Testvalue.pdf

Value:
• It means worth or utility.
• It varies time to time
• It also depends on its supply and demand.
• Example cost of an property value depends on its utility,
scarcity and events
Cost: It is the original cost of construction which comes by
adding day to day expenditure from the day of planning till
construction is completed.
Price: Amount worked out by adding cost of production,
interested on investment, reward to the producer for his labor
and risk

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 at a stated time.
• It suggests certain price of a property based on
judicious processing of certain facts.
• Raise and fall can occur with in short period of time.
• Valuation should clearly mention the date to which
valuation relates as time is the essence of all valuations

Purpose of Valuation
1. Purchase for investment or for occupancy
2. Buying or selling property: when it is required to buy or to
sell a property, its valuation is required.
3. Taxation: To fix up municipal tax, wealth tax, property tax,
gift tax etc., and all taxes are fixed on the valuation of the
property.
4. Rent fixation: In order to determine or justify the rent of a
property as per Rent control Act Rent. It is usually fixed on
certain percentage of valuation (6% to 10% of the valuation).
5. Sale: It is necessary for sellers as they consider this amount
as reserve amount below which any offer is not acceptable. It
is the minimum price excluding all potential, speculative and
monopoly values.

6. Insurance Premium: To fix up insured value of a property
excluding cost land Valuation is required to in order to
replace the same and to determine the insurance premium
7. Compulsory Acquisition: Property may be acquired by the
government for public purpose need to be compansated by
the Government to the owner
8. Betterment charges: Value of property may increase as a
result of making new roads, developing of land and by
providing other amenities. To fix up betterment charges of
fees valuation becomes necessary before and after
completion of development
9. probate: To prove before court lawful act of will of a died
person.
10. Partition: In case of partition of a property, market value of
the same is determined to divide the shares on the owners

11. Assessment of income or stamp fees: Income tax authority
need to determine the total expenditure incurred to
construct a new property for comparison of the income tax
return by the owner. To verify stamp fees provided during
purchase of a property.

• Gross income: It is the total income from all sources without deducting
the outgoings necessary for taxes, maintenance, collection, replacement
or loss in income, ground rent etc
• Out goings: Expenses to be made by virtue of possessing a property and
also expenses of maintain a property. Some of them are
 taxes(municipal taxes),
 repairs(annual repairs),
 management and collection charges(collection of rent by agents, salaries
of liftman, sweepers, common passage),
 insurance premiums, loss of rent(part of property remain vacant for
certain period of time)
 sinking fund(amount set aside at fixed intervals of time out of gross
income, so that at the end of useful life of property fund equals to the
initial cost of property).
 Incometax(Income from any property is subjected to income tax as per
Income Tax Act)
• Net income: Gross income less all out goings

Types of Values
Scrap Value:
• It is the value of dismantled materials of a property at the end
of its utility period and absolutely useless except for sales as
scrap.
• In case of old building after its useful life certain amount can
be got by selling old useful material like bricks, steel, wooden
articles etc.
• Scrap value of 10% to total construction is considered.
• It is also called as junk value or Demolition value.
• In rare occasions it may become zero in case if demolition or
dismantling cost is equal or higher than Scrap value

Salvage value:
• It is the estimated value of a built up building at the end of its
useful life without being dismantled. This is obtained by
deducting depreciation from its new cost.
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 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

Book Value: The value of property shown in the account book in
that particular year which is original cost minus total
depreciation till that year. Book value decreases gradually year
by year up to the limit of scrap value till its utility period. This
value is showed in books of a company to show the assets and
also reserved price of court sale.

Market value Vs Book value
• The value is fixed by
purchased
• Value increase or decrease
due to price index
• Value may be constant for
certain period of time
• Applicable to any type of
property
• Market value is considered
for valuation
• Depends on demand and
supply, development of
area etc
• Value fixed by rate of
depreciation
• Value doesn't increase year
by year
• Value cannot be constant
• Not applicable for land,
steel gold copper etc
• Book value is considered for
account books in a company
• Value is not variable due to
its demand and supply or
development of the area

Assessed Value:
• value recorded in municipal records to determine the
municipal tax to be collected from owner. For buildings it is
considered as 5% of the total project cost
Distress value or Forcrd sale value:
• Property sold at low cost that the market value it is said to
have distress value
• This may be due to Financial difficulties to seller, on order of
court, Insufficient knowledge of court, quarrel among
partners, panic due to war or riots
Replacement values:
• Present value of property or portion of which have to be
replaced at current market rates

Potential value:
• Property capable of fetching more returns due to its
alternative use or by advantageous planning or providing
some development works such increased value is called
potential value
Monopoly Value:
• In case of scarce remaining for sale or certain portion possess
special advantage with respect to adjoining property due to
location, frontage, size shape owner may demand for fancy
price.
Speculative value:
• Investment in agricultural land, building development, will
cause values to raise, even before roads are made ad services
installed. Speculators purchase such property at low price as
far as possible and sell it to gain profit after short duration
with out spending any further amount on it

Accommodation value:
• Value of surrounding agricultural land of a city which is
expanding will be more if the land is converted into
accommodation land after obtaining approval from concerned
authority. Owners of this land will be offered more price for
accommodation which will be higher than the market value
Occupation Value:
• Occupation value is When the purchasers are attracted to
own a property for personal uses as necessity and there will
not be any substitute for this.

Sinking Fund:
• It is the amount which has to be set aside at fixed
intervals of time(annually) out of the gross income so
that at the end of the useful life of the building or
property the fund should accumulate to the initial cost of
the property.
• A building, machine or vehicle becomes useless after a
period of time after its utility period.
• It enable owner to accumulate to a sum required for
rebuilding the premises or can replace the article.
• A periodical deposition of fund is made in the bank to get
highest compound interest or sinking fund.

• It is created by taking a sinking fund policy with an insurance
company or by depositing in bank to collect highest
compound interest.
• Cost of land is not taken into consideration
• Sinking fund is also requires for payment of loan
• If a property is owned by taking loan a sinking fund may be
created by setting a side a sum of money annually to
accumulate with compound interest in order to repay the
debt at end of term of loan
• The amount thus set is known as Annuity payment
• The amount which set aside may also paid directly to lender
by annual installment.

Determination of Sinking Fund
• Calculation of sinking fund depends on life of a building and
also up on rate of interest
• Scrap value for old building is considered as 10%
• Sinking fund is calculated on 90% cost of building
S = Total amount of sinking fund
I = Annual installment required
i= rate of interest
n = No of years rquired to accumulate S
Ic = Coefficient of annual sinking fund = i/(1+i)n - 1
I = Ic x S

Capitalized Value:
• The capitalized value of a property is the amount of a money
whose annual interest at the highest prevailing rate of interest
will be equal to the net income from the property.
• To know CV net income from the property and prevailing rate
of interest should be know
• Ex: Capitalized value of a property fetching a net annual rent
of Rs 1000 and the heights rate of interest prevalent being 5%
is
CV x Rate of Interest = Net income
CV x 5% = 1000
CV = 1000 = 1000 x 100 = Rs 20000
5% 5

Year’s Purchase:
The multiplier of the net annual return(income) or rent to
obtain the capital value is know as Year’s purchase
Capitalized vale = Net annual return x Years purchase
In come of property should provide both for the interest of
capital and accordingly YP reduces shown as
YP = 1
Rate of interest for capital value+ Rate of sinking fund
YP = 1
Ip +Ic

Depreciation:
• The loss in the value of the property due to its use, life, wear,
tear decay and obsolescence.
• It depends on physical wear and tear of building and property,
its original condition, quality of maintenance and mode of use
• Book value of the property at a particular time is the original
cost minus depreciation
• Types of Depreciation
1. Physical depreciation:
 Wear and tear from operation: Examples are when a motor
car is used for several years then the compression capacity of
the engine falls down, ball bearings may fall up to their safe
limits. Railway track may loose its true shape
 Action of time and elements: Pasting of a building, iron girder

2. Functional Depreciation:
1. Inadequate or suppression: Old automobile tyre estimated
as capable of 10000 KM of use, where as new tyre may
estimated as capable of 50000 km. Value of old tyre
becomes 1/5 th cost of new one. depreciation is 80% due to
its function
2. Obsolescence: A floor of a bedroom has several bed rooms,
drawing rooms and other rooms but has only one bathroom
and one closet located at the rear end of the floor
3. Contingent:
• Accidents: Due to negligence's, the elements and structural
defects
• Diseases: Parasites, pollution of water
• Diminution of supply: Natural gas, water etc

Obsolescence:
• Loss in value of property due to change in fashion, in design,
in adequacy to present or growing needs, necessity for
replacement due to new inventions
• An apartment which becomes increasingly difficult to rent is
said to suffer from obsolescence
• Obsolescence may be due to
1. Internal is due to poor odd design, change in type and kind of
construction, utility demand
2. External is due to poor original location, change in character
of district, specific influences such as due to construction of
factories, stock-yards, proximity of public building, traffic
locations and noises and Zoning laws

Depreciation Obsolescence
1) This is the physical loss in the
value of the property due to
wear & tear, decay ect.
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
witch the amount of
depreciation can be calculated.
1) The loss in the value of the
property is due to change of
design, fashion, in structure of
the other, change of utility,
demand.
2) obsolescence depends on
normal progress in the arts,
inadequacy to present or
growing needs etc.
3) this is not dependent on age of
the building. A new building
may suffer in its usual rent due
to obsolescence.
4) At present there is no method
of calculation of obsolescence.

Determination of depreciation
It is assessment of physical wear and tear of property and is
naturally depends on its original quality of maintenance and
mode of use. Types of depreciation
1. Straight line method: Property is assumed to loose value by
a constant amount every year and thus a fixed amount of
original cost deducted every year so that only scrap value is
left at end of the useful period.
Annual depreciation = original cost – Scrap value
Life in years
C = original cost
Sc = Scrap value
N = Life of property in years
D = Annual depreciation by straight line method

2. Constant percentage method or Declining balance method:
Property is assumed to loose value annually at constant
percentage of its value(or Book value)
p = percentage rate of annual depreciation in decimal
C = original cost
Sc = scrap value
n = Life of property in years
Value of property at the end of first year = C(1-p)
Value of property at the end of second year = C(1-p)2
Value of property at the end of n year = C(1-p)n
At the end of utility period value of property becomes
ultimately Scrap value = Sc = C(1-p)n

3. Sinking Fund Method: It is assumed that depreciation is
equal to sum of annual sinking fund and interest on annual
sinking fund till that year.

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.
Annuity: 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.

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

• 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%
Soln:
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

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.

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.

Outgoings
• 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.
• 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.

• Sinking Fund
• 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
• 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
• 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.

Note: If the outgoing are not given in the question and are to be
assumed, the following percentage may be taken for solving
the problems.
i. Repair @ 10% of the gross income or rent
ii. Municipal taxes @ 20% of the gross rent
iii. Property tax @ 5% of gross rent
iv. Management and collection charges @ 5% of gross rent
v. Insurance premium @ ½% of gross income
vi. Miscellaneous charges @ 2% of the gross rent.

Valuation of 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 prise of material.
• Also depend on the locality if it is in market area having high
value then the residential area.
• And depending on the specialities in the building like sewer,
water supply, and electricity ect.
• The value of the building is determined on working out its
cost of construction at present day rate and allowing a
suitable depreciation.

• 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: the following are the different
methods of valuations:
1) Rental method
2) Profit based method
3) Depreciation method
1. 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.

2. Valuation based on profit: this method of valuation is
suitable for buildings like hotels, cinema theatres etc. for
which the capitalized value depends on the profit. In such
cases the net annual income is worked out after deducting
from the gross income all possible working expressions,
outgoings, interest on the capital invested etc. the net profit
is multiplied by Y.P to get the capitalized value. In such case
the valuation may work out to be too high in comparison
with the cost of construction.

3. 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.

The value of rd can be taken as given
in table below
S.N Life of Building rd value
1 75 – 100 1
2 50 – 75 1.3
3 25 – 50 2
4 20 – 25 4
5 <= 20 5

Fixation of rent:
• The rent of building is fixed upon the basis of certain
percentage of annual interest on the capital cost and all
possible annual expenditure on outgoings.
• The capital cost includes the cost of construction of the
building, the cost of sanitary and water supply work and
the cost of electric installation and alteration if any.
• The cost of construction also includes the expenditures
on the following: a) raising, levelling and dressing of site
b) construction of compound wall, fences and gates c)
storm water drainage d) approach roads and other roads
within the compound.

• Standard rent or gross rent = net return or net rent +
outgoings
• Annual Net return is worked out based on
• A certain annual interest on cost of construction of building
including cost of water supply, sanitary works, electric
installations etc
• Certain annual interest on the cost of land is considered. The
rate of interest on land may be same or bit less than the rate
of interest for cost of construction.
• Outgoings: same as rental method of valuation
• Gross rent = net rent + out goings.

Valuation of Land:
• Valuation of land is done by one of the three methods as and
where applicable.
1. Comparative method
2. Belting method
3. Hypothetical building schemes

1. Comparative method: this is simplest and most direct
method. The method is based on instances of other
sales with dates of open comparative like lands in the
neighbourhood. So there are two main factors on witch
this method is based 1) Sale prices and 2) similar
neighbourhood lands.
o Sale prices should be recent.
o The method is based on the comparison of like to like.
Properties may be similar but each property is unique
so they can never be like. But we can assess by using
the following factors.

 Situation: position of the land means locality, availability, type
of people, nearby schools, market, office, hospital etc.
 Size
 Return Frontage
 Front road width
 Vistas
 Nature of soil

2. Belting method of valuation: it is based on the road
frontage. Frontage land has a greater value than back land.
So in order to find out the realistic value of land the entire
plot is divided into a number of convenient strips by lines
parallel to the centre line of the road.
• Each such type of land is known as belt.
• Then a relationship regarding the value and the depth of each
belt to the front belt is fixed up. Then calculate the values of
each belt in terms of first belt. Then summing up all the value
of each belt.
• Normally the plot of land is divided in to three belts. The
depth of second belt is taken as 1 ½ times that of front belt
and the depth of the third belt at 1 ½ times the depth of the
second belt or depth remaining after second belt is
considered as the depth of third belt.

• Value of recessed land not lying within the perpendiculars
drawn on belting lines from the end point is valued at three-
fourth value in that particular belt of land.
• Value of the front belt is maximum. The second belt is valued
at 2/3 rate of the first belt and third belt value at half the rate
of the first belt.

3. Hypothetical building scheme: in this system value of a
vacant plot of land is estimated by capitalising the
assumed rent that can be obtained from the building, if
erected on the land after developing the same, and then
deducting the cost of development and building.
Procedure:
• From the total area of land find out the permissible covered
area = total area – one third area of land as required for
compulsory open space under municipal by laws.
• Find out rentable area = total covered area – 20% for area of
wall and wastes.

• Calculate net rent per month = gross rent – outgoings. Usually
consider total outgoings be 30% of the gross rent.
• Find out years purchase for perpetual (changing) with interest
on capital at the current bank deposit rate (should be
minimum 10%)
• Capitalise the net rent by multiplying the year’s purchase
deferred for the development and construction period.
• Consider the current plinth area and find out the cost of the
building from the total covered area. For storied buildings the
covered area shall be worked out all the stories.
• Work out the development cost of land.( if required)
• Find the total cost of building and development cost of land.
• Deduct the total cost of building and development from the
deferred rental value of the building to find the cost of land.

Valuation of leasehold interest: there are two types of
properties namely
a) Free hold property b) lease hold property
a) free hold property:
• The free hold is inherent the absolute owner of the property ,
he holds it without any payment in the nature of the rent. He
may sell the property, dived it or donate or grant it on lease at
his will.
• The freehold or owner who grants the lease known as ‘lessor’
and leaseholder is known as ‘lessee’.
• In common practice it give as for 15, 21, 25 or 50 years are
common in practice. When a lease is granted for a period of
99 it is known as long term lease and when it is for 999 years
it is said to be perpetuity or for endless duration.

• A leasehold property: The leaseholder is known as lessee and
holds the physical possession(holding) of the property for the
definite period under terms and condition specified in the
lease document.
The different types of leases:
1. Building lease
2. Occupation lease
3. Sub-lease
4. Life lease
5. Perpetual lease

• Building lease: freehold is want to give the open plot for lease
to some person lessee on an agreement of premium or
ground rent or a combination of a both. The lease holder can
erect a building there up to a specified amount in a specified
period and he maintains the property and earn through that
property. These types of leases are generally grand for a long
period of 50,99,999 years . At the termination of the lease,
the lessor becomes the full owner of the land.

• Occupation lease: In this the lease is granted against premium
or rent or combination of two by on owner of property
consisting of land or buildings or other structure for
occupancy for fixed period to another person. The lease
holder dose not have to spent money to construct. Such lease
is granted for 7, 12, 21 years. Lease holder need to maintain
property as per the agreement.
• Sub lease: A lease holder may render sub lease of his lease
hold property to another person subjected to terms and
condition in original lease. Original lease holder is called
assignment of lease and sub holder is called sub-lease
• Life lease: When duration of property for lease is given until
death of person or persons
• Perpetual lease: when the lease of a property is given for a
number of years providing a condition that the lease is
renewable time to time, even for endless time.

Testvalue.pdf

More Related Content

Similar to Testvalue.pdf (20)

Recently uploaded (20)

Testvalue.pdf