MIEM-Value engineering

Valuation of Real Properties

Valuation of real properties: this assignment is done in two parts. chapter 1 and 2 describes various methods and practices used for valuation and chapter 3 is a case study of valuation of a property

Chapter 1. Valuation

1.1 IntroductionThe subject of valuation of real properties demands a high degree of common sense for doing justice to the subject, and in addition, the knowledge of economics, law and engineering becomes essential on the part of valuer.

Valuation is an art of judgment and forecast based on data obtained and organized. There are, however, certain well-established principles and procedures on which the science of valuation of real estates rests.

Valuation is defined as the process of estimating value. It depends on the circumstances of the case and purpose of which valuation is needed, at the given time, place and market conditions prevailing on the date as on which the valuation is required.

It is an art requiring judgment and forecast, in which conclusions about value are arrived at by a scientific analysis of the available data. In valuation, mathematical certainty is neither demanded nor possible.

There are various aspects like situation of the land/property, frontage and depth, nature of soil, climatic conditions, communication means, fashion and local demands, availability of essential services, time element, holding of the property, tenure of the property, encumbrances, topography of the area, legal factors etc. to be taken into account while working out any of the various types of valuations like present market value, capital gain tax, open lands, lands with building life interests etc.

1.2 PurposeThe purpose of the valuation of property consisting of land and building can be any of the following:• Purchase or sale of property• Land acquisition• Assessment of wealth tax, capital gains tax and the like• Probate/ death duty• Partition of property• Mortgage, bank loans and other security purposes• Fire insurance, for fixing insurable value and premium payable• Rent fixation• Court fees/ stamp duty payable in property litigations• Fixing rentable value of municipal taxes• Fixing betterment charges• Fixing minimum reserve price in property auctions

1.3 Methods of ValuationFor the purpose of valuation the properties in general are divided into two categories:

1) Open lands2) Lands with buildings

1) Open Lands

Open lands can broadly be divided in two categories namely, urban lands and farm lands. The urban open lands are classified in different ways such as residential, industrial, etc and the value of such lands primarily depends on the potentiality of their development by constructing appropriate structures over them. The farm lands are agricultural fields and they are capable of producing earnings themselves. The valuation methods for these two types of open lands will now be briefly discussed.

Following are the three methods adopted for the valuation of urban open lands:

a) Comparative Method

b) Abstractive Method

c) Belting Method

2) Lands with Buildings:

When lands are married with buildings following five methods of valuations are adopted:

a) Rental Methodb) Direct Comparison Methodc) Valuation by reference to profitsd) Valuation based on the cost or contractor’s methode) Residual or development method

Chapter 2. Valuation of BuildingThis is the second case as discussed in the above chapter i.e. when lands are married with buildings. The five methods discussed above can be used for the valuation of this kind of property and they are:a) Rental Methodb) Direct Comparison Methodc) Valuation by reference to profitsd) Valuation based on the cost or contractor’s methode) Residual or development method

Here the case study has been done with the help of the method “Valuation based on the cost or contractor’s method” or it is also called “summation method or capital value method”.

2.1 Valuation based on the cost or contractor’s methoda) IntroductionThe land and building (also known as physical method, summation method, capital value method, Contractor’s method etc) consists of estimating the cost of building, depreciated to allow for age of the building on the relevant date of valuation, and adding to it the fair market value of the land on the relevant date of valuation.It is particularly suitable when land forming part of the property is not yet utilized to the full extent allowable by rules/ statutes/ legislation of the local/state authorities, making application of rental method of valuation difficult. It also provides cross check on the valuation done by other methods.

b) Valuation of land componentIn the Land and building method, valuation of land component of the property almost entirely depends on the comparison technique, wherein value of comparable plots of land from various instances of sale in the recent past is taken, and by working out an average, assessment of the market rate of land is made. In such an exercise, maximum reliance is placed on the sale instances of the land nearest to the property being valued.Market value of land depends on many factors like location, size and shape, depth/frontage/return frontage, width of road, etc. After deciding the average market value of the land in vicinity, weight age for various plus and minus factors of the land being valued is considered to arrive at the land rate to be adopted.

c) Plot features: Impact on the value of land component

o For very large plots of say 2000 sqmt and above in area, there being very few likely purchasers for such large plots, a minus weight age of 10% to 20% is considered.

o In the case of plots having irregular shape, proper land utilization for building purpose may become difficult. So based on the irregularity of the shape of the plot, a minus weight age of 5 to 15% may be considered.

o For the plot with immediate vicinity of slums, cemeteries, railway track nuisance, tanneries and other depressing factors like nallah, open drain, public toilet blocks, a minus weightage for such factors may be considered from 5 to 25%.

o The plot with wide frontage but tapering to much lesser width towards rear – ‘vyaghramukhi’ plot –is being considered as inauspicious by superstitious buyers and a minus weight age of 5 to 10% may be considered.

o A plot of land having no access or approach whatsoever to any road is called ‘land locked land’. Value of such land locked plots is usually assessed about 20 to 50% lesser than plots free of such Disadvantage.

o Corner plots with return frontage or plots with access to road at front as well as rear access may be given a plus weight age of between 5 to 15% depending upon the locality, width of the road and importance on the road on which the additional frontage is available.

o A plot situated at T junction of road, on the opposite side of the secondary road will have a clear and uninterrupted view along the length of the secondary road, and said to enjoy a ‘vista’. Such land may be given a plus weightage of 5 to 10%.

d) Belting of Land

road

Plot

This method is restored only for very large plots for more than 1000 sq mt in area and having road at one of the smaller side of the plot only.

• In this method, Plot divided in 3 belts as shown in the figure above • 1st – margin of frontage (i.e. x here)• 2nd – 50% more than depth of 1st (i.e. y=1.5x) belt• 3rd – remaining area (z=1.5y or remaining area)

x y=1.5x z=1.5y

• Value per unit of land in 1st best is taken same as the rate of plots of reasonable size and having depths ideal for the internal land use i.e. commercial/residential etc.

Rate of land in 2nd Belt = 66% x land rate in 1st Belt

Rate of land in 3rd Belt = 50% x land rate in 1st Belt

e) Valuation of Building Component

Land and building basis of valuation contemplates Ascertainment of cost construction, depreciated or un depreciated one. In both the cases, the task of the valuer will be to estimate the basic cost of construction as if new on the relevant data of valuation and make necessary deductions for the depreciation. Basic cost of construction can be ascertained by any one of the five methods out of which the first two will give more accurate results as compare to the latter three.1. Account method2. Detailed or item wise method3. Estimate on area basis4. Estimate in cubic meter basis5. Estimate by Building cost index

Chapter 3. Case studyFor the purpose of case study a residential property of Jamnagar falling well within JMC (Jamnagar Municipal Corporation) was taken. The details of the real estate property taken for case study are:

1) Purpose of Valuation: To assess present market value for Banking purpose

2) Date as on which valuation is made: 01-11-2010

3) Bank for which valuation is made: Dena Bank – Hawai Chock Branch, Jamnagar.

4) Name of the purchaser: Mr. Manoj Hansraj Gondaliya

5) Name of the vendor:

6) Brief description of the property: The property is within city limit area and belongs to residential zone. The property is within well-developing area and facilitated by road, drainage line, street light etc. Permissible F.S.I. in this area 2.00 at present

7) Location, Street, Ward No: Near K.P.Shah Vadi, Rameshwar Nagar, Jamnagar

8) Classification of locality – high-class middle-class / poor class: Middle class

9) Proximity to civic amenities like schools, hospitals, offices, markets, etc: Within 1 km

10) Is it freehold or leasehold land? : Freehold

FORM 0-1(See Rule 8-D)REPORT OF VALUATION OF IMMOVABLE PROPERTY

PART – 1 QUESTIONNAIRE

1. Purpose for which valuation is made.

: To assess present market value for Banking purpose.

2. Date as on which valuation is made.

: 01-11-2010.

3. Bank for which valuation is made. : Dena Bank – Hawai Chock Branch, Jamnagar.

4/a. Name of Proposed Purchaser. :Telephone No. Residence :

Office :

Mobile :

4/b.

Name of Venders. :

5. If the property is under joint ownership / co-ownership, share of each such owner. Are the shares undivided?

: Personal ownership.

6. Brief description of the property : The property is within city limit area and belongs to residential zone. The property is within well-developing area and facilitated by road, drainage line, street light etc. Permissible F.S.I. in this area 2.00 at present.

7. Location, Street, Ward No. : Near K.P.Shah Vadi, Rameshwar Nagar, Jamnagar.

8. Survey/Plot No. of Land. : R. S. no. 265/1-Paiki, Plot no. 9/A.

9. Is the property situated in residential / commercial / mixed area / industrial area ?

: Residential area.

10. Classification of locality – high-class middle-class / poor class.

: Middle class.

11. Proximity to civic amenities like schools, hospitals, offices, markets, cinemas etc.

: Within 1.00 Km. radius.

12. Means and proximity of surface communication by which the locality is served.

: G. G. Hospital Road.

L A N D :13. Area of land supported by

documentary proof, shape, dimensions & physical features.

: The documents are seen by me, and it is available with the owner.

14. Roads, street or lanes on which the land is abutting.

: Road 6.00 Mt. wide.

15. Is it freehold or leasehold land? : Free hold.

16. If leasehold, the name of Lessor / Lessee, nature of lease, due dates of commencement and termination of lease and terms of renewal of lease.

: N. A.

i) Initial premium. : N. A.ii) Ground rent payable per annum : N. A.iii) Unearned increase payable to the

Lessor in the event of sale or transfer.

: N. A.

17. Is there any restrictive covenant in regard to use of land? If so, attach a copy of the covenant.

: N. A.

18. Are there any agreements of easement? If so, attach copies.

: N. A.

19. Does the land fall in an area included in any Town Planning Scheme or any Development Plan of Government or any Statutory Body? If so, give particulars.

: J.A.D.A. rules & regulation is applicable.

20. Has any contribution been made towards development or is any demand for such contribution still outstanding?

: N. A.

21. Has the whole or part of the land been notified for acquisition by Govt. or any Statutory Body? Give date of the notification.

: N. A.

22. Attach a dimensioned site plan. :

IMPROVEMENTS :23. Attach plans and elevations of all

structures standing on the land a layout plan.

:

24. Furnish technical details of the building on a separate sheet.

: See part – 2, in this valuation.

25. i) Is the building owner-occupied / tenanted / both ?

: Fully occupied by the owner.

ii) If partly owner-occupied, specify portion & extent of area under owner-occupation.

: N. A.

26. What is the floor space index permissible and percentage actually utilized ?

: Permissible = 2.00 at present.

RENTS : :27. i) Names of tenants/lessees/

licensees etc.: N. A.

ii) Portions in their occupation. : N. A.iii) Monthly or annual rent/

compensation / license fee etc. paid by each.

: N. A.

iv) Gross amount received for the whole property.

: N. A.

28. Are any of the occupants related to, or close business associates of, the owner?

: N. A.

29. Is separate amount being recovered for the use of fixtures like fans, geysers, refrigerator cooking ranges, built-in wardrobes etc. or for service charges? If so, give details.

: N. A.

30. Give details of water and electricity charges, if any, to be borne by the owner.

: N. A.

31. Has the tenant to bear the whole or part of the cost of repairs and maintenance? Give particulars.

: N. A.

32. If a lift is installed, who is to bear the cost of maintenance and operation – owner or tenant?

: N. A.

33. If a pump is installed, who has to bear the cost of maintenance and operation – owner or tenant?

: N. A.

34. Who has to bear the cost of electricity charges for lighting of common space like entrance hall, stairs, passages, compound etc. – owner or tenant?

: N. A.

35. What is the amount of Property Tax? Who is to bear it? Give details with documentary proof.

: N. A.

36. Is the building insured? If so, give the policy No., amount which it is insured and the annual premium.

: N. A.

37. Is any dispute between landlord and tenant regarding rent pending in Court of Law?

: N. A.

38. Has any standard rent been fixed for the premises under any Law relating to the control or rent?

: N. A.

SALES: :

39. Give instances of sales of immovable property in the locality on a separate sheet, indicating the name and address of the property, registration No., sale price and area of sold land.

: N. A. Because purpose of valuation is to find out present market value.

40. Land rate adopted in this valuation. : 7,000.00 Rs./Sq.Mt.

41. If sale instances are not available or not relied upon, the basis of arriving at the land rate.

: As per enquiries from the local property dealers, Developers, Owners & Personal Experience as a valuer since last Eleven years.

COST OF CONSTRUCTION:

42. Year of commencement of construction and year of completion.

: 1996 – 1997.

43. What was the method of construction – by contract / by employing labour directly / both ?

: N. A.

44. For items of work done on contract, produce copies of agreements.

: N. A.

45. For items of work done by engaging labour directly, give basis rates of materials and labour supported by documentary proof.

: N. A.

PART - IIGENERAL & TECHNICAL DETAILS OF THE PROPERTY

Sr.No.

Particulars Details of the property

1. Name of Proposed Purchaser. :

2. Address of the property : Near K.P.Shah Vadi, Rameshwar Nagar, Jamnagar.

3. Survey No./Sheet No. : R. S. no. 265/1-Paiki.

4. Plot No. : Plot no. 9/A.

5. Construction Permission. : Permission no. J.A.D.A./Tech/Dev/1573/294, Date : 02-02-1996.

6. Gross Plot Area : 60.00 Sq.Mt.

7. Gross Built-up Area : 44.87 Sq.Mt.

8. Year of construction : 1997.

9. Estimated future life : 32 Years subject to proper maintenance and under normal conditions.

10. Definition of the building : Residential building.

11. No. of floor : G.F. only.

12. Accommodation : As per sectioned plan, at the ground floor the property is facilitated by living room, pooja, kitchen, bath, W.C., balcony projection, R.C.C. stair, open compound, compound wall with gate, U.G.W.T., O.H.W.T., S.T., etc. and at the terrace floor the property is facilitated by open terrace, parapet wall, etc.

13. Type of structure : Load bearing structure.

14. Foundation and plinth : U.C.R. masonry.

15. Super-structure : Brick masonry.

16. Floor Height : 3.00 Mt.

17. Roof covering : R.C.C. slab.

18. Finishing Inside : Cement plaster with lime niru finished.Outside : Sand faced cement plaster.

19. Flooring : Mosaic tiles flooring.

20. Kitchen Platform : Marble platform with lintel level glazed tiles dedo.

21. No./Glazed: : GlazedToilet : N. A.Bath : 0.91 Mt. glazed tiles dedo.W.C. : 0.91 Mt. glazed tiles dedo.Washing space : N. A.

22. Doors : Type of DoorsWooden framed paneled door.

23. Windows : Type of WindowsWooden framed glass paneled with grill.

24. Ventilation : Type of VentilationR.C.C. jali.

25. Special Architectural features : No.

26. Electrification : Concealed.

27. Water supply & Sanitary system : Concealed.

28. Painting Outside : Cement paint.Inside : Distemper.Doors / Windows : Oil paint.

29. Drinking water facility provided? : Yes.

30. Special facility provided, if any. : No.

31. Detail of joint property:

- North : Plot no. 8.

- South : Block no. 9/B.

- East : Plot no. 1.

- West : Road 6.00 Mt. wide

LAND COSTLand cost can be worked out by taking into consideration the size, shape and situation of the plot available road frontage, surrounding development and prevailing market rates of land in that area, demand and availability and payment terms & conditions etc.

Here in this case, considering the above factors and technical details of the property, land cost can be

assumed

7,000.00 Rs./M2, which is quite fair and reasonable as per my opinion as on date

01-11-2010.

CALCULATION/OPENION Size & shape of the plot is good. Demand / availability ratio for land is equal to one in this area. Availability of civic amenities and infrastructure is medium in this area. Photograph of the property is attached here with.

CONSTRUCTION COSTConstruction cost of any building depends upon type of the structure, quality of material used and workmanship, size of the rooms, life span passed, present market rates of labour, construction area etc.

Here in this case, considering the above factors and technical details of the property, construction cost can

be assumed

3,500.00 Rs./M2, which is quite fair and reasonable as per my opinion.

DEPRECIATIONDepreciation is the graded exhaustion of the usefulness of a property. The value of building will be gradually reduced due to its used life, wear & tear etc. Here in this case, structure of the building is load bearing type structure. Generally for load bearing type building, total expected life is 60 years is taken into consideration. Here in this case by considering

construction condition of the building total expected life of the building can be assumed 45 years. Here in this case the building is 13 years old, so the depreciation will be 26%. And estimated future life of the building will be 32 years.

Calculations:

Construction cost = Rs 3500 per sq mt Depreciation = 3500*0.26 = 910 Cost after dep. = 3500 – 910 = 2590 Rs per Sq. mtQuality of construction and workmanship is medium as such net construction cost of the property i.e. Rs 2590 per Sq.mt is quite fair and reasonable

VALUATION:Sr.No.

Description AreaM2

Assumed RateRs./M2

AmountRs.

1 Land cost 60.00 7,000.0 4,20,000.002 Construction cost 44.87 2,590.00 1,16,213.30

Total Rs. 5,36,213.30Note: The valuation is subject to agreement (Vechan Karar) done on date: 13-10-2010.

Say Rs. 5,36,000.00

FORCED / DISTRESS SALE VALUE The property is said to have distress value when it can fetch lower value than the market value. The distress value is developed due to various reasons such as : (1) Financial difficulties of seller, (2) Intention to favour purchaser, (3) More availability and less demand etc. considering above mentioned factors here in this case forced / distress value of the property can be assumed – 5% of the valuation done. So forced / distress value of the property as on 01/11/10 is Rs 5, 09,200/-

VALUATION CONCLUSION (As on Date: 01-11-2010)Name of Proposed Purchaser. : Mr. MANOJ HANSRAJ GONDALIYALocation of The property : Near K.P.Shah Vadi, Rameshwer Nagar, Jamnagar.Market Value of the property : Rs. 5,36,000.00Force/Distress sale value of the property

: Rs. 5,09,200.00

NOTE

1. Any kind of litigation or dispute pertaining to the property under consideration is not accountable to the valuer.

2. Value varies in accordance with the purpose, time, specific condition, demand potentials etc.

3. Valuation of the property under consideration should not be referred to any purpose other than the one specified here in above.

4. If any financial assistance is sought producing this property as collateral security, the concerned financial institution is requested to verify the extent shown in this valuation report with respect to the latest legal opinion.

5. This value does not include Stamp Duty, Registration or any other Governmental and incidental Expenses of brokerage charges etc.

DECLARATIONHereby declare that,1. The information furnished in Part-I is true and correct to the best of my knowledge and

belief.2. I have no direct or indirect interest in the property valued.3. I have personally inspected the property on 30/10/104. I have not been convicted of any offence and sentenced to a term of imprisonment.5. I have not been found guilty or misconduct in my professional capacity.

Signature of valuer