METHODS OF VALUATION

WELCOME

PROPERTY

• DICTIONARY MEANING—• THINGS OWNED POSSESSION• ALL USEFUL THINGS OWNED BY MAN CLASSIFIED

AS “WEALTH”• PROPERTY- INTANGIBLE CONCEPT BEING RIGHT

TO POSSESS WEALTH• PROPERTY- LEGAL RIGHT THAT EXPRESSES THE

RELATIONSHIP BETWEEN OWNERS AND THEIR POSSESSIONS

PROPERTY

• DEFINITION– CONTINUOUS, EVER LASTING USE, CONTROL AND DISPOSITION EXERCISABLE BY OWNER OVER THING OR OBJECT.

• PROPERTY SIGNIFIES SUM TOTAL OF ALL RIGHTS AND POWERS INCIDENT TO OWNERSHIP.

PROPERTY

• TYPES-1) CORPOREAL OR TANGIBLE• 2) INCORPOREAL OR INTANGIBLE• TANGIBLE—OWNERSHIP IN MATERIAL THINGS WHICH

CAN BE PHYSIALLY TOUCHED OR FELT, E.G. LAND,FURNITURE, JEWELLARY ETC.• INTANGIBLE—OWNERSHIP OF NON-MATERIAL THINGS

WHICH CANNOT BE POSSESSED IN PHYSICAL SENSE E.G. COPYRIGHTS, LEASES, GOODWILL, EASEMENT RIGHTS ETC.

PROPERTY

• CUSTOMARY CLASSIFICATION—• 1) MOVABLE.• 2) IMMOVABLE.• MOVABLE—FURNITURE , PLANT AND MACHINARY,

STOCKS, SHARES, DEBENTURES, INTELLECTUAL PROPERTY, GEMS AND JEWELLARY, CURRENCY, ARTS AND ARTIFACTS ETC.• IMMOVABLE—LAND AND BUILDINGS ETC.

IMMOVABLE PROPERTY• DEFINITION [AS PER SECTION 3(26) OF GENERAL

CLAUSES ACT] “IMMOVABLE PROPERTY SHALL INCLUDE LAND,

BENEFITS TO ARISE OUT OF LAND AND THINGS ATTACHED TO THE EARTH OR PERMANANTLY FASTENED TO ANYTHING ATTACHED TO THE EARTH.”

ATTACHED TO EARTH MEANS- 1. ROOTED IN EARTH AS TREES 2. IMBEDDED IN EARTH AS WALLS, BUIDG. 3.ATTACHED TO EMBEDDED FOR PERMANAT BENEFICIALENJOYMENT.

IMMOVABLE PROPERTY (COND)

• AS PER TRANSFER OF PROPERTY ACT– NO POSSITIVE DEFINITION• STATES THAT “ IMMOVABLE PROPRTY DOES NOT

INCLUDE STANDING TIMBER GROWING CROPS AND GRASS.”• AS PER JUDICIAL DECISIONS– • IMMOVABILITY IS INCAPACITY OF A THING OF

SUFFERING ALTERATION IN RELATION TO PLACE, WITHOUT INJURY OR DAMAGING ITS SURROUNDINGS

IMMOVABLE PROPERTY( CONTD)

• CRITERIA—• THE LINE OF DISTINCTION BETWEEN MOVABLE

AND IMMOVAVLE IS THIN.• THE INTENTION OF PARTIES –KEY• THE MODE OF ANNEXATION—IMPORTANT• IF PLANT OR FIXTURE CANNOT BE REMOVED

WITHOUT GREAT DAMAGE—INTENDED TO BE ANNEXED IN PERPETUITY.

LAND OWNERSHIP

• LAND IS ORIGINAL AND BASIC FACTOR OF PRODUCTION.• LAND AS NATURE PROVIDED CONSISTS OF THE

EARTH’S CRUST.• LEGALLY, POSSESSION OF PART OF EARTH’S

CRUST INCLUDES RIGHTS TO CONTROL MINERALS, GAS AND OIL BELOW THE EARTH’S SURFACE AS WELL AS AIR SPACE ABOVE THE GROUND.• SHAPE—INVERTED PYRAMID.

REALTY

• LAND ORIGINALLY PROVIDED BY NATURE NO LONGER EXISTS ANYWHERE ON EARTH.• ALL LAND DIRECTLY ( BY CONSTRUCTION IF

IMPROVEMENTS ON SITE ) OR INDIRECTLY (BY IMPROVEMENTS RELATED TO SITE) MODIFIED BY MAN.• LAND TOGETHER WITH IMPROVEMENTS, IS

DESIGNATED AS “ REALTY”• REALTY INCLUDES LAND AND BUILDINGS, AS ALSO

ANYTHING PERMANENTLY AFFIXED TO LAND I.E. ‘FIXTURES’.

PROPERTY OWNERSHIP• OWNERSHIP OF REALTY CLASSIFIED AS PROPERTY.• TWO TYPES.• PERSONAL PROPERTY– OWNERSHIP IS FOR A

LIMITED TERM OF YEARS.• REAL PROPERTY– OWNERSHIP OF REALTY EXTENDS

FOR A LIFETIME.• LESSEE POSSESSES PERSONAL PROPRETY IN REALTY,

WHERE AS LESSOR OWNS REAL PROPERTY.• REAL PROPERTY CONSISTS OF LAND AND OBJECTS

PERMANENTLY ATTACHED TO GROUND.

DEFINITION OF MARKET VALUE

“ THE MARKET VALUE OF A PARTICULAR INTEREST IN LANDED PROPERTY MAY BE DEFINED AS THE AMOUNT OF MONEY OFFERED BY A WILLING PURCHASER TO A WILLING SELLER OF THAT INTEREST,IN THE OPEN MARKET, WHERE THERE IS COMPETITION, AND BOTH PARTIES ARE BEING ACTUATED BY ECONOMIC CONSIDERATIONS, AND WHERE THERE IS NO UNDUE PRESSURE ON EITHER OF THEM.”

TECHNIQUES OF VALUATION OF IMMOVABLE PROPERTIES.• PROPERTY.• IMMOVABLE.• VALUATION.• TECHNIQUE.• COST.• PRICE.• VALUE.

VALUATION OF IMMOVABLE PROPERTIES

• PROPERTY: - Right to own and possess and to put to Legal and possible uses. - Land together with building improvements plus anything permanently affixed to it.• IMMOVABLE: Land + Anything attached to it + Anything embedded in it.• VALUATION: For highest, best and most profitable legal use.

COST AND PRICE

• COST – Expenditure on inputs.• PRICE – Expenditure on input + Profit.

VALUE

• Result of Interaction of Demand and supply.• Value is not intrinsic in Object. People create Value.• Individual / Subjective Value.• Market / Objective Value.

CHARACTERISTICS OF VALUE

• FUNDAMENTAL PRINCIPLE OF ECONOMICS IS THAT,FOR AN OBJECT TO HAVE VALUE. IT MUST SATISFY FOLLOWING BASIC CONDITIONS

• UTILITY – The power to render a service or fill a need.• SCARCITY – in relation to supply and demand and possible alternative uses.• DEMAND – Need with monetary power to fill demand. • TRANSFERABILITY – Rights of possession and control of ownership of property.

SPECIAL CHARACTERISTICS OF LANDED PROPERTY

1) IT IS MORE DURABLE THAN OTHER COMMODITIES. 2) LANDED PROPERTY IS HETROGENEOUS. 3) THE PRICE OF LANDED PROPERTY TENDS TO BE HIGH RELATIVE TO CURRENT INCOME. 4) LANDED PROPERTY IS OFTEN PURCHASED AS AN INVESTMENT. 5) THE SUPPLY & DEMAND & ALSO VALUE OF PROPERTY IS USUALLY AFFECTED BY LEGAL FACTORS. 6) DEALING WITH LANDED PROPERTY REQUIRES LENGTHY AND COMPLICATED PROFESSIONAL ADVICE. 7) LANDED PROPERTY IS IMMOVABLE.

FACTORS AFFECTING THE DEMAND FOR LANDED PROPERTY

1] INCREASE OR DECREASE IN POPULATION.2] CHANGES IN THE GENERAL STANDARD OF LIVING.3] CHANGE IN TASTE AND FASHION.4] CHANGE IN TYPE OF SOCIETY.5] CHANGE IN TECHNOLOGY.6] MOVEMENTS OF POPULATION.7] IMPROVEMENTS IN METHODS OF TRANSPORT AND COMMUNICATIONS.

FACTORS AFFECTING SUPPLY OF LANDED PROPERTY

1] CHANGES IN TASTE AND FASHION.2] CHANGES IN GOVT.POLICY & LEGISLATION.3] CHANGES IN PRICES OF BUILDING MATERIAL.4] CHANGES IN TECHNOLOGY.5] CHANGES IN THE ECONOMIC SITUATION.6] INSTITUTIONAL FACTOR – INSTITUTIONAL PLANNING.

VALUATION• It is an art or science of estimating the value for a specific

purpose of a particular interest in property at a particular moment in time taking into account all features of the property and considering all factors of the market.

PURPOSE OF VALUATION

• I) PURCHASE FOR INVESTMENT OR FOR OCCUPATION.• II) SALE/TRANSFER OF THE PROPERTY.• III) MORTGAGE AND OTHER SECURITY.• IV) RENT FIXATION.• V) LAND ACQUISITION.• VI) BETTERMENT CHARGES.• VII) AUCTION BIDS.• VIII) PROBATE.• IX) SPECULATION.• X) TAXATION.• XI) INSURANCE.• XII) PARTITION.• XIII) COURT FEES & STAMP DUTY – READY RECKONER.• XIV) RATABLE VALUE.• XV) ARBITRATION.• XVI) LEASE’S INTEREST/LESSEE’S INTEREST.• XVII) MERGER AND ACQUISITION OF INDUSTRIAL UNITS. REVALUATION OF

ASSETS FOR MARKET CAPITALIZATION.

INTERESTS IN LANDED PROPERTY

1] FREEHOLD INTEREST.2] LEASEHOLD INTEREST.3] SUBLEASEHOLD INTEREST.4] LIFE INTEREST.6] RIGHTS OF OCCUPANCY.7] RIGHT OF WAY.8] RIGHT OF LIGHT AND VENTILATION.

PARTICULAR MOMENT IN TIME

• The valuation of a property is related to the date of valuation and is different at different moments in time.

FEATURES OF THE PROPERTY

• Location• Situation• User – Residential/Industrial/Commercial• Size – Small/Gross• Shape – Regular/Irregular• F.S.I. permissible• Road Frontage – Small/Large, Important Road/Local Road

FACTORS OF MARKET

• Impact of Political, Legal, Social, Urban and Economic forces influence the valuation of the property.

TYPES OF LANDED PROPERTY

1] RESIDENTIAL. a) HOUSES OF VARIOUS TYPES. b) FLATS AND TENEMENTS.2] INDUSTRIAL. I) FACTORIES. II) WAREHOUSES AND GODOWNS.3] COMMERCIAL. a) SHOPS. b) OFFICES.4] AGRICULTURAL.

TYPES OF VALUATIONS

1] STATUTORY VALUATIONS – VALUATIONS GOVERNED BY LEGISLATION.2] NON STATUTORY VALUATIONS – VALUATIONS,WHICH STEM FROM NATURAL EVENTS.

METHODS OF VALUATION

1] THE DIRECT COMPARISON OR COMPARATIVE METHOD.2] THE CONTRACTOR’S METHOD.3] THE PROFITS OR ACCOUNTS METHOD.4] THE RESIDUAL METHOD.5] THE INVESTMENT METHOD.

COMPARATIVE METHOD

FIND OUT CONSIDERATION ACTUALLY PAID FOR OTHER SIMILAR PROPERTIES IN THE SAME LOCALITY AND THREE TO FIVE YEARS PRIOR TO THE DATE OF VALUATION.

FACTORS TO BE TAKEN INTO CONSIDERATION: 1] LOCATION OF PROPERTY. 2] SITUATION. 3] LEVEL OF AMENITIES & FACILITIES. 4] USER OF PROPERTY. 5] AGE OF PROPERTY. 6] CONDITION OF PROPERTY. 7] FACILITES AVAILABLE IN THE PROPERTY. 8] SIZE (FLOOR AREA) OF PROPERTY.

The Evidence

The Market

Should be based on

Transactions of similar properties

IN the same area

Obtained from

Recent Records

Comparative Valuation

Should be fairly stable

Underlying economic factors should be studied

of Frequent transactions

The evidence

Transactions of similar properties COMPARATIVE

VALUATION

In the same area

Recent Records Frequent Transactions

The Market

Should beFairly stable

UnderlyingEconomic

Factors shouldBe studied

COMPARATIVE METHOD.

Belting Method

• If the depth of the plot is more than then the depth of the comparable plots in sales considered, this method is adopted to value the land.

1st Belt

2nd Belt

3rd Belt

X

1 ½ X

Remaining

Full Value

3/4th Value

Of 1st Belt

½ Value

Of 1st Belt

Recess Land

¾ of Belt Value

Recess Land¾ of Belt Value

R O A D

Belting Method

CONSIDERATION FOR DIFFERENT LANDS

• Land with return frontage :- Give positive allowance depending on the importance of road on which return frontage.

• Land with irregular shape :- Carve out regular shape by drawing perpendiculars to road and give negative allowance to remaining land.

CONTRACTOR’S METHOD OR CAPITAL VALUE METHOD.

• USED IN ASSESSMENT IN CASE OF PROPERTIES NOT USUALLY SOLD, NOT INTENDED TO BE SOLD OR EVEN INCAPABLE OF BEING SOLD IN OPEN MARKET.

• PROPERTIES CLASSIFIED INTO THREE GROUPS:

• 1] PUBLIC PROPERTIES -- MUSEUMS,SCHOOLS,COLLEGS,LIBRARIES.

• 2] PROPERTIES HAVING POTENTIAL FOR PROFIT – STADIUMS, THEATRES,MUSIC HALLS,RACE COURSE ETC.

• 3] PROPERTIES OF PUBLIC UTILITY UNDERTAKINGS – RAILWAYS, WATER WORKS, ELECTRICITY UNDERTAKINGS, DOCKS.

CONTRACTOR’S METHOD

•METHOD

• 1] ESTIMATE VALUE OF LAND IN ITS EXISTING USE.• 2] ESTIMATE COST OF CONSTRUCTION OF BUILDING.• 3] ALLOW FOR DEPRECIATION ON ACCOUNT OF

AGE,OBSOLESANCE ETC.• 4] CAPITAL VALUE = LAND VALUE PLUS DEPRECIATED

COST OF BUILDING

CONTRACTOR’S METHOD

• Methods to determine replacement cost of building:-1. Plinth area rate.2. Cubical content rate.3. Item-rate.

Contractor’s MethodDepreciation

• Depreciation is calculated for period of present life with due consideration to its future life and total life.

• Methods:-1. Straight-line Method – Allocates depreciation uniformly

throughout its service life Depreciation=original cost – salvage value Total life2. Declining balance Method – Fixed % of unit cost at the

beginning of the year is allowed to be deducted at the end of year annually.

Contractor’s MethodDepreciation

3. Sinking Fund Method – Depreciation=1-Y.P. future life at certain % Y.P. full life at same % Presumes normal and regular maintenance and repairs. If

neglected, more allowance should be made, depending on the state of maintenance and repairs.

CONTRACTOR’S METHOD

• Approximate life span:-1. R.C.C. framed Structure 75-90 years2. R.C.C. Brick built 60-65 years3. C.G.I.Sheet+BBMasonary 50-60 years4. A.C.C.Sheet+BBMasonary 40-50 years5. Country Tiled + bricks 20-30 years6. Temporary sheds 10-20 years

Weakness of Contractor’s Method

• No direct co-relation between cost of property and Market value, which depends on forces of supply and demand.• Requires assumptions relative to unit costs.

More probability of assumption being wrong.• Requires assumptions as to original economic

life and/or remaining economic life. Greater probability of assumptions being in error.

PROFIT METHOD

• PROFITS MADE BY AN OCCUPIER DETERMINES THE RENT A TENANT WOULD BE WILLING TO PAY FOR HIRING THE PREMISES.

METHOD.1] ESTIMATE THE GROSS AVERAGE RECEIPTS OF THE OCCUPIER.2] DEDUCT THE EXPENSES INCURRED FOR EARNING THOSE RECEIPTS.3] DEDUCT THE TENANT’S SHARE OF REASONABLE PROFITS,WHICH INCLUDE INTEREST ON HIS CAPITAL, REMUNERATION OF HIS SERVICES AND COMPENSATION FOR HIS RISK.4] THE RESIDUE WILL BE THE LANDLORD’S SHARE OF RENT.NOTE: BEAR IN MIND THAT WHAT IS ASSESSIBLE IS THE PROPERTY AND NOT THE TRADE.

RESIDUAL METHOD• This method is used to value property with Development

potential.• Development potential is also called “Latent Value”.• Increased value of property after carrying out development

will be more than expenditure incurred.

RESIDUAL METHOD

• Assess optimum development for the property. Estimate gross Development value [A].

• Assess cost of development [B].• Assess Developers risk and Profit [C].• Residual Value= [A] – {[B] +[C]}.

RESIDUAL METHOD

• Cost of each item of infrastructure is estimated and • Allowances made for each relevant factor which are deducted

from sale value of small plots, carved out from larger plot.

RESIDUAL METHOD• Cost of development will include:-1.Building costs2.Architects fees [% of cost of development]3.Engineers fees4.Other professional fees [% of proceeds of sell]5.Advertising and legal fees

THANK YOU

CONCEPT

• FUNDAMENTAL PRINCIPLE OF ECONOMICS IS THAT,FOR AN OBJECT TO HAVE VALUE. IT MUST SATISFY THREE BASIC CONDITIONS.• 1) SCARCITY IN RELATION TO DEMAND.• 2) UTILITY AND • 3) FUTURITY.• VALUE IS EXPRESSED AS THE PURCHASING

POWER OF A COMMODITY EXPRESSED IN TERMS OF MONEY.