Various Methods of Valuations of Property
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The value of anything means its worth or utility as also the qualities inherent in the thing on which its utility or worth depends. The simple definition by Hadley is ‘Price is a fact and value is an estimate of what the price ought to be’.
Valuation of anything is an estimate of the value, of that thing in terms of money. The fundamental principle of the valuation of the property is the present worth to a present owner or to a foreseeable purchaser for future productive services. Such future return may be the realisation of fair rent of the estimated properties, use of the property by the owner himself for his mental gratification and the pleasure of having its ownership determined on monetary value.
The Following are the Different Methods of Valuation:
01. Rental Method of Valuation:
In this method, the net income by way of rent is found out by deducting all outgoings 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 Y.P. gives the capitalised value or valuation of the property. This method is applicable only when the rent is known or probable rent is determined by enquiries.
The rental method of valuation has been commented upon and approved in a number of High Court Cases. When land is fully developed by buildings erected thereon and when the property is let at a rent from which the fair rent can be ascertained and when the rent has been proved and is likely to be maintained for years to come, then rental method of valuation should be applied to determine the market value of the premises, as by virtue of provisions of the Rent Control Act, the landlord is not likely to evict the tenant nor likely to get more rent.
02. 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 the sale price of properties as a whole. In such cases, the capitalised value of the property is fixed by direct comparison with capitalised value of similar property in the locality.
03. Valuation Based on Profit:
This method of valuation is suitable for buildings like hotels, cinemas, theatres, etc. for which the capitalised value depends on the profit. In such cases, the net annual income is worked out after deducting from the gross income all possible working expenses, outgoings, interest on the capital invested, etc. The net profit is multiplied by Y.P. to get the capitalised value. In such cases, the valuation may work out to be too high in comparison with the cost of construction.
04. Development Method of Valuation:
This method of valuation is used for the properties which are in the undeveloped stage or partly developed and partly undeveloped stage. If a large place of land is required to be divided into plots after providing for roads, parks, etc., this method of valuation is to be adopted. In such cases, the probable selling price of the divided plots, the area required for roads, parks, etc., and other expenditures for development should be known.
If a building is required to be renovated by making additions, alterations or improvements, the development method of valuation may be used. The valuation of the property may be worked out from the anticipated future net income which it may fetch after its renovation. The net income multiplied by the Y.P. will give the anticipated capitalised value. The total expenditure required to be incurred in renovation should be worked out, and the original cost of the property together with the new expenditure should be compared with anticipated value and decided if the investment in the renovation is justified.
05. Land and Building Method:
In Land and Building method, the value of land and building are assessed separately. Value of building may be arrived at by any of the two methods:
- Valuation Based on Cost
- Depreciation Method of Valuation
a) Valuation Based on Cost:
In this method, the actual cost incurred in constructing the building or in possessing the property is taken as the basis to determine the value of property. In such cases, necessary depreciation should be allowed and the points of obsolescence should also be considered.
b) Depreciation Method of Valuation:
According to this method of valuation the building should be divided into four parts viz. — (i) Walls, (ii) Roofs, (iii) Floor and (iv) Doors & windows; and me cost of each part should first be worked out on the present-day rates by detailed measurements. The life of each of the four parts should then be ascertained.
The values arrived at will be exclusive of the cost of land, water supply, electric and sanitary fittings, etc., and will apply to those buildings only which have been properly maintained. If the repairs had been neglected in the past and the present condition is had or dilapidated, the suitable deduction should be made from the values as deducted above, for neglected repairs.
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 the total valuation of the building.
Value of land: For the valuation of the whole property the value of land should also be added to the depreciated value of the building. The value of land should be taken as prevalent in the locality from the recent sale transactions or from the enquiries from the property Brokers or from the Sub-Registrar’s Office.
There are no mathematical formulas by which the market value of the land can be ascertained. The determination of the market value involves a little amount of guess work which is of quasi-scientific nature. Generally, the market value is based on the sale price of the very property under consideration or by comparing the land whose market value is determined with the instances of sales of similar lands in the similar neighbourhood.
Please note that in all other methods as there is the concept of “income earned out of property” is considered, one cannot separate land and building for valuing.