ELEMENTS OF

VALUATIONS
PROFESSIONAL PRACTICE

SUBMITTED BY :
SHAH ZAIN
12/AR/008
IX SEM
B.ARCH

VALUATION
Valuation is an adventure in economic research, leading to an economic decision of a value which indicates the conclusions
arrived at after taking into consideration all factors like economic, social, political, legal and physical which affect the value one
way or another.
Valuation is the process of determining the current worth of an asset or a company; there are many techniques used to determine
value.

VALUE, PRICE AND COST

A price is a fact and a Value is an estimate of what the price ought to be.
Value, price and cost do not come into existence unless and until an exchange of commodities or services takes place and the
exchange usually takes place depending upon utility, satisfaction, transferability and the extent to which a commodity is scarce.

ESSENTIAL CHARACTERISTICS
VALUE
In order that a commodity can have value, it must possess three essential qualifications, namely :
i.

It must possess utility.

ii.

It must be scarce.

iii.

It must be transferable or marketable.

. PRICE
It is the cost of a commodity plus additional reward to the producer for his labor and capital.

. COST
Expenditure to produce a commodity having a value.

MARKET VALUE
The market value has been defined as the amount which might be expected to realize from a willing
purchaser on a sale of a property by a willing seller in the open market.
i.

In the open market means the property is offered for sale in such a manner that every person who desires to
purchase can make an offer.

ii. A willing seller is a person who will not sell the property unless he obtains something more than his reserve
price.
iii. Might be expected to realize refers to the expectations of the purchasers after they have been supplied with all
the necessary data, etc. and after they know the conditions of the market.

CHARACTERISTICS OF MARKET VALUE

iv. Vendor must be willing to sell.
v.

Purchaser must be willing to purchase and must be a prudent one who can put the land to the most beneficial use.

vi. No compulsion on either in the transaction.

vii. Urgent necessity of purchase or sale to be discarded.
viii. Disinclination of vendor to be ignored.
ix. Sentimental value to the vendor will have no place.
x. Present and future uses known as potentials are to be taken into account.

OPEN MARKET
In the open market means the property is offered for sale in such a manner that every person who desires
to purchase can make an offer and that the necessary steps are taken to advertise its sale in papers and all
necessary means are adopted to bring to the notice of all the purchasers that the property is for sale in the
market under the most favorable condition.
The term open market is used generally to refer to an economic situation close to free trade.

VALUE CLASSIFICATION
o

Assessed Value: The value of a property which is recorded in the register of a local authority and used
for the purpose of determining the amount of property taxes to be collected from the owner of the
property.

Book Value: It is also known as book cost which shows the original investment of a company on its
assets, including properties and machineries less depreciation for the period passed.

Salvage Value: Value of a machinery realized on sale when its useful span of life is over but it has not
become useless.

Scrap Value or Junk Value: Value of machinery realized when it becomes absolutely useless except for
sale as junk. It also applies to built-up properties which have outlived their useful span of life and in
such cases the value of the old materials of such buildings less cost of demolition will represent the scrap
value or break up value. It is also known as Demolition Value.

o Replacement Value: It indicates the value of a building or portions thereof if these have to be replaced in the form
of acceptable substitutes, at the current market rates. If the substitutes form substantially identical new ones, in
other words constructed or manufactured to order, the value in such a case will be known as Reproduction Value.
o Earning Value: It is the present value of a property which will start yeilding an income in future.
o Potential Value: The land has got an inherent value which may go on increasing due to passage of time or due to
some alternative use fetching more return. This inherent value is known as Potential Value.
It includes the following:
i.

Beneficial present use of land.

ii.

Future usefulness.

iii.

Special suitability for a definite purpose.

iv.

Better lay out.

o. Distress Value: When a property is sold at a lower price than that which can be obtained for it in an open market, it
is said to have Distress Value.
It may be due to the following:
i.

Financial difficulties of vendor.

ii.

Indirect benefit to vendor or purchaser.

iii.

Part consideration paid otherwise.

iv.

Panic due to war and riots.

o Speculative Value: When the property is purchased so as to sell the same at a profit after a short duration, the price
paid is known as speculative value and the chief aim behind the purchase is not that of development so as to earn rent
but that of speculation.

o Monopoly Value: Following the law of supply and demand as the number of available plots in a locality goes on
decreasing, the value of the land goes on increasing and a time comes when very few plots remain in the market. The
fancy price demanded by the vendor for those few remaining plots will be known as monopoly value.

o Sentiment Value: The fancy price which is demanded by a vendor when he attaches some sentimental value to his
property is known as sentimental value having no relationship with the market value.

o Accommodation Land and Accommodation Value: The land on the outskirts of a town used for the purpose of
play grounds, gardens, etc. is known as accommodation land. It has a value greater than that of agricultural land and
less than that of building land.

CLASSIFICATION OF OWNERSHIP FOR BUILDING/LAND

There are two forms of ownership, namely, freehold and leasehold and this qualification of the property is designated
by the word Tenure.

TENURE:
It indicates the terms and conditions under which a property consisting of land or land with building can be owned. In
wider sense there are two types of tenures, namely; (a) freehold, (b) leasehold.

FREEHOLD TENURE
This type of tenure indicates that the land can be owned without any restrictions whatsoever so far as its
use is concerned. It does not require payment of any charges or ground rent.
However, the rules and regulations of the Government or local authority will have to be complied with, for
its development as the freehold tenure is not exempted from the said restrictions which are meant for the
welfare of citizens in general.
It is the highest form of ownership of land. The freeholder has got:
i.

Right to its occupancy and use.

ii.

Right to sell in whole or in part.

iii.

Right to gift.

iv.

Right to contract for its use to others for a period of time.

LEASEHOLD TENURE
. The property is a Bundle of Rights which can be retained as it is; or can be divided by a lease or leases
so as to create two or more interests in the property like lessors interest, lessees interest, sub-lessees
interest, etc.

LEASE
It is a registered instrument which contemplates a transfer of a right to enjoy a property proposed to be leased out for a
certain time of in perpetuity in consideration of a price which may be premium or rent or a combination of both and
subject to other terms and conditions as may have agreed .
The lease of a property can well be compared to a financing device whereby the lessee borrows the land from the lesser
instead of borrowing the capital from someone to purchase the land from the free holder. His payment of lease rent will be
just like payment of interest on borrowed capital and his return of capital will correspond to his return of the property to
then lesser at the expiry of the lease period .however it is essential that the period of lease should long enough so as to
enable the lessee to recover his capital invested in the improvement of the land.

LESSOR
He is the superior owner of the property or freeholder who surrenders the right to use and occupancy for the term and
rental stated in the lease, retaining the right of reversion.

REVERSION
It indicates the right to reposes the property at the end of the lease term.

LESSEE
He is the person who aquires the right of use and occupancy in a property for a specified period in exchange the
rental or premium or a combination of both and subject to others terms and conditions of the lease.
The lessee having acquired part of the Bundle of Rights may create a sub-lease subject to laws and restriction or he
may assign his interest in the lease that is he may part with entirely of his rights in the property to someone else.
The former is known as sub-lease and the latter is known as assignment of lease.
The distinction between a sublease and an assignment of lease is very important. When a lessee makes a sublease he
still retains reversion with him often it may be very nominal being of a few days.
When a lessee assigns a lease he parts with all his rights in it, retains no reversion and ceases to be the tenant under
the head lease, if the assignment is recognized by the head lessor. If ground rent in case of sub-lease is higher than
the original ground rent it is known as improved ground rent.

DURATION OF LEASE PERIOD.

It is normally of 21, 50, 98 or 999 years or even short of duration than 21 years with different terms and conditions
and also as regards ground rent and renewal periods.
When the lease is granted for a period of 98 years, it is known as long-term lease and when it is for 999 years, it is
said to be the lease in perpetuity or for endless duration. Sometimes the lease of the property can be for the lifetime
of an individual and such lease is known as Life lease.
Two common types of leases in our country are Building lease and Occupation lease.

BUILDING LEASE
Open plot of land is leased out on payment of periodic consideration known as Ground rent (unsecured ground rent).
The lessee to develop the land at his own cost by putting up the construction work whose minimum cost at times is
specified in the deed so that the ground rent reserved under the lease becomes a secured one and is known as secured
ground rent.
Period of lease is usually 50, 98 or 999 years or may be for different period but of long duration: (a) One can find
B.P.T. leases for periods of 30 years, 50 years or more than that. (b) Formerly the lease period of 99 years is now
adopted at 98 years.
Covenants and conditions setting forth the rights and obligations of each party to the lease including covenant on the
part of the lessee to deliver up the premises on the determination of the terms.

OCCUPATION LEASE
The lessor has the right of Re-entry that is a right to eject the tenant and again become possessed of the property
himself, subject of course to the protection that may be available to the lessee under the Rent Control Act or under the
Transfer of Property Act, 1882.

PURPOSE OF VALUATION
1.

Purchase for investment or for occupation

2.

Sale

3.

Mortgage

4.

Rent Fixation

5.

Land acquisition

6.

Betterment charges

7.

Auction bids

8.

Probate

9.

Speculation

10. Insurance
11. Wealth tax
12. Capital gains etc.
13. Stamp duty
14. Gift tax
15. General court purpose in order to determine the amount of Court Fee Stamp in a suit, etc.

 The purpose of valuation plays an important part in determining the market value of a property.
o For Mortgage: In case of a mortgage proposal, the valuer has to advise the mortgagee as to what sum can safely be
advanced on the property. Thus, the function of the valuer here is to safeguard the position of the mortgagee, his client.

o For Sale or Purchase: In the case of purchase, the valuer desires that his client should get a bargain proposal, whereas in
case of sale, he will value at a price that could be obtained in the market depending upon the conditions of the money market
and rate of interest on securities.

o For Acquisition Proceedings: For acquisition proceedings, the valuer is likely to take a liberal view as the seller is an
unwilling person and due to acquisition he may have to undergo a lot of trouble and expense.

o For Government Taxes: For the purpose of Government taxes the valuer determines the market value of the property that
is what a willing buyer would pay to a willing seller.

FACTORS AFFECTING THE VALUE OF A PROPERTY.

Supply and Demand: A number of properties having the same rent fetching capacities available for sale as compared to
few buyers will result in low prices for the properties and vice versa.

Cost of Replacement: When a built-up property is available for sale with vacant possession for the beneficial occupation
of a purchaser, he will always consider the cost of replacement of the same building at present.

Occupational Value: When a property is required for the purpose of residential occupation, the price paid is generally
more than its market value arrived at by rental method.

Interest and Security of Capital: Every person expects some reward in return if he allows the use of his capital. The
reward is known as interest. The amount of reward expected by an individual depends upon a number of factors, the most
important being interest available in general investment market and security of his capital.

 Rent Restriction Act: The value of a property depends upon its annual rental and in case of an old building
let out prior to 1.9.1940 the same is not allowed to be increased under the Rent Act except for permitted
increases.

Abnormal Conditions: The value of properties may go down due to abnormal conditions like war, riots or
due to insecure conditions.

Town Planning Act: Due to declaration of a Town Planning Scheme in a particular area whereby the said
area is proposed to be provided with all civic amenities like roads, gardens, drainage, etc. the value of open
plots in that locality will go up.

METHODS OF VALUATION.
RENTAL METHOD
The main principle of this method is the Present worth of future benefits and since the receipt of benefits is
the receipt of net income and as such true basis upon which to judge the value would be net income. This
method of valuation calls for a detailed study of a number of factors like rent, outgoings and factors on which
the years purchase will depend.

Years purchase: It is a figure which shows how many times the net annual income is secured for its value. It
can be obtained by dividing 100 by the rate of interest for an indefinite period that is in perpetuity.

LAND AND BUILDING METHOD OR PHYSICAL METHOD

Applied for valuing such properties where there is no direct evidence of rent, e.g. schools, welfare centres, owner
occupied properties, purpose built industrial buildings, etc.
Steps: (a) Determine market value of land, (b) Cost of construction of building (depreciated or otherwise)
MARKET VALUE OF LAND:
Market value based on the sale price of very property under consideration
By comparing the land whose market value is to be determined with the instances of sales of similar lands in the
neighborhood.
DEPRECIATION:
Defined as the loss in capital value of a building, a machine or an equipment on account of any cause, may be of the
internal nature leading to Physical depreciation and Functional obsolescence or may be of external nature leading
to Economic obsolescence.
METHODS OF COMPUTING DEPRECIATION:
i.

Straight Line Method

ii. Sinking Fund or Present Worth Method

DEVELOPMENT METHOD
. In this method, sub-division of the complete holding is done into small units. The effective area of small units
(excluding 15 % garden area, area in access, area for sub-station and other amenities) will form the base. Other
important factors requiring consideration will be: (a) Easement rights, (b) Tenancy encumbrances.

PROFIT METHOD
This method deals in working the profit from a property and subsequently capitalizing the same at
appropriate rate of return depending upon a number of factors:
The net profit to be adopted should be an average of last three years of profit.
Part of the profit is due to goodwill which should be properly reflected in the rate of return.
Applicable to cinemas, hotels, etc.

Depreciation

Obsolescence

Depreciation in the popular

concept is defined as the loss in
capital value of a building a
machine or an equipment on
account of any cause, may be of
the internal nature leading to
physical depreciation and
functional obsolescence or may
be of external nature leading to
economic obsolescence.it is a
loss from upper limit of value,
and effect cause by the
depreciation or an obsolescence.
Deterioration is the evidence by

It is divisible into two parts

1. Functional
2. Economic
Functional obsolescence is
caused by changes external to
the properties such as
neighborhood infiltrations in
harmonious groups or property
used legislation, etc.
It is also the actual decline in the
market value of the improvement
to land from time of purchase to
the time of release.

Thank You !