Estimation, Costing and

Specification
methods of valuation
General
•For the purpose of valuation, the properties in general may be classified in the
following categories:
1. Open lands
2. Lands with buildings

Methods of valuation for open lands

1. Open lands
2. Farm lands

Methods of valuation for urban open lands

1. Comparative method
2. Abstractive method
3. Belting method
Comparative method
•Various transactions of nearby lands are studied and then fair rate of land under
consideration is decided
•Valuer has to make sure that no changes in conditions in market has taken place
since the transactions took place.
•Time plays a vital role.
•Following factors are considered while making analysis of sale instances:
i. Situation
ii. Size
iii. Shape
iv. Frontage and depth
v. Return frontage
vi. Level
vii. Nature of soil
viii. Land locked land
ix. Restrictions on development
x. Encumbrances
xi. Miscellaneous advantages
Abstractive method
•Useful when no information regarding land transaction in the nearby area is
available.
•Following steps are involved in this method:
i. capitalised value is worked out. Let this be C.
ii. Estimated cost of the building is worked out. Let this be S.
iii. The difference C-S gives the value of the land.
iv. If A is the area of the land, then (C-S)/A gives the cost per unit area.
• Difficult to estimate the current cost of the materials based on the use of the
same and also to estimate the depreciated value.
Belting method
•Used to value the plots of big sizes with less frontage and more depth.
•The plot of land under consideration is divided into three belts.
•The depth of first belt near the road is suitable adjusted.
•The depth of second belt is kept 50% more than that of first belt.
•The depth of third belt is kept 50% more than that of second belt.
•Following are the important facts in this method:
i. Depth of front belt
ii. Division of plot
iii. Sufficient data
iv. Utility
Methods of valuation for lands with buildings
1. Rental method
2. Direct comparisons of the capital value
3. Valuation with reference to profits
4. Valuation based on the cost or contractor’s method
5. Residual or development method
Rental method
• Following procedure is adopted in this method:
i. Gross income from the property from the consideration of its rental value is
estimated.
ii. The usual outgoings to which the property is subjected is worked out.
iii. The net income from the property is obtained.
iv. Y.P is worked out.
v. The multiplication of net income and Y.P. gives the capitalised value
Direct Comparisons of the capital value
• Comparison with the nearby lands with buildings
• Composite rate is used to indicate rate of land per unit area with the structure.
• Following factors to be considered while using this method:
i. The sales must have taken in an open market
ii. Should be sold in the market value of the property.
iii. Sufficient sale of instances should be studied.
iv. The period of valuation taken for comparison should be recent.
v. Facilities like accommodation provided, type of architectural design, quality
of fixtures and fittings, location,. Structural condition, repair, age of the
building shall be considered.
• Following errors should be avoided:
i. The rate of a building with a large area should not be based on the sale
instances on the small buildings.
ii. Average should not be taken
iii. Mere offers should be rejected for comparison
• The additional factors to be considered are as follows:
i. The unit of comparison should be same for the properties to be compared
ii. Essential amenities like lifts, sanitation, parking facilities, etc. should be carefully
examined.
iii. The features like road view, river or sea view, garden view, etc. should be
examined.
iv. The restrictive conditions of the housing society or association of members
should be considered.
v. The quality of occupants should be considered.
Valuation by reference to profits
• This method is generally used where there is some degree of monopoly attached
to a property.
• In this method, the capitalised value primarily depends on the profits resulting from
the volume of trade or business.
• Following points should be noted in this connection:
i. If the business in existence is run in a normal way with good accounts, the
study of the accounts will assist in arriving at the reasonable annual earning
capacity of the property.
ii. If the business in mismanaged, the accounts may reflect low returns. The level
of the net profit will have to be raised to arrive at the normal market value.
iii. If the business is run by a super efficient trader then the resulting net profit
would be exceptional. The level of the net profit arrives at will not reflect the
normal market value of the property.
iv. Sometimes the accounts maintained may not give the true reflection of trade
transactions because they have been badly maintained due to inefficiency
or ignorance or because the trader man has chosen not to put all the items
through his books of accounts.
• This method is sometimes referred to as accounts method and in practise, it is
regularly used for rating purposes.
Valuation based on the cost or contractor’s method
• In this method, the highest and best value of open land with due provision for
encumbrance factor is worked out and it is then added to the depreciated cost
of the structure.
• The cost of construction for the details for which there is no market demand
should be ignored. These details are known as the excesses.
• The cost of the building by disregarding such excesses is known as the prime cost of
building.
• This method is considered to be appropriate for hospitals, libraries, town halls, police
stations, temples, mosques, special factory buildings, etc.
• This method is used for rating purposes.
• It is also used to work out the amount of compensation when the property is to be
acquired for public purpose.
• This method is the most appropriate method for the purpose of fire insurance because the
valuer has to find out the estimated cost of the building for possible loss in case of fire.

Residual or development method

• This method is sometimes referred to as the hypothetical building scheme.
• In this method, the probable increase in net income from the property, if certain
additions, alterations or modifications are carried out, is worked out.
• The cost for such additions, alterations or modifications is estimated and the difference
between the increased capital value and the estimated cost of additions represents the
potential value of the property.
• If the property is in the form of open land only, an attempt is made to value such open
land by means of figures based upon the calculated financial results of a notional
erection of buildings on the land under consideration.
• This method is useful for properties possessing development or redevelopment
potentiality.
• This method can be expressed in a simple equation as follows:
A–B=C
Where A = value of the completed development
B = Total expenditure on improvements including the developer’s
profit
C = Value of site or property in its present condition