Property Valuation : Terminology & Methods

Before we look at various Valuation Methods, it is important to know various terminologies and most importantly difference between Cost, Price & Valuation.

Difference between Cost, Price & value

  1.   Cost  :  It is the expenditure incurred to produce a commodity.

 2.  Price : Cost of commodity plus gains required by manufacturer/owner for capital invested & labor put in.

  3.   Value : It is a price determined by considering following factors:

-      Utility of commodity.

-      Demand supply ratio for that.

-      Marketability & transfer-ability.

-      It is a combination of Time, Place & purpose.

In Short

-      Cost is a Fact.

-      Price is a policy.

-      Value is an opinion.

So, what is Value

-      It is money paid by a person for a value received in form of commodity.

-      It is an estimate of what the price should be.

-      It is an opinion & varies from purpose to purpose, time to time & place to place.

Different Types Of Values

  1.   Assessed Value: Value recorded in records of local authorities for assessing property taxes & other levies.

  2.   Book Value: Also known as Book Cost of original investment on assets like Building , Plant & Machinery less depreciation for period passed.

  3.   Salvage value: Also known as BER(Beyond Economic Repair) value of asset. It is realized when useful life of asset is over but has not become useless.

  

  4.   Scrap Value: Also known as BLR(Beyond Limits of Repair) value of asset. It is applied when asset becomes absolutely useless and is sold as scrap. It is :

-      Scrap Rate for Machinery.

-      Value of material retrieved less cost of demolition for a Building.

 5. Earning Value: It is the present value of property which will start giving income in future. It is mainly applicable on properties like Hotels, Multiplexes, Cinemas, Shopping Malls, Marriage Palaces & so on.

  6. Replacement Value: It is the value of asset or portion thereof if the same is to be replaced at current market rate.

        

       Apart from these, there are some more types of Values:

  

  1  .   Market Value.

  2  .   Fair Market Value.

  3  .   Open Market Value.

  4  .   Forced or Distress value.

  5  .   Monopoly Value.

  6  .   Speculative(Hypothetical) Value. 

  7  .   Sentimental Value.

  8  .   Goodwill Value.

Valuation is the art of assessing the value of an asset. But for doing so, it is important to know, from client, what the purpose of it is. It can be any of following:

   1  .   Accounting Purpose.

   2  .   For Loan.

   3  .   Dissolution of a Firm.

   4  .   Insurance.

   5  .   Partition in Family.

   6  .   Reconstruction.

   7  .   Setting a new project.

   8  .   For Investment.

   9  .   Purchasing for Self Occupation.

   10.  Rent Fixation.

   11.  Compensation for Land Acquisition.

   12.  Fixing price for Auction.

   13.  Court Fee.

   14.  Stamp Duty.

   15.  Visa.

   16.  For court to evaluate share of rights in a disputed property.

   17.  To assess assets held by a criminal or defaulter.

       So first purpose has to assessed & than to proceed further.

Different Valuation Methods

  1.   Land Building Method for Bungalows/Houses: Here value of Land & building are assessed separately & than added to get total value of property.

                       I.    Valuation of Land considers:

-  Circle rates.

-  Price paid for purchase of Land.

-  Demand.

-  Characteristics  like Shape, Size & Location

-  Opinion of appropriate persons like Neighbors, Area Property Brokers, Recent sales & General Prevalent trends in market.

                II.        Valuation of Building Considers:

-  Present value of Building.

-  CPWD or State PWD schedule rates for construction adjusted by Index Cost.

   2.   Flats: Valuation of a Flat takes into consideration following factors

I.        Location.

II.      Developer.:

III.   Amenities like Parks, Play Areas, Gym., Swimming Pool, Community Center to name some.

IV.    Lifts.

V.       Type & Number of Parking.

VI.    Quality of Construction.

VII.  Market Trend.

Based on these Rate Per Square Feet of Super Area is arrived at. Super Area generally includes Plinth+ Share in Common Areas like Corridors, Parks, Roads, Facilities etc. Super Area is generally 15-20% higher than Carpet Area.

   

  3.   Rental capitalization Method : It is based on capitalizing net Annual Rent at an appropriate Rate Of Interest.

  4.   Development Method:

I.   This method is used to evaluate properties where there is   development potential in future.

II.      It is assumed that after development value of property will be more than expenditure incurred.

III.   As an example a big piece of land is developed by leveling, land filling, laying roads etc. Than this is sold by dividing in small plots. In this case rate will be on Per Square Yards basis. The cost at which it is to be sold will include :

-   Cost of development which is generally 20% of Land value. It includes Roads, Gardens, Underground Drain, Electric main & sub-station, Land Filling, Sewage, Municipal Taxes etc.

-        Professional charges of consultants like Architects, Surveyors etc.

-        Developer’s Profit, which is generally 15-20%.

  5.   Profit Method: This is mainly applicable to Hotels, Multiplexes, Marriage Palaces, Cinema Halls etc. This method as name suggests deals in working out profit from property and subsequently capitalizing the same.

This is in General what Valuation is. This needs to be done with full dedication, honesty and knowledge.