PP501: Professional Practice

Lecture 6
 Module 5
1. Arbitration – Principles, Indian Arbitration act, Powers and duties of arbitrators,
Revoking authority, Umpire and Award.
2. Valuation – Purpose, Value, Factors affecting value, Value classification,
Classification of Ownership, Valuation reports, methods of valuation.
3. Easement – Definition, various types, essential conditions for enjoyment of
easements, Valuation for Easements.

Ongoing Lecture Assignment Completed Upcoming/Self study

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.
By valuation the present value of a property is defined. The present value of
property may be decided by its selling price, or income or rent it may fetch. The
value of property depends on its structure, life, maintenance, location, bank
interest, etc.
(Cost: means original cost of construction of purchase)
 Value
A simple definition by Hadley is: “A price is a fact and a value is an estimate of what the price is ought to be.”
Market Value

• Market value: the market value of a property 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 and labour etc.
Purpose of Valuation
1. Buying or selling property: when it is required to buy or to sell a property, its valuation
is required.
2. Taxation: To assess the tax of property its valuation is required. Taxes may be municipal
tax, wealth tax, property tax, etc., and all taxes are fixed on the valuation of the
property.
3. Rent fixation: in order to determine the rent of a property, valuation is required. Rent
is usually fixed on certain percentage of valuation (6% to 10% of the valuation)
4. Security of loans or mortgage: when the loans are taken against the security of the
property, its valuation is required.
5. Compulsory acquisition: whenever a property is acquired by law, compensation is paid
to the owner. To determine the amount of compensation valuation of property is
required.
6. Valuation of a property is also required for insurance etc
Value Classification
1. Scrape value or Junk value: It 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. Also known as demolition
value.
Scrape value = sale of useable material – cost of dismantling and removal of the
rubbish material.
2. Salvage Value: It is the value of the utility period without being dismantled. We
can sale it as a second handle. Value of machinery realized on sale when its
useful span of life is over but it has not become useless.
3. 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.
Value Classification

4. 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. Book value is the amount shown 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.
5. 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.
Value Classification

6. 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.
7. Earning Value
8. Potential Value
9. Distress Value
10. Speculative Value
11. Monopoly Value
12. Sentiment Value
13. Accommodation Land and Accommodation Value
Value Classification (spranger’s classification)
1. Theoretical value - mathematical value worked
out for the property.
2. 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.
3. Social and Cultural value.
4. Aesthetic value
5. Political value
6. Religious Value
Value Classification :
Types and definitions of value by real estate appraisal
1. Market value - The price at which an asset would trade in a competitive Supply and Demand
setting. Market value is usually interchangeable with open market value or fair value.
2. Value-in-use or use value - The net present value (NPV) of a cash flow that an asset generates
for a specific owner under a specific use. Value-in-use is the value to one particular user, and
may be above or below the market value of a property.
3. Investment value - is the value to one particular investor, and may or may not be higher than
the market value of a property. Differences between the investment value of an asset and its
market value provide the motivation for buyers or sellers to enter the marketplace. The value of
an asset to the owner or a prospective owner for individual investment or operational
objectives.
4. Insurable value - is the value of real property covered by an insurance policy. Generally it does
not include the site value.
5. Liquidation value - may be analyzed as either a forced liquidation or an orderly liquidation and
is a commonly sought standard of value in bankruptcy proceedings. It assumes a seller who is
compelled to sell after an exposure period which is less than the market-normal time-frame.
Classification of Ownership

Text book page number 383 - 388

Valuation: Some important terms

1. 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.
2. Net income or net return: this is the saving or the amount left after deducting
all outgoings, operational and collection expenses from the gross income or
total receipt.
3. 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 instalment.
Valuation: Some important terms

4. Depreciation: is the loss in the value of the property due to is use, life, wear,
tear, decay and obsolescence. The general annual decrease in the value of a
property is known as annual depreciation.
Usually, the percentage rate of depreciation is less at the beginning and generally
increase during later years. Methods of calculating depreciation:
1) Straight line method
2) constant percentage method
3) Sinking fund method.
5. Obsolescence: The value of property or structures become less by its becoming
out of date in style, in structure in design, etc. and this is termed as Obsolescence.
Valuation: Some important terms
Depreciation Obsolescence
1. This is the physical loss in the value of the property due to wear & tear, decay etc..
2. Depreciation depends on its original condition, quality of maintenance and mode of
use.
3. This is variable according to the age of the property. More the age, more will be the
amount for the depreciation.
4. There are different methods by which the amount of depreciation can be calculated.
i. The loss in the value of the property is due to change of design, fashion, in
structure of the other, change of utility, demand.
ii. Obsolescence depends on normal progress in the arts, inadequacy to present or
growing needs etc.
iii. This is not dependent on age of the building. A new building may suffer in its usual
rent due to obsolescence.
iv. At present there is no method of calculation of obsolescence.
Valuation: Some important terms
6. Outgoings
1. Repair - It includes various types of repair such as annual repair, special repairs,
immediate repair, etc. - Amount to be sent on repairs is 10 – 15 % of gross income.
2. Taxes - Include municipal tax, wealth tax, income tax, property tax etc. - Paid by owner
of the property annually and are calculated on annual rental value of the property after
deducting the annual repairs 15 to 20% of gross income.
7. Return Frontage
Plots situated at junction of two roads having the frontage on these two roads are
said to have return frontages. Such plots usually have more monetary value than
other plots in the same area .
Valuation: Some important terms
8. Reversionary value of Land : the value of property at the expiration of a certain
time period.
It is present consideration for the full value of land obtainable after the specified
period is over.
For Eg: Let life of building = 30 yrs.
Present value of land = 50,000
The person interested will get the said Rs 50,000 after 30 yrs has passed.
Now if he wants its value at present then he gets Rs 15500 which if invested at
present in some securities at 4% compound interest will amount to Rs 50220 in 30
yrs.
Valuation: Some important terms
9. Rent : annual or periodic payment made by the tenants for use and possession
of land and buildings.
10. Rental Value: It is the rent which may reasonably be expected to be obtained in
the open market.
11. Ground Rent: When a piece of land had been leased out, the rent reserved
under the lease is ground rent
12. Contractual Rent: Rent fixed between the land lord and the tenant by
negotiations.
13. Standard Rent: Rent which would be permissible under the law to be charged
from a tenant.
Sinking Fund
Sinking Fund
Sinking fund: A certain amount of gross rent is set aside annually as sinking fund to
accumulate the total cost of construction when the life of the building is over. This
annual sinking fund is also taken as outgoings.
Management and collection charges - 5to 10% of gross income may be taken for
this purpose - For small building it may not necessary to considered it
1. Loss of Rent - As it may not be possible to keep whole of the premises fully let
at all times, in such cases a suitable amount should be deducted from the gross
rent.
2. Miscellaneous - These include: electrical charges for lighting, running lift, etc
and are borne by the owner - 2 to 5% of gross rent is taken for these charges.
Sinking Fund
Valuation of a real property
• Valuation of building is depends on the type of building. Its structure and
durability, on the situation, size, shape, width of road way, quality of material
used in the construction and present day price of material.
• Also depend on the locality if it is in market area having high value than the
residential area.
• And depending on the specialties in the building like sewer, water supply, and
electricity etc.
• The value of the building is determined on working out its cost of construction at
present day rate and allowing a suitable depreciation.
Principles of Valuation
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.
Factors affecting the value of a property
1. Supply and Demand (Market Conditions)
• Basically the value of a property is determined by supply and demand.
• For eg: plentiful supply of a commodity and little or no demand, lower the value
of commodity, whereas, if there is little supply and a great demand, higher the
value of property.
• In the property market the supply of property is relatively fixed at any one time.
In order to increase the supply, more properties need to be built. However, this
process takes time.
• Demand, in contrast, can change relatively quickly. Therefore property values
tend to be influenced by demand rather than supply.
Factors affecting the value of a property
2. Location
• Property proximity to public transportation, train stations, shopping facilities,
schools, etc., plays an import factor in determining your property's market value.
• Every area has a high end and a low end.
• The market value of your property is affected by that reality.
• People that purchase homes in "lower end" areas expect to pay less than they
would if they bought the same home in a "higher end" neighbourhood.
3. Features
• One of the key factors in property's value is the features it provides.
• For example, some house styles are more popular with buyers than others.
• The age and size of your home compared to other available properties also plays
a part in affecting your home's value.
Factors affecting the value of a property
4. Condition
• The value of Property also depend upon its condition and its functional utility.
• For eg: A home in immaculate condition has a much higher potential for a top
dollar sale than one that is lacking the most basic routine maintenance.
5. Property
• Improvements Property improvements are unquestionably important factors that
affect the property value.
• For eg: Improvements like room additions, bedrooms, bathrooms, kitchens and
other items like floor tiles, swimming pools, etc., can increase the value of your
home.
Factors affecting the value of a property
6. Age
• The age of a property can be a factor in value.
• If a property has historical connections, it can make it more valuable and
imperfections such as uneven walls and sloping floors that would not be tolerated
in a new property would perhaps be seen as quaint and charming.
• Some older properties may need more maintenance and repairing than a modern
property and a newer property would meet all the latest up to date.
7. Seller Motivation
• Seller motivation is also a major factor which affects the offer price made by the
buyer.
• For example, if you bought a home in a new area you may be willing to accept a
lower price to quickly complete the sale your current house.
Factors affecting the value of a property
8. Marketing
• The marketing plan that your agent executes on your behalf will determine the
amount of interest that is shown in your property.
• Your agent's level of skill and expertise in the negotiating process will affect the
amount of money you'll be able to get for your Property.
Valuation
• The age of the building is generally obtained from record if available or by
enquires or from visual inspection.
• Present day cost may be determined by the following methods:
1. Cost from record: cost of construction may be determined from the estimate, from the bill
of quantities, from record at present rate. If the actual cost of the construction is known,
this may increase or decrease according to the percentage rise or fall in the rates which
may be obtained from the public work department (PWD) schedule of rates.
2. Cost by detailed measurements: If record is not available, the cost of construction may be
calculated by preparing the bill of quantities of various items of works by detailed
measurements at the site and taken the rate for each item as prevalent in the locality or as
current PWD schedule of rates.
3. Cost by plinth area basis: the above methods are lengthy, a simple method is to calculate
the cost on plinth area basis. The plinth area of the building as measured and the present
day plinth area rate of similar building in the locality is obtained by enquiries and then the
cost is calculated.
Methods of Valuation
1. Rental Method of Valuation
2. Direct comparison of the capital value
3. Valuation based on profit
4. Valuation based on the cost
5. Development method of valuation
6. Depreciation method of valuation
1. Rental Method of Valuation
• In this method, the net income by way of rent is found out by deducting all
outgoing 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 Year's Purchase gives the capitalized value or
valuation of the property.
• This method is applicable only when the rent is known or probable rent is
determined by enquiries.
1. Rental Method of Valuation
1. Rental Method of Valuation
2. Direct comparison with the capital Value
• This method may be adopted when the rental value is not available from the
property concerned, but there are evidences of sale price of properties as a
whole.
• In such cases, the capitalized value of the property is fixed by direct comparison
with capitalized value of similar property in the locality.
3. Valuation based on profit
• Such valuation generally done for commercial buildings like hotels & cinemas
and is based on the profit of business in such properties.
• Net yearly profit is worked out by reducing all possible outgoings and interest of
capital invested by the owner of the business and remuneration of his labor.
• This net profit is taken as net rent.
• Capitalised value is determined by multiplying net rent with year's purchase.
4. Valuation based on cost
• In this method, the actual cost incurred in constructing the building or in possessing
the property is taken as basis to determine the value of property.
• In such cases, necessary depreciation should be allowed and the points of
obsolescence should also be considered.
5. Development method of Valuation
• This method of Valuation is used for the properties which are in the
underdeveloped stage or partly developed and partly underdeveloped stage.
• If a large place of land is required to be divided into plots after providing for
roads, parks etc, this method of valuation is to be adopted.
• In such cases, the probable selling price of the divided plots, the area required for
roads, parks etc and other expenditures for development should be known.
• If a building is required to be renovated by making additional changes, alterations
or improvements, the development method of Valuation may be used.
5. Development method of Valuation
6. Depreciation method of Valuation

• According to this method of Valuation, the building should be divided into

four parts:
1. Walls
2. Roofs
3. Floors
4. Doors and Windows
• And the cost of each part should first be worked out on the present day
rates by detailed measurements.
• The present value of land and water supply, electric and sanitary fittings etc
should be added to the valuation of the building to arrive at total valuation
of the property.
6. Depreciation method of Valuation
6. Depreciation method of Valuation
6. Depreciation method of Valuation
6. Depreciation method of Valuation
Valuation Reports
Reference
• Professional Practice, 2016, Dr. Roshan H Namavati