Valuation

What is Valuation?

Valuation is the technique of estimation or determining the fair price or value of the property such as building, a factory, other engineering structures of various types, land etc. By valuation the present value of a property is defined. The present value of the property may be decided by its selling price, or income or rent it may fetch. The value of a property depends on its structure, life, maintenance, location, bank interest, etc. Cost: means original cost of construction of purchase.

Purpose of valuation?

Security of loans or mortgages: when the loans are taken against the security of the property, its valuation is required.

Buying or selling a property: when it is required to buy or to sell a property, its valuation is required. 

Taxation: To assess the tax of property its valuation is required. Taxes may be municipal tax, wealth tax, property tax, etc., and all taxes are fixed on the valuation of the property. 

Rent fixation: in order to determine the rent of a property, valuation is required. Rent is usually fixed on a certain percentage of valuation (6% to 10% of the valuation).

Types of Valuation.

Comparison Method: The comparison Method of Valuation is the most commonly used and accepted method in ascertaining the market value of properties. Under the Comparison Method, the valuation approach entails comparing the subject property with similar properties that were sold recently and those that are currently being offered for sale in the vicinity or other comparable localities. The characteristics, merits and demerits of these properties are noted and appropriate adjustments thereof are then made to arrive at the value of the subject property.

Residual Method: The Residual Method of Valuation is normally used for development land or projects. This approach entails estimating the gross development value of the development components and deducting therefrom the development costs to be incurred, i.e. preliminary expenses, statutory payments, earthworks, infrastructure and building construction costs, professional fees, contingencies, project management fees, marketing and legal fees, financing costs, developer’s profits and other costs (if any) to arrive at the residual value. This residual value appropriately discounted for the period of development and sale is deemed to be the present market value of the subject property.

The gross development value is derived by comparing the development components of the subject property with similar properties that have been sold recently and those that are currently being offered for sale in the vicinity or other comparable localities. The characteristics, merits and demerits of these properties are noted and appropriate adjustments thereof are then made to arrive at the proposed selling prices of the development components. The development costs to be incurred are the actual or estimated costs, fees, etc which are likely to be incurred for the completion of the development components.

Cost Method: It is normally used for individually designed properties or specialized properties for which comparisons are not available or inappropriate. In this approach, the value of the land is added to the replacement cost of the building and other site improvements.

The value of the site is determined by comparison with similar lands that were sold recently and those that are currently being offered for sale in the vicinity with appropriate adjustments made to reflect improvements and other dissimilarities and to arrive at the value of the land as an improved site.