Professional Practice

Valuation

Ar. Abhishek.S.Patil
What is Valuation?
• "Valuation is the process of estimating the worth of an asset or property, typically conducted by a qualified
professional valuer.“
OR
• "Valuation refers to the professional estimation of the economic value of an asset or property, derived through
comprehensive analysis of physical, legal, financial, and market-related parameters by a qualified valuer.“
OR
• "Valuation is a comprehensive process of economic research that culminates in a professional judgment by the
valuer. This decision reflects conclusions drawn after careful consideration of various factors—economic, social,
political, legal, and physical—that influence the value in one way or another."

What Is Value, Price and Cost?

Value:- The Monetary Worth of Something. Or to estimate or assign the monetary worth of. Economist Hadley
has defined it as “ A price is a fact and a value is an estimate of what the price ought to be”

Price:- The amount of money expected, required, or given in payment for something.

Cost:- (of an object or action) require the payment of (a specified sum of money) before it can be acquired or
done.
Aspects of the word ‘Value’.
• Value can be said to be a ratio between the price of money and the price of commodity in return.
• Value is not necessarily the price of a commodity
• Value can be an unearned increase or an unforeseen decrease in price.
Aspects of the word ‘Price’.
• It is the cost of a commodity plus an additional to the producer for his labour and capital.
Cost of Production+ Reasonable profit=Price.
• Price is demanded by the seller while the value is determined by the purchaser.
When the price and the value concur, then the transaction takes place.

Aspects of Cost
• An expenditure to produce a commodity having a value, is the cost of commodity,
• Depreciation is usually worked out on the cost of a commodity rather than on its value.

History of Valuation

The concept of valuation is as old as human civilization. Formerly, there was a barter system whereby one
commodity was exchanged for the other, thee equivalent depending upon the law of supply and demand.
 History of Valuation
The concept of valuation is as old as human civilization. Formerly, there was a barter system whereby
one commodity was exchanged for the other, thee equivalent depending upon the law of supply and
demand.

Period Key Developments

Ancient/Vedic Land valued for fertility, water access, taxation

Medieval/Mughal Systematic land valuation for tax collection

Formal land records, surveys, first Valuation Act (1850), Bengal
Colonial/British
Tenancy Act

Early 20th Century Stamp Act (1899), rise of real estate, formal property valuation

Post-Independence Income Tax Act (1961), Indian Standards (1978), modernization

Real Estate Act (2016), SEBI regulation, advanced valuation methods,

Recent/Contemporary
heritage
The Purpose of Valuation.
The word Value as different meanings as per the view point of a person. The word Value ca be labelled
with different adjectives, each one expressing a view point of a valuer.
• Determining the sale or purchase price of a property
• Securing loans or mortgages
• Calculating taxes or insurance premiums
• Settling legal disputes or inheritance matters
• Assessing rental values
• Supporting investment decisions

The Purpose of Valuation in construction sites.

• During the construction phase, valuation also refers to the periodic assessment of the value of work completed on
site. This is typically carried out by a contract administrator or quantity surveyor, who checks the progress of works
and verifies it before issuing payment certificates to the contractor. The valuation is essential for the following
reasons
• Ensuring contractors are paid fairly and promptly for completed work
• Protecting clients from overpaying for incomplete or substandard work
• Managing cash flow throughout the life of the project
Factors Affecting the Valuation.
• Structural type and durability
• Location (commercial vs. residential, availability of utilities)
• Size, shape, and layout
• Quality and cost of materials
• Demand and supply in the market
• Age and condition of the building
• Potential income generation (e.g., rental income)
• Legal and regulatory considerations
Market Value.
• Dictionary Meaning: the price at which something can be sold : the price that buyers are willing to
pay for something.
• Market Value in Construction: Market value in construction is the estimated price that a property,
building, or asset would fetch in the open market, assuming a transaction between a willing buyer
and a willing seller, both acting knowledgeably and without compulsion, after proper marketing
and under fair conditions.
Characters of the Market Value.
1. Open and Competitive Market
Market value is established in an open and competitive market, where the property is exposed to
potential buyers for a reasonable period. This ensures that the price reflects genuine demand and
supply dynamics, not artificial constraints or limited exposure.
2. Willing Buyer and Seller
Both parties involved in the transaction-a buyer and a seller-must be willing participants. Neither
should be under undue pressure or compulsion to buy or sell. This condition ensures that the agreed
price is not influenced by distress or urgency.
3. Knowledgeable and Prudent Parties
The buyer and seller are assumed to be reasonably informed about the property, market conditions,
and relevant facts. Both act prudently and in their own best interests, contributing to a fair and rational
transaction.
Market Value.
Characters of the Market Value.
4. Fair Sale Conditions.
The transaction occurs under fair conditions, with the property properly marketed and available for inspection. There
are no hidden defects or undisclosed information that could unfairly influence the price.
5. Cash or Equivalent Consideration
Market value assumes the transaction is settled in cash or its financial equivalent. This avoids distortions that might
arise from barter, swaps, or non-standard payment arrangements.
6. Reflects Current Market Conditions
Market value is dynamic and reflects prevailing market conditions, including demand and supply, economic trends,
location advantages, and buyer sentiment. It is not a fixed or static figure and can fluctuate with changes in the broader
economic environment.
7. Reasonable Exposure Time
The property is assumed to have been exposed to the market for a sufficient period, allowing enough time for interested
buyers to make offers. This avoids artificially high or low values due to rushed sales or prolonged listings.
8. Objective and Impartial
Market value is an objective estimate, not influenced by the personal circumstances or motivations of the parties
involved. It is based on what the broader market would pay, not what a specific individual might offer.
Different Values.
The word Value as different meanings as per the view point of a person. The word Value ca be labelled
with different adjectives, each one expressing a view point of a valuer.
1. Assessed Value.
2. Book Value Or Depreciated Value.
3. Salvage Value.
4. Demolition Value.
5. Replacement Value.
6. Potential Value.
7. Distress Value.
8. Speculative Value.
9. Monopoly Value.
10. Sentimental Value.
11. Capitalized Value.
Different Values.
The word Value as different meanings as per the view point of a person. The word Value ca be labelled
with different adjectives, each one expressing a view point of a valuer.
1. Assessed Value.
• Assessed value in construction is the monetary value assigned to a property by a local government
assessor for the primary purpose of calculating property taxes.
• Local government assessors evaluate properties periodically, considering factors such as recent sales
of comparable properties, property size (square footage), location, condition, improvements, and
prevailing real estate market conditions.
• The assessed value is used to determine the property tax bill. A higher assessed value results in higher
property taxes, while a lower assessed value reduces the tax liability.
2. Book Value or Depreciated Value:
• It is an amount obtained by deducting the depreciation from the original value of a property, worked ot
on a given date. Book value or a depreciated value , reduces by the passage of time and has to be
worked out for a given date.
3. Salvage Value:
• The salvage value of a building is the estimated resale or market value that the building (or its
materials) is expected to fetch at the end of its useful life, after it can no longer serve its original
purpose.
• This value reflects what the owner could potentially recover by selling the building as a whole, as
scrap, or by selling its usable materials.
4. Demolition Value.
• Demolition value refers to the monetary worth of a building or structure at the end of its useful life,
specifically the value obtained from dismantling or demolishing it and selling the resulting materials as
scrap or salvage.
• Definition: Demolition value is the estimated amount that can be realized by selling the dismantled
materials (such as steel, bricks, wood, and fixtures) after a building has been demolished, once it is no
longer suitable for its intended use.
Example
If a building is demolished and the recovered steel, bricks, and other materials can be sold for ₹2 lakh,
then ₹2 lakh is the demolition value of that building.
5. Replacement Value:
• It is the reasonable cost of construction on the given date, to rebuild a building or a part thereof as it
was. OR It is the cost of a construction at the current market rate to reconstruct a building
or a portion thereof, same as it was.
• Replacement value in construction is the amount of money required to replace or rebuild an asset-
such as a building, facility, or piece of equipment-at current market prices, using materials and
construction methods of similar kind and quality.
• It reflects what it would cost to construct a new asset that performs the same function as the
original, regardless of the asset’s age or current condition.
6. Potential Value.
• An inherent value of a property, which may go on increasing due to a passage of time or change of the
user, fetching more return, is called its potential value.
• This concept recognizes that a building or property may have the ability to generate greater returns or
value if its use, design, or planning is altered or optimized.
7. Distress Value.
• Distress value is the estimated price a property or asset would fetch if it needs to be sold quickly due to
the owner's urgent financial or personal circumstances, such as financial distress, impending
foreclosure, or the need for immediate liquidity. This value is typically significantly lower than the fair
market value because the seller is under pressure to sell and may have limited time and bargaining
power.
Characters.
Urgency: The sale must occur quickly, often due to financial emergencies, legal issues, or other urgent
needs.
Seller Under Pressure: The seller is motivated by distress, not by market timing or maximizing profit.
Lower Than Market Value: Buyers are aware of the seller's urgency and may negotiate for a lower
price, resulting in a value well below what the property could fetch under normal, non-urgent
circumstances.
Market Conditions: In a buyer's market or during economic downturns, distress values drop even more.
Location: Properties in desirable locations tend to retain higher distress values compared to those in less
attractive areas.
Legal Issues: Outstanding liens or legal complications can reduce the distress value
8. Speculative Value.
Value of a property purchased apparently as a higher price, with an intension to be able to sale the same
with a bigger profit within a short duration of time.
9. Monopoly Value:
As per the law of demand and supply when the properties in particular locality become scarce, a fancy
price could be demanded by the vendor. This could be said as monopoly value.
10. Sentimental Value: Value usually higher than the market value attached to a property due to some
sentimental reasons is known as sentimental value.
11. Capitalized Value:
Value which is obtained on the basis of income yielding capacity of a property. It is obtained by
multiplying the net annual returns by a factor based on a current rate of interest for the capitalization.
THANK YOU