Download - Valuation Edusat
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ValuationEr. Gurbakshish Singh AntalLect Civil Engg.
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Property valuation
Valuation is both aScience and an Art!
Valuation Methods
Need of Valuation
Value Theory
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Valuation is both a Science and an Art!
Valuation includes componentsand knowledge of:
-mathematics-statistics-physical (land) planning
-urban planning-rural planning/agriculture
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› -building construction› -sociology/human behaviour
› -common sense/feeling
Valuation components
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ValuationValuation is the technique
of estimating and determining the fair price or value of a
property such as a building, a
factory or other engineering structures of various types, land
etc.
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Valuation of a building depends on
•type of the building, •building structure and durability, •on the situation, •Size of building, •Shape of building, •Frontage of building,
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Valuation of a building depends on
width of roadways, the quality of materials
used in the construction present day prices of
materials
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The valuation of a building is
determined on working out its cost of construction at
present day rate and allowing a suitable
depreciation.
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Purpose of valuation
1.Buying or Selling Property When it is required to buy or sell a
property, its valuation is required. 2.Taxation To assess the tax of a property, its
valuation is required. Taxes may be municipal tax, wealth tax, Property tax etc, and all the taxes are fixed on the valuation of the property.
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3.Rent Function In order to determine the rent of a
property, valuation is required. Rent is usually fixed on the certain percentage of the amount of valuation which is 6% to 10% of valuation.
4.Security of loans or Mortgage When loans are taken against the
security of the property, its valuation is required.
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5.Compulsory acquisition Whenever a property is acquired by
law; compensation is paid to the owner. To determine the amount of compensation, valuation of the property is required.
6.Insurance,Betterment charges, speculations Valuation of a property is also required for Insurance,Betterment charges, speculations etc.
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Information needed• Information about the property:
– Land use– Land area– Building: size, age, standard etc.– Yearly costs and incomes– Other special conditions
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Information needed• Information about the purchase
– Price– Date of sale– Seller– Buyer
• Information about the real property– Land use– Land area– Building: size, age, standard etc.– Other special conditions
Seller : Mr ABuyer : Mrs BDate: 04-09-15Price: 1 200 000etc.
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Information needed
• General information – Average replacement costs– Depreciation - time and percent– Average value of land
• Information about the real property– Land use– Land area– Building: size, age, standard etc.– Other special conditions
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The cost approachSEK/USD
Age (years)0 10
Depreciation 3.5 %/year
Replacementcosts
Replacement costs 1 000Depreciation 10 years 3,5 % - 350Cost of land 200Cost value 850
Cost of land Costvalue
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Type
s of
Val
ue
Market valueScrap valueSalvage valueLiquidation value
Insurable value
Book Value
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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.
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Market Value
The market value also changes from time to time for various
miscellaneous reasons such as changes in industry, changes in fashions, means of transport, cost of materials and labour
etc.
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Scrap value- Scrap value may be defined as
the value of materials of dismantle buildings. After the
completion of utility period the dismantled materials such as
Steel, timber ,bricks and furniture will fetch a certain amount which is called scrap
value of building. Scrap value of building is about 10 % of its total cost of construction.
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Salvage value - The value of building at the end
of utility period without being dismantled is called the Salvage Value. Another example is a machine after the completion of its usual span of life , may be sold or purchased by some one for other use. The sale value of that machine is called Salvage value.
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Salvage value of a property or an asset may be positive, zero or negative. For example the salvage value of RCC structures is negative ,because dismantling and removal will be costly. Scrap value of machine is Positive because it will be used for other purpose.
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Insurable value
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Liquidation Value
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Book Value Book value is the amount shown in
the account book after allowing necessary depreciations.
The book value of a property at a particular year is the original cost minus the amount of depreciation
allowed per year and will be gradually reduced year to year and
at the end of the utility period of the property, the book value will be only
scrap value.
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Sinking fund:
Sinking Fund may be defined as the fund which is gradually accumulated by way of periodic on account deposit
for the replacement of building or structure at the end of its useful life. Main function of creating Sinking
fund is to accumulate sufficient to meet the cost of construction or maintenance or replacement of
structure after its utility period.
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Depreciation
Depreciation is the gradual
decrease in the property with
time due to structural
deterioration , wear and tear ,
decay and obsolescence .the
value is reduced due to
gradually used reduced due to
its use, life ,wear & tear.
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Depreciation is the gradual exhaustion of the usefulness of a property. This may be defined as the decrease or loss in the value of a property due to structural deterioration, life wear and tear, decay and obsolescence.
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Definition
HKSSAP defines depreciation as the
‘allocation of the depreciable amount of an asset over its estimated
life’.
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Rateable Value Rateable Value is net annual
letting value of a property , which is obtainable after deducting the amount of yearly repairs from gross income. Municipal and other taxes are charged at a certain percentage on the rateable value.
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Obsolescence Obsolescence is defined as the
overall decrease in the value of property or structure due to becoming outdate in style, in structure or in design.
i.e an old dated building with massive walls, arrangement of rooms not suited in present days becomes obsolete even iif it is well maintained.
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Reasons of Obsolescence Progress in Art
Change in Fashion
Change in planning idea
New trends in Market
New invention
Improvement in Design
Inadequate Space
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Annuity Annuity is the annual periodic
payments for repayment of the capital amount invested by the party.
These payments are either paid at the end of year or at the start of year.
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Capital cost
Capital cost is the total cost of construction including land, or the original total amount required to possess a property.
It is the original cost and does not change while the value of the property is the present cost which may be calculated by methods of Valuation.
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Capitalized Value of a Property The capitalized value of a property is
the amount of money whose annual interest at the highest prevailing rate of interest will be equal to the net income from the property. To determine the capitalized value of a property, it is required to know the net income from the property and the highest prevailing rate of interest.
Capitalized Value = Net income x year’s purchase
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Year’s Purchase
Year’s purchase is defined as the capital sum required to be invested in order to receive a net receive a net annual income as an annuity of rupee one at a fixed rate of interest.
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Year’s Purchase
The capital sum should be 1×100/rate of interest.
Thus to gain an annual income of Rs x at a fixed rate of interest,
the capital sum should be x(100/rate of interest).
But (100/rate of interest) is termed
as Year’s Purchase.
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Factors Kept in Mind During Valuation Area where
Property Situated Present Cost of
Material Heritage value of
Building Condition of scrap
Land value Gross income On situation Road width frontage
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Qualities of a Good valuer He must know the deep knowledge of the
concerned field or subject area. He must posses Analytical and Computer Skills. He should know the tolerances for wastage
incurred during construction. He should be know the Present rates of
material used. He should be well experienced He should know the bye laws of that area. He should posses the leadership and soft skills. He must know the deep knowledge about the
latest materials and their cost.
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Methods of Valuation
Rental Method of Valuation
Direct comparison with the capital Value
Valuation based on profit
Valuation based on cost
Depreciation Method
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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.
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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.
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Valuation based on profit
This method of Valuation is suitable for buildings like hotels, cinemas, theatres etc for which the capitalized value depends on
the profit. In such cases, the net income is worked
out after deducting gross income; all possible working expense, outgoings, interest on the capital invested etc. The net profit is multiplied by Year’s Purchase to get the capitalized value.
In such cases, the valuation may work out to be high in comparison with the cost of
construction.
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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.
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According to this method of Valuation, the building should be divided into four parts:
Walls
Floors
Doors and
Windows
Roofs
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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.