Valuation is the technique of estimating or determining the fair price or value of a property such as building, factory, other engineering structure of various types of land etc.

1.2 Purpose of valuation

• Buying or selling of property.
• For mortgage as security of loan.
• For determination of rent.
• For tax fixation or assessment of taxes.
• For compulsory acquisition.
• For fixation of insurance premium.
• To determine speculation i.e. more than fair price in selling.
• To determine betterment charges i.e. more than fair price in buying.

1.3 Terms used in valuation

1. Value and cost

• Value is the present market value of any property which may be higher or lower than cost of construction.
• Cost means actual cost of construction.

2. Book value

• It is original investment shown in account book of a company on its asset including properties and machinates.
• Book value is applicable on building and movable properties but not on land.
• Book value = Original cost – Total depreciation upto previous year

3. Assessed value

• Value of any property recorded in record of local authority which is used for the purpose of determining the various taxes to be collected from owner of the property.

4. Distressed value or forced sale value

• When a property is sold at a lower price than the market value of that time it is called distress value.

5. Replacement value

• Value of property or its services calculated on the prevailing market rate to replace the same.

6. Retable value

• Net annual letting value property which is obtained after deducting the amount of yearly repairs from gross income. Municipal and other taxes are charged on the rotable value of property.

7. Potential value

• Some property like land has an inherent value which may go on increasing due to passage of time or can fetch more return if used for some alternative purpose. This inherent value is known as potential value.

8. Annuity

• Annual periodic payment for repayment of the capital amount invested in a property or in some other form of investment by a party.

9. Perpetual annuity

• If the payment of annuity continues for indefinite period, it is known as perpetual annuity.

10. Different annuity

• If the payment if annuity begins at some future data after a number of years this is known as different annuity.

11. Scrap value

• Dismantled material value of property at the end of its utility period.
• 10% of cost of construction in case of building.

12. Salvage value

• Value of any property at the end of utility period without being dismantled.

13. Gross income

• Total income from all sources without deducting the outgoing necessary for operation, taxes, maintenance, replacements etc.

14. Outgoing

• These are the expenses incurred to maintain the property by undertaking periodic repairs.
• Also, includes government tax, sinking fund, management or collection charge other miscellaneous charges.

15. Net income

• Amount left after deducting all outgoing, operational and collection expenses from gross income. i.e. Net income = Gross income – Outgoings

16. Capitalized value

• Amount of money whose interest at the highest prevailing rate of interest will be equal to the net income from the property in perpetuity. i.e. CV = Net income * Year purchase (Y.P)

17. Years Purchase (Y.P)

• Capitalized value required to be invested in order to receive an annuity of Rs. 1 at the prevailing rate of interest. i.e. Year’s purchase = 100 / Rate of interest

18. Sinking funds

• It is a fund which is built up for sole purpose of replacement or reconstruction of a property when it loses its utility either at the end of its life span.
• S = (S_n * R)/(1+R)^n-1

Where,

S = Year installment of sinking fund

S_n = Sinking fund to be accumulated in n years

R = Rate of interest

n = Utility period / Life of property

19. Depreciation

• The gradual decrease or loss in value of a property because of constant structural deterioration, use, wear and tear, decay etc.

1.4 Method of Determining value of property

1. Rental Method

• In this method the rental income is calculated after deducting all outgoing from the gross rent, years purchase is calculated after adopting the current bank interest and then capitalized value of the property is worked out.

2. Profit based Method

• Similar to rental method.
• In this method the net profit is worked out after deducting all possible outgoing and years purchase calculated after adopting current bank interest rate and multiplied by YP to get capitalized value of property.

3. Cost based Method

• In this method the actual cost incurred in constructing the building or in processing the property is taken as basis to determine the value of property.

4. Development based Method

• This method of valuation is used for properties which are in the development stage or party developed stage.

5. Depreciation Method

• Depreciated value of building is directly calculated with the help of formula

i.e. D = P [(100 – r_d)/(100)]ⁿ

Where,

D = Depreciated value

P = Cost of building

r_d = Rate of depreciation

n = No. of years

6. Plinth area Method

• In this method the resent plinth area rate of similar building in the same locality with the same specification is worked out, multiplied with the plinth area of building whose valuation is to be done and suitable depreciation is allowed.

7. Capital value comparison Method

• In this method, capitalized value of the property is worked out by direct comparisons with other capitalized value of similar property in the same locality, whose sale records are available.

1.5 Methods of valuation

• After doing all the valuation works the valuation report is prepared for submitting in the concerned department.
• The valuation report is divided into three parts:
  • Part I: Detail about property
  • Part II: Valuation calculation
  • Part III: Valuation declaration

Report format:

• Cover page
• Table of content
• Valuation certificate
• Description of the property
• Appendix:
  • Introductory details
  • Technical details
  • Area calculation
  • Land value
  • Land ownership certificate
  • Citizenship certificate
  • Drawings
  • Photographs

References:

• Dutta, B.N. – Estimating and Costing in Civil Engineering, UBS Publishers, New Delhi.
• CPWD (Central Public Works Department), India – Standard Schedule of Rates and Analysis of Rates.
• IS 1200 – Indian Standard for Method of Measurement of Building and Civil Engineering Works, Bureau of Indian Standards (BIS).
• Punmia, B.C. – Estimating and Costing, Laxmi Publications.
• Building Estimation and Costing Notes – Department of Civil Engineering, Pokhara University.
• MoUD Nepal – Standard Norms and Guidelines for Public Infrastructure Development Projects.

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