Valuation

a) Why valuation of property is required

Purposes of valuation — why it is required

1. Buying and selling — to fix a fair price for both parties.
2. Rent fixation — standard rent is normally 6–10% of the value.
3. Security of a loan / mortgage — a bank lends only a fraction of the valuated amount.
4. Taxation — property tax, house tax, wealth tax and municipal rates are assessed on value.
5. Compulsory acquisition by government, to fix the compensation payable.
6. Insurance — to fix the sum insured and the premium.
7. Probate, partition and inheritance — to divide property among heirs.
8. Court cases and arbitration — to settle disputes.
9. Auction — to fix the upset (reserve) price.
10. Speculation and investment decisions — to judge whether a purchase is worthwhile.
11. Betterment charges, when a public work raises the value of adjoining land.

b) Obsolescence distinguished from depreciation

A building can be physically sound and still lose most of its value through obsolescence — which is why a valuer must consider both.

ENCE 351 §7.1 and §7.2.

a) Valuation, and how a computer helps the engineer in valuation

Valuation. The art and science of estimating the fair present value of a property — land, building, factory or other engineering structure — on the basis of its present condition, its income-earning capacity, its future life, and the prevailing market conditions.

A computer assists the valuer in several practical ways:

• Spreadsheets compute year's purchase, sinking fund and depreciation instantly, and allow "what-if" analysis — the effect of a change in the interest rate or the life can be seen at once.
• Databases of sale deeds and rates can be searched for genuinely comparable properties, which is the weakest part of manual valuation.
• GIS links a plot to its cadastral map, land use zone, road width and surrounding sale prices, and produces value contours for a locality.
• CAD and quantity take-off software give the plinth area and the replacement cost quickly and accurately.
• Automated valuation models apply regression to a large body of sale data to produce a mass appraisal for taxation.
• Report generation is standardised, so no component of the report is omitted, and records are archived and auditable.

b) Valuation of the undeveloped property — development method

Saleable area

Gross sale price of the developed plots

Deductions from the sale price

Value of the undeveloped property

Three points decide the marks. The development cost is spent on the whole 1,56,000 sq ft but the income comes only from the saleable 1,09,200 sq ft. The profit and the fees are percentages of the sale price, not of the cost. And the answer is expressed per sq ft of the original area, since that is what the investor is buying.

ENCE 351 §7.1 and §7.4.

a) Why valuation is done, and the parameters affecting the value of a property

Purposes of valuation — why it is required

1. Buying and selling — to fix a fair price for both parties.
2. Rent fixation — standard rent is normally 6–10% of the value.
3. Security of a loan / mortgage — a bank lends only a fraction of the valuated amount.
4. Taxation — property tax, house tax, wealth tax and municipal rates are assessed on value.
5. Compulsory acquisition by government, to fix the compensation payable.
6. Insurance — to fix the sum insured and the premium.
7. Probate, partition and inheritance — to divide property among heirs.
8. Court cases and arbitration — to settle disputes.
9. Auction — to fix the upset (reserve) price.
10. Speculation and investment decisions — to judge whether a purchase is worthwhile.
11. Betterment charges, when a public work raises the value of adjoining land.

Factors affecting the value of a property

Physical factors

• Location — the single most important factor; a central or commercial location commands a far higher value.
• Size, shape and frontage of the plot; a regular plot with good road frontage is worth more than an irregular one.
• Type, age and condition of the building, and its remaining useful life.
• Quality of construction, specification and workmanship.
• Availability of services — water supply, drainage, electricity, telephone, road access.
• Soil condition and topography, and liability to flooding or landslide.

Economic factors

• Supply and demand for property in that locality.
• Rental income the property can fetch, and the security of that income.
• Prevailing rate of interest — a lower rate raises the year's purchase and hence the value.
• Cost of construction at the present time.
• Inflation and the general state of the economy.

Legal and social factors

• Clear title, freehold or leasehold tenure, and the unexpired lease period.
• Encumbrances — mortgage, easement, right of way, tenancy.
• Town planning restrictions — land use zoning, setback, floor area ratio, height limit.
• Neighbourhood and social environment, proximity to schools, hospitals and markets.
• Government policy — taxes, rent control, planned public works.

b) Capitalized value of the building

Gross annual income

Outgoings

Net annual income

Year's purchase for 80 years at 8%

Capitalized value of the building

Add the value of the land

The plinth area data (600 × 200 = Rs 1,20,000) gives the cost of the building. Note that its capitalized value, Rs 2.20 lakh, is nearly twice its cost — a good illustration of the difference between cost and value. Over 80 years the sinking fund instalment on Rs 1,20,000 at 8% is only about Rs 20 a year, so omitting it changes nothing material.

ENCE 351 §7.1 and §7.4.

a) Importance of specification and of valuation, and the methods of valuation

Importance of specification. The drawing shows the size of the work; the specification states the quality. Together they define the work completely. A specification is important because it fixes the class of material and workmanship, forms the legal basis of the contract, is essential for the analysis of rates (the rate cannot be worked out until the item is defined), guides the contractor in execution and the engineer in acceptance, prevents disputes, and is the standard against which the work is measured and paid.

Importance of valuation. Valuation fixes the fair present worth of a property, and is required for sale and purchase, rent fixation, mortgage and bank loans, taxation, compulsory acquisition and compensation, insurance, partition and probate, court cases, and investment decisions.

Methods of valuation of a property

b) Capitalized value of the RCC framed building

Gross annual income

Outgoings

Net annual income

Year's purchase — dual rate, 6% yield with 4% sinking fund

Capitalized value

Because a separate sinking fund rate is given, the dual rate year's purchase must be used: the investor earns 6% on his capital but can only reinvest the recoupment instalments safely at 4%. Using YP = 100/6 = 16.67 (perpetuity) would ignore the fact that the building has a finite life.

ENCE 351 §7.4 and §8.3.

a) Value of a property, and what a property must satisfy to have value

Value is the present worth of the benefits that will arise from the ownership of a property — what it is worth today to its owner or in the market. It is not the same as its cost.

For a property to possess value, four conditions must all be satisfied:

1. Utility — it must be capable of satisfying some want or need. A thing of no use to anybody has no value.
2. Scarcity — it must be limited in supply relative to demand. Air is useful but free because it is not scarce.
3. Transferability — the ownership must be capable of being transferred, with a clear and marketable title free of dispute.
4. Effective demand — there must be a purchaser who not only wants it but has the means and the willingness to pay for it. Desire without purchasing power creates no value.

b) Fair value of the property

Net annual income

Year's purchase — dual rate

Value of the building and of the land

"Rate of redemption of capital" is simply another name for the sinking fund rate, so the dual-rate year's purchase applies. The land is added at its market value and is not capitalized, because land does not depreciate and its value is already reflected in the market rate.

ENCE 351 §7.2 and §7.4.

The paper offers a choice. Both alternatives are answered below.

EITHER — Valuation: definition, purposes and factors

Valuation. The art and science of estimating the fair present value of a property — land, building, factory or other engineering structure — on the basis of its present condition, its income-earning capacity, its future life, and the prevailing market conditions.

Purposes of valuation — why it is required

1. Buying and selling — to fix a fair price for both parties.
2. Rent fixation — standard rent is normally 6–10% of the value.
3. Security of a loan / mortgage — a bank lends only a fraction of the valuated amount.
4. Taxation — property tax, house tax, wealth tax and municipal rates are assessed on value.
5. Compulsory acquisition by government, to fix the compensation payable.
6. Insurance — to fix the sum insured and the premium.
7. Probate, partition and inheritance — to divide property among heirs.
8. Court cases and arbitration — to settle disputes.
9. Auction — to fix the upset (reserve) price.
10. Speculation and investment decisions — to judge whether a purchase is worthwhile.
11. Betterment charges, when a public work raises the value of adjoining land.

Factors affecting the value of a property

Physical factors

• Location — the single most important factor; a central or commercial location commands a far higher value.
• Size, shape and frontage of the plot; a regular plot with good road frontage is worth more than an irregular one.
• Type, age and condition of the building, and its remaining useful life.
• Quality of construction, specification and workmanship.
• Availability of services — water supply, drainage, electricity, telephone, road access.
• Soil condition and topography, and liability to flooding or landslide.

Economic factors

• Supply and demand for property in that locality.
• Rental income the property can fetch, and the security of that income.
• Prevailing rate of interest — a lower rate raises the year's purchase and hence the value.
• Cost of construction at the present time.
• Inflation and the general state of the economy.

Legal and social factors

• Clear title, freehold or leasehold tenure, and the unexpired lease period.
• Encumbrances — mortgage, easement, right of way, tenancy.
• Town planning restrictions — land use zoning, setback, floor area ratio, height limit.
• Neighbourhood and social environment, proximity to schools, hospitals and markets.
• Government policy — taxes, rent control, planned public works.

OR — Value of the cinema hall

Annual sinking fund for the machinery

Total annual outgoings

Net annual income

Year's purchase — 60 years, 8% interest, 10% redemption

Value of the property

This is the profit-based method, used for a commercial property whose worth depends on the business carried on in it. Note that the sinking fund is provided for the machinery only (life 25 years), not for the building (life 60 years) — the building's finite life is already allowed for in the year's purchase.

ENCE 351 §7.1 and §7.4.

i) Value and cost

For a property to have value it must satisfy four conditions: it must have utility (be capable of satisfying a want), be scarce (limited in supply), be transferable (have a clear, marketable title), and command effective demand (there must be a buyer able and willing to pay).

ii) Salvage value and scrap value

Scrap value. The value of the dismantled material of a property at the end of its useful life — the broken bricks, steel, timber and other debris sold as material, after deducting the cost of demolition. It is usually taken as about 10% of the cost of construction. A building at the end of its life has scrap value only.

Salvage value. The value of a property or machine at the end of its useful life to its present owner, when it is sold without being dismantled — it can still be used by somebody else for the same or another purpose. A machine sold second-hand at the end of its economic life to the present user has salvage value.

iii) Cost based method and development method of valuation

ENCE 351 §7.2 and §7.4.

a) Cost distinguished from value, and factors affecting valuation

For a property to have value it must satisfy four conditions: it must have utility (be capable of satisfying a want), be scarce (limited in supply), be transferable (have a clear, marketable title), and command effective demand (there must be a buyer able and willing to pay).

Factors affecting the value of a property

Physical factors

• Location — the single most important factor; a central or commercial location commands a far higher value.
• Size, shape and frontage of the plot; a regular plot with good road frontage is worth more than an irregular one.
• Type, age and condition of the building, and its remaining useful life.
• Quality of construction, specification and workmanship.
• Availability of services — water supply, drainage, electricity, telephone, road access.
• Soil condition and topography, and liability to flooding or landslide.

Economic factors

• Supply and demand for property in that locality.
• Rental income the property can fetch, and the security of that income.
• Prevailing rate of interest — a lower rate raises the year's purchase and hence the value.
• Cost of construction at the present time.
• Inflation and the general state of the economy.

Legal and social factors

• Clear title, freehold or leasehold tenure, and the unexpired lease period.
• Encumbrances — mortgage, easement, right of way, tenancy.
• Town planning restrictions — land use zoning, setback, floor area ratio, height limit.
• Neighbourhood and social environment, proximity to schools, hospitals and markets.
• Government policy — taxes, rent control, planned public works.

b) Present value of the property — straight line depreciation

Present replacement cost of the building

Depreciation by the straight line method

Depreciated value of the building

Value of the land, and the total

Two traps in this question. First, the Rs 22 lakh original cost is a distractor — depreciation is always applied to the present replacement cost, not to the historical cost. Second, notice how completely the land dominates: it is 80% of the value. Land does not depreciate; buildings do.

ENCE 351 §7.2 and §7.4.

(i) Scrap value. The value of the dismantled material of a property at the end of its useful life — the old bricks, steel, timber and other debris sold as material, after deducting the cost of demolition. Usually taken as about 10% of the cost of construction. If the demolition cost exceeds the sale proceeds, the scrap value is negative.

(ii) Depreciation. The gradual loss in the value of a property due to its use, wear and tear, decay and age.

Other methods are the sinking fund method and the quantity survey method. Depreciation is physical and gradual, and is retarded by good maintenance — unlike obsolescence, which is functional and sudden.

(iii) Sinking fund. A fund created by setting aside a fixed sum out of the income of a property every year so that, with compound interest, it accumulates to the amount needed to rebuild or replace the property at the end of its life.

It is treated as an outgoing in the valuation, because that money is not available to the owner as income.

(iv) Capitalized value. The amount of capital whose interest, at the prevailing rate, would yield the net annual income actually received from the property — that is, the value of the property on an income basis.

ENCE 351 §7.2 and §7.4.

Answer any three. All four are given below.

i) Overhead charges. The expenses a contractor must incur to run his business which cannot be charged directly to any one item of work. They are recovered by adding a percentage — usually 5–10% — in the analysis of rates.

• General overheads — office rent, salaries of head-office staff, stationery, telephone, travelling, advertisement, insurance, interest on capital, depreciation of plant, legal and audit charges.
• Job overheads — expenses of that particular work: site office, site supervisor's pay, watchman, temporary shed, water and power connection, tools, and safety arrangements.

ii) Task or out-turn of work. The quantity of work that an average workman of a trade can complete in one working day of eight hours. It is the figure that converts a quantity of work into man-days, and so is the basis of the labour component in every rate analysis.

The out-turn depends on the skill of the workman, the nature and height of the work, supervision, weather and the tools provided.

iii) Salvage value and scrap value.

Scrap value. The value of the dismantled material of a property at the end of its useful life — the broken bricks, steel, timber and other debris sold as material, after deducting the cost of demolition. It is usually taken as about 10% of the cost of construction. A building at the end of its life has scrap value only.

Salvage value. The value of a property or machine at the end of its useful life to its present owner, when it is sold without being dismantled — it can still be used by somebody else for the same or another purpose. A machine sold second-hand at the end of its economic life to the present user has salvage value.

iv) Sinking fund.

Sinking fund. A fund created by setting aside a fixed sum out of the income of a property every year, so that with accumulated compound interest it amounts, at the end of the useful life, to the sum needed to rebuild or replace the property. The annual instalment is

The sinking fund instalment is treated as an outgoing in the valuation, because it is money that must be set aside and is therefore not available as income.

ENCE 351 §6.1, §6.3 and §7.2.

Answer any three. All four are given below.

i) Approximate estimate. A rough estimate prepared at the proposal stage, before detailed drawings exist, from a single overall parameter — plinth area, cube content, cost per bed, per student, per km of road. It is used to judge whether the scheme is worth pursuing, to obtain administrative approval and to provide the amount in the budget. It is supported by a report, a site plan and line drawings, and is accurate only to about ±15–20%.

ii) Revised estimate. A fresh detailed estimate prepared for a work already sanctioned, when the expenditure exceeds or is likely to exceed the sanctioned amount by more than 5%, or when the rates or the design change materially. It shows the original and the revised quantity and cost of every item side by side, with the reason for each variation, and must be sanctioned afresh by the competent authority.

iii) Centre line method. A method of taking out quantities in which the total centre-line length of all the walls is found once and then multiplied by the breadth and the depth of each item in turn. Where walls meet, half the breadth of the item is deducted for each junction, because that corner would otherwise be counted twice.

It is the quickest method and is best suited to buildings in which all the walls have the same thickness.

iv) Capitalized value. The amount of capital whose interest, at the prevailing rate, would yield the net annual income actually received from the property. It is the value of the property on an income basis:

For example, a property yielding a net income of Rs 1,20,000 a year, capitalised at 8%, has a capitalized value of 1,20,000 × (100/8) = 1,20,000 × 12.5 = Rs 15,00,000.

ENCE 351 Chapters 2, 3 and 7.

Answer any three. All four are given below.

i) Contingency. A lump-sum provision, normally 3–5% of the estimated cost, added to every estimate to meet unforeseen and petty expenses and minor omissions that cannot be itemised at the time of estimating — small changes at site, small variations in rates, incidental charges. It is not meant to pay for a change in the scope of the work, which requires a supplementary or revised estimate, and it can be spent only with the sanction of the competent authority.

ii) Bill of quantities. A tabulated schedule of every item of work in a project, giving a brief description, the estimated quantity, the unit, the rate and the amount. It is issued with the tender documents so that all contractors price the same quantities and their offers can be compared item by item, and it is afterwards used to measure and pay for the work actually executed and to value variations.

iii) Distress value. The value that a property fetches when it is sold under compulsion or unfavourable conditions instead of in an open, willing market — for instance in a forced auction to recover a debt, in an urgent sale to raise money, during a partition dispute, or where the title is doubtful or the property is encumbered. It is always appreciably lower than the fair market value, typically by 15–30%, because the seller has neither the time nor the freedom to wait for the right purchaser.

iv) Depreciation.

Depreciation. The gradual loss in the value of a property due to its use, wear and tear, decay and age. It is a physical deterioration, and it is recovered by charging a part of the cost against the income each year.

Methods of calculating it:

1. Straight line method — equal amount every year:

2. Constant percentage (declining balance) method — a fixed percentage of the book value each year: p = 1 − (S/C)^1/n.
3. Sinking fund method — depreciation is the annual sinking fund instalment plus interest.
4. Quantity survey method — the property is examined in detail and the loss in each part is assessed. The most accurate and the most laborious.

ENCE 351 §3.6 and §7.2.

Scrap value. The value of the dismantled material of a property at the end of its useful life — the broken bricks, steel, timber and other debris sold as material, after deducting the cost of demolition. It is usually taken as about 10% of the cost of construction. A building at the end of its life has scrap value only.

Salvage value. The value of a property or machine at the end of its useful life to its present owner, when it is sold without being dismantled — it can still be used by somebody else for the same or another purpose. A machine sold second-hand at the end of its economic life to the present user has salvage value.

ENCE 351 §7.2.

Factors to be kept in mind while evaluating the fair and reasonable value of a property

Factors affecting the value of a property

Physical factors

• Location — the single most important factor; a central or commercial location commands a far higher value.
• Size, shape and frontage of the plot; a regular plot with good road frontage is worth more than an irregular one.
• Type, age and condition of the building, and its remaining useful life.
• Quality of construction, specification and workmanship.
• Availability of services — water supply, drainage, electricity, telephone, road access.
• Soil condition and topography, and liability to flooding or landslide.

Economic factors

• Supply and demand for property in that locality.
• Rental income the property can fetch, and the security of that income.
• Prevailing rate of interest — a lower rate raises the year's purchase and hence the value.
• Cost of construction at the present time.
• Inflation and the general state of the economy.

Legal and social factors

• Clear title, freehold or leasehold tenure, and the unexpired lease period.
• Encumbrances — mortgage, easement, right of way, tenancy.
• Town planning restrictions — land use zoning, setback, floor area ratio, height limit.
• Neighbourhood and social environment, proximity to schools, hospitals and markets.
• Government policy — taxes, rent control, planned public works.

A valuer should also be satisfied on three practical points before signing: that the title is clear and marketable, that the property is free of encumbrances, and that the comparable sales relied upon are genuine arm's-length transactions and not distress or related-party sales.

ENCE 351 §7.3.

Methods of valuation of a property

ENCE 351 §7.4.

Methods of valuation of a property

Choosing the method is itself part of the answer. Ask what the property is: if it earns rent, capitalize the rent; if it is self-occupied, use the cost method; if it is bare land in an active market, compare it; if it has development potential, use the development method; if a business is run in it, capitalize the profit.

ENCE 351 §7.4.

Valuation. The art and science of estimating the fair present value of a property — land, building, factory or other engineering structure — on the basis of its present condition, its income-earning capacity, its future life, and the prevailing market conditions.

Methods of valuation of a property

ENCE 351 §7.4.

Methods of valuation of a property

Concept of depreciation

Depreciation. The gradual loss in the value of a property due to its use, wear and tear, decay and age. It is a physical deterioration, and it is recovered by charging a part of the cost against the income each year.

Methods of calculating it:

1. Straight line method — equal amount every year:

2. Constant percentage (declining balance) method — a fixed percentage of the book value each year: p = 1 − (S/C)^1/n.
3. Sinking fund method — depreciation is the annual sinking fund instalment plus interest.
4. Quantity survey method — the property is examined in detail and the loss in each part is assessed. The most accurate and the most laborious.

Depreciation and obsolescence

A building can be physically sound and still lose most of its value through obsolescence — which is why a valuer must consider both.

ENCE 351 §7.2 and §7.4.

Methods of valuation of a property

ENCE 351 §7.4.

a) Situations in which each method of valuation is used

(i) Cost based method. Value = present replacement cost of the building, less depreciation, plus the present value of the land. Used when the property is self-occupied and has no rental record; when the building is special or unusual (a factory, a school, a place of worship) so that no comparable sale exists; for insurance valuation; and for a newly built property.

(ii) Plinth area method. Value = plinth area × present plinth area rate, less depreciation, plus land. Used for a quick valuation of an ordinary building — a residence or an office — when the rate of a recently completed similar building in the same locality is available. It is the standard method for bank loan valuations and for government property.

(iii) Development method. Value = estimated sale value after development, less the development cost, professional and legal charges and the developer's profit. Used for undeveloped land having development potential — agricultural land ripe for a housing colony, a large plot to be subdivided — and for fixing the compensation when a planning authority acquires land for a colony.

b) Valuation of the cinema hall

Annual sinking fund for the machinery

Total annual outgoings

Net annual income

Year's purchase — 60 years, 8% interest, 4% redemption

Value of the property

The sinking fund is provided only for the machinery, whose 25-year life is much shorter than the 60-year life of the hall. The hall's own finite life is already accounted for by using a year's purchase for 60 years rather than for perpetuity.

ENCE 351 §7.4.

Annual sinking fund for the machinery

Total annual outgoings

Net annual income

Year's purchase — 60 years, 8% interest, 4% redemption

Value of the property

ENCE 351 §7.4.

Saleable area

Sale price of the developed plots

Deductions

Maximum compensation payable

The improvement expenditure is incurred on the whole 5,00,000 m², while the income arises only from the saleable 3,00,000 m² — applying Rs 8 to the saleable area instead would wrongly raise the compensation by Rs 16 lakh. The compensation is finally expressed per m² of the acquired area, because that is what each owner is paid for.

ENCE 351 §7.4.

Saleable area

Sale price of the developed plots

Deductions

Maximum compensation

ENCE 351 §7.4.

Replacement cost of the building by the plinth area method

Depreciation by the straight line method

Present value of the building

Value of the land and total valuation

The plinth area rate of Rs 15,000/m² is stated to be for a building with water supply, sanitary and electrical fittings and of sound construction, so no further percentage is added for services. The building has used only 30 of its 100 years, so it retains 73% of its cost.

ENCE 351 §7.4.

Present value of the land

Total capital invested

Net return expected on the capital

Fixed annual outgoings

Set up the rent equation

Standard rent per floor per month

Note two things. The land is taken at its present value (Rs 38,00,000 from the prevailing ropani rate), not at the Rs 25,00,000 paid in 2060 — standard rent must give a fair return on capital as it stands today. And the percentage outgoings are carried to the left side of the equation as fractions of the unknown R, which is why the answer comes out of a division by 0.72.

A refinement worth knowing. The standard method takes a separate rate of return on the building and on the land — typically about 7% on the cost of construction and 6% on the cost of land, the land rate being the same as or a little less than the building rate. Working it that way here:
net return = 0.07 × 40,00,000 + 0.06 × 38,00,000 = 2,80,000 + 2,28,000 = Rs 5,08,000, giving R = (5,08,000 + 49,880.94)/0.72 = Rs 7,74,834 a year, or about Rs 16,142 per floor per month. Either treatment is accepted provided the assumed rate or rates are stated.

ENCE 351 §7.4; the standard-rent equation follows Chakraborti, Estimating, Costing and Specification, §15-12 (standard rent = net return + outgoings).

Net annual income

Year's purchase — 65 years, 8% interest, 4% redemption

Value of the property

Loan that may be advanced against the mortgage

State the margin you adopt and why. The cubic content of 400 m³ and the age of 25 years are given as background — the valuation here is by the rental (capitalization) method, which uses the income and the remaining life, so the cube content is not needed.

ENCE 351 §7.4.

Value of the land by the bank's policy

Value of the building by the plinth area method

Total valuation of the property

Maximum loan that can be sanctioned

Cross-check by the rental (income) method

The income method gives only about Rs 41 lakh — far below the cost-based figure of Rs 3.86 crore. That is not an error: it shows that the building is let at a rent well below a fair return on its capital value (Rs 6 lakh a year on Rs 3.86 crore is barely 1.6%). For mortgage purposes the bank's own cost-based policy governs, which is why the loan is computed on Rs 3,86,00,000. A valuer should report both figures and explain the gap.

ENCE 351 §7.4.

Value of the land

Replacement cost of the building — plinth area method

Depreciation — straight line method

Depreciated value of the building

Total value of the property

The building has used 10 of its 70 years, so it has lost 12.86% of its depreciable value and retains about 87% of its replacement cost. Note that the land, which does not depreciate, is 65% of the total — the older the building, the more the land dominates.

ENCE 351 §7.4.

Net annual income

Year's purchase — 66 years, 8% interest, 4% redemption

Value of the property

Loan recommended against the mortgage

The rate of interest, the redemption rate and the total life are not given in this question, so they must be assumed and the assumption stated. The cubic content of 1,600 m³ would be used if the building were valued by the cube rate method; here the rental method is used, so it is not needed.

ENCE 351 §7.4.

Value of the land

Replacement cost of the building

Depreciation — straight line method

Present value of the building and of the property

The question says "assume suitable data if necessary". The life and the scrap value must be assumed, and the assumption must be stated — a life of 60 years instead of 70 would give a depreciation of Rs 75,00,000 and a property value of Rs 4.25 crore. Marks are given for stating the assumption, not for a particular number.

ENCE 351 §7.4.

Value of the land

Replacement cost of the building

Depreciation — straight line method

Present value of the building and of the property

State every assumed figure. The building has used only 10 of its 70 years and so retains about 87% of its replacement cost.

ENCE 351 §7.4.

Data to be collected by a valuer for the valuation of land

1. Legal / title data

• Certificate of ownership (lalpurja) and the name of the registered owner.
• Plot number, sheet number, ward, municipality and district.
• Tenure — freehold or leasehold, and the unexpired period of the lease.
• Encumbrances — mortgage, lien, court case, tenancy, right of way, easement; a search of the land revenue office record.
• Land revenue and tax paid, and any arrears.

2. Physical data

• Area, shape, dimensions and frontage; the cadastral (napi) map and a site plan.
• Levels and topography, filling or cutting required, liability to flood or landslide.
• Soil condition and bearing capacity.
• Access — width and type of the approach road, and whether it is public.
• Availability of water supply, drainage, sewer, electricity and telephone.
• Existing structures, trees and crops on the land.

3. Planning data

• Land use zoning, and any restriction on the use.
• Setback (right of way) requirement, ground coverage, floor area ratio and height limit under the municipal by-laws.
• Any proposed road widening, acquisition or public work affecting the plot.

4. Market data

• The government registration rate (minimum valuation rate) of the locality.
• The prevailing commercial market rate, from recent registered sale deeds of comparable plots nearby.
• Rent obtainable, and the trend of prices in the locality.
• Development in the neighbourhood, and its effect on demand.

ENCE 351 §7.5.

A valuation report prepared as security for a loan is relied upon by the lender, so the valuer must be able to defend every figure in it. The data to be collected are:

Data to be collected by a valuer for the valuation of land

1. Legal / title data

• Certificate of ownership (lalpurja) and the name of the registered owner.
• Plot number, sheet number, ward, municipality and district.
• Tenure — freehold or leasehold, and the unexpired period of the lease.
• Encumbrances — mortgage, lien, court case, tenancy, right of way, easement; a search of the land revenue office record.
• Land revenue and tax paid, and any arrears.

2. Physical data

• Area, shape, dimensions and frontage; the cadastral (napi) map and a site plan.
• Levels and topography, filling or cutting required, liability to flood or landslide.
• Soil condition and bearing capacity.
• Access — width and type of the approach road, and whether it is public.
• Availability of water supply, drainage, sewer, electricity and telephone.
• Existing structures, trees and crops on the land.

3. Planning data

• Land use zoning, and any restriction on the use.
• Setback (right of way) requirement, ground coverage, floor area ratio and height limit under the municipal by-laws.
• Any proposed road widening, acquisition or public work affecting the plot.

4. Market data

• The government registration rate (minimum valuation rate) of the locality.
• The prevailing commercial market rate, from recent registered sale deeds of comparable plots nearby.
• Rent obtainable, and the trend of prices in the locality.
• Development in the neighbourhood, and its effect on demand.

5. Data on the building, if any, standing on the land

• Type of structure, number of storeys, plinth area of each floor.
• Specification and quality of construction, and the plinth area rate of a comparable recent building.
• Age of the building, its present condition, and its remaining useful life.
• Approved drawings and the municipal building permit.
• Rent actually received, and the outgoings.

Components of a valuation report

1. Title and reference — who ordered the valuation, and for what purpose (sale, loan, tax, acquisition).
2. Particulars of the property — owner, plot number, area, location, boundaries.
3. Title and tenure — ownership documents examined, tenure, and any encumbrance.
4. Description of the land — shape, frontage, levels, access, services.
5. Description of the building — type, storeys, plinth area, specification, age, present condition, remaining life.
6. Date of inspection and the date to which the valuation relates.
7. Method of valuation adopted, with the reason for choosing it.
8. Detailed calculations — rates adopted and their source, depreciation, outgoings, year's purchase.
9. Value arrived at — land, building and total, in figures and in words.
10. Assumptions, limitations and remarks.
11. Enclosures — site plan, cadastral map, photographs, copies of the ownership certificate and tax receipts.
12. Declaration, signature, name, registration number and date of the valuer.

For a mortgage valuation the valuer must be especially careful on three points: the title must be clear and marketable, the property must be free of encumbrances, and a margin must be kept — a bank normally advances only about two-thirds of the valuated amount, so that it is protected against a fall in price and the cost of recovery.

ENCE 351 §7.5.