Spranger’s classification)

Theoretical value – mathematical value worked out for the

property

Economical value - is a measure of the benefit that an economic

actor can gain from either a good or service & is generally
measure in terms of currency.

 Social and Cultural value

 Aesthetic value
 Political value
 Religious Value 18
 VALUATION of BULDINGS
The valuation of a building is determined on working out its cost of
construction at present day rate and allowing a suitable depreciation.
Six Methods of Valuation
1) Rental Method of Valuation
2) Direct Comparisons of the capital value
3) Valuation based on the profit
4) Valuation based on the cost
5) Development method of Valuation
6) Depreciation method of Valuation

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 VALUATION of BULDINGS
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/ (R+Sc)

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%.
Ans: Here, R=5%, R1 = 4.5%
Y.P =1/(R+Sc)
Coeff. Of sinking fund (Sc) = R1/((1+R1)n-1) =0.0319
Y.P = 1/(.05+.0319) = 12.21 20
 VALUATION of BULDINGS
Depreciation Method of Valuation

According to this method the depreciated value of the property on the

present day rates is calculated by the formula:

D = P[(100 – rd)/100]n
Where,
D – depreciated value
P – cost at present market rate
rd – fixed percentage of depreciation (r stands for
rate and d for depreciation)
n – The number of years the building had been constructed.

To find the total valuation of the property, the present value of land,
water supply, electric and sanitary fitting etc; should be added to the
above value. 21
 VALUATION of BULDINGS
Depreciations

It is defined as the gradual decrease in the value of a property

because of constant wear, tear and decay etc.

The rate of depreciation depends upon the longevity of utility

period neglect of maintenance etc of a property.

Method of Depreciation Calculation

• Straight Line Method

• Sinking Fund Depreciation Method
• Constant percentage method
• Quantity Survey Method
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 VALUATION of BULDINGS
If the outgoing are not given in the question;
Assumed as the following percentage may be taken for solving
the problems.
1. Repair @ 10% of the gross income or rent
2. Municipal taxes @ 20% of the gross rent
3. Property tax @ 5% of gross rent
4. Management and collection charges @ 5% of gross rent
5. Insurance premium @ ½% of gross income
6. Miscellaneous charges @ 2% of the gross rent.

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 VALUATION of BULDINGS
Rental method of valuation:
 In this method, the net income by way of rent is found out by
deducting all outing goings from the gross rent.
 A suitable rate of interest as prevailing in the market is assumed
and year’s purchase is calculated.
 This net income multiplied by Y.P gives the capitalized value or
valuation of the property.
 This method is applicable when the rent is known or probable
rent is determined by enquiries.

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 VALUATION of BULDINGS
Rent Return Method:
Capitalized value of the property is worked out as under:

Net rent = Gross rent – out goings

Year Purchase (Y.P)
= 1/(R + Sc) where
* Sc – coefficient of sinking fund Capitalized value = Net rent * Y.P.

In case there are immediate repairs (capital repairs) to be

undertaken then
Net value = capitalized value – capital repairs

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 VALUATION of BULDINGS
Example 5 : A building in an A class city is let out @ Rs. 5000 PM.
( per month) The total outgoings of the property is estimated to be
15% of the gross income, calculate the capitalized value of the
property if the present rate interest is 6% and life of the property is
50 Years.
Ans:
Gross rent = 5000*12 = Rs 60000 P.A (per year)
Outgoings = 15% of gross rent
= 60000*15/100 = Rs 9000 P.A
Net Rent = 60000-9000 = Rs 51000
Since the life expectancy is quite lengthy therefore, the income is
considered to be perpetual (identifying long time) hence
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 VALUATION of BULDINGS
Y.P = 1/R = 16.67
Capitalized value = 51000*1/0.06 = Rs 850000
In case sinking fund allowance is also to be accounted for
Sc = (R/[(1 + R)n – 1]
= 0.06/[(1+0.06)50-1] = 0.0034
Y.P = 1/ (R + Sc)
= 1/ (0.06+0.0034) = 15.77

Capitalized value = 51000*15.77 = Rs 804270.

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