What Is Valuation?
Valuation is a process to determine the fair price or the correct value of a property such as a building, a factory, a piece of land, etc.
Value means the worth of something or someone. When it is said that the value of something is “x”, the “x” refers to the worth of that particular thing, maybe a building or a piece of land too.
The value of something depends on its demand and supply. It varies from time to time. Here we shall talk about the value of building and land, respectively.
For example, if there are more buyers than the number of flats in an apartment, the value of the flat will shoot up as there is a high demand for the same.
Similarly, if there are more flats and less people interested to buy the flat, the value of the flat may go down or may not shoot up. This is due to the lesser demand of that flat in public. This is how the value works.
The value of something depends mainly on:
- Its utility
- Its scarcity
The present value or the current price of a particular structure is determined using this process. The value of a building may fluctuate with time. So when the value of a building is taken out, the time should be clearly mentioned with it.
The value of a property depends on the following factors:
- Nature of the structure
- Life of a structure
- Quality of maintenance of a structure
- Location of the structure
- Bank interest charged on the structure
- Legal control
- Supply and demand of the structure at a particular period
- Purpose of valuation
We learned the basics of value and valuation. But who does the valuation of a structure? The person who does the valuation of a structure or who takes out the value of a structure by analyzing the structure by all aspects is known as a valuer.
A valuer must have a thorough knowledge of the following:
- Estimation and costing
- Planning and design
- Surveying and level long
- Building bye-laws
- Contracts and their types
- Acquisition of land
- Construction works
- Town planning acts
- Economic geography
- Commercial maths
- Investment principles
- Money market and rate of interest
- Report writing
Necessary Conditions For Value
A product should possess some conditions to have value for itself. The conditions are as follows:
i) Transferability – the land and the building cannot move but can be transferred.
ii) Marketability – means the product can easily be bought and sold in the open market.
ii) Utility – the attribute of usefulness of the structure.
iv) Scarcity – the commodity must be in a limited quantity or the demand of the structure must be high to possess a high value.
Purpose Of Valuation
The purposes of valuation are as follows:
i) For buying or selling a property.
ii) For mortgage, when a loan is to be taken against the security of the property.
iii) Valuation of a property is also required when the rent of it is to be fixed. Generally, the rent of property varies between 5% to 10% of the valuation of the property itself.
iv) When the insurance of the property is to be taken, the valuation of the property is worked out, if the owner of that property desires to know its replacement value.
v) For tax assessment of a property, its valuation is required. Taxes like municipal tax, property tax, wealth tax, etc. are fixed based on property’s value.
vi) For compensation of a private property acquired by the government, by law for some public purposes.
vii) For betterment charges, if in case a property comes under the newly formed town planning scheme. Betterment charges mean the extra sum of money paid as a tax amount.
viii) Valuation of a property is also required when the property is to be shown on the balance sheet.
Methods Of Valuation For Building
There are various methods for calculating the value or for the valuation of properties and buildings. Each method diﬀers from the other methods and each method is used for some specific category of properties such as residential properties, industrial properties, mercantile buildings, educational buildings, etc.
Diﬀerent methods for valuation of buildings and properties are as follows:
- Rental method
- Land and building based method
- Profit based method
- Development method
1. Rental Method
The rental method of valuation is used when the rent of a building is known. In this method, the net income from the property’s rent is calculated, deducting the outgoings and expenses from the gross rent. The current rate of interest is assumed and the year’s purchase is calculated. The net income from the rent is multiplied by the year’s purchase which gives the capitalized value, as its outcome.
Therefore, C.V. = N.I. Y.P. Where,
C.V is the capitalized value
N.I. Is the net rental income, and
Y.P. Is the year’s purchase.
2. Land And Building Based Method
The basic principle of this method is to work out the individual current market value of land and the depreciated value of the structure and then adding these two values with each other, to obtain the final value of the property. The valuation of a property is calculated as follows:-
Present value of property = cost of land + depreciated value of the property.
The depreciated value of the property shall be calculated keeping in mind a few factors such as the age of the building, condition of the building, and its estimated life.
This method is used for the properties like schools, police stations, or properties which perform non-profitable community functions where there is no direct evidence of income.
3. Profit Based Method
The profit-based method is similar to the rental method of valuation. In this method, the net profit is determined after the deduction of all the expenses including the rate of interest of capital investment. The net profit or the net income is multiplied by the year’s
purchase, resulting in the capitalized value of the property. This method is mostly used for the valuation of shops, hotels, cinemas, etc.
The equation for the profit-based method of valuation is as follows:-
C.V. = N.I. Y.P.
C.V. is the capitalized value
N.I. is the net income
Y.P. is a year’s purchase.
4. Development Method
The development method of valuation deals in the properties which are usually undeveloped or underdeveloped. So the valuation of such type of properties highly depends on the initial investment made to purchase that particular property, the cost of development of the property, and the expected profit after a certain period.
The development method of valuation is used for the valuation of properties such as plots, which are to be developed with full amenities and facilities.
The development method of valuation is based on the following:
- Development of building estates, and
- Hypothetical building schemes.
Factors Affecting Valuation Of Properties
The factors aﬀecting the valuation of properties are listed below:-
- Demand and supply of the property
- Maintenance of the property
- The cost of construction
- Purpose of purchase of properties
- Life of property
- Rise in population
- Location of property