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CHAPTER 14

ELEMENTS OF VALUATIONS
METHOD, TECHNIQUES, OTHER
TECHNIQUES AND ILLUSTRATIVE
EXAMPLES
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I PART-I
ELEMENTS OF VALUATION

Introduction to the Subject

From the dawn of civilisation land has been found to have a value for Its
capacity to provide the essentials of life like food; cloth and shelters. It was
also recognised even at that time the difference in value of two plots by trial
and error when people found the produce from one plot per acre more than
that of the other. The greater productivity of some lands made them scarce
and part of fertile land used to be exchanged for a big chunk of fallow lands. In
olden days there was a barter system whereby one commodity was exchanged
for another, the equivalent depending again upon the law of supply and
demand. There was also a practice in our country where the services of an
individual or of a famil"' were valued against a piece of land, the person or the
family receivfc.g land in exchange for the services to the landlord, or to the.
State. This process went on till the introduction of money as the medium, of
exchange. 1
In the past. Kings used to appoint experts to evaluate precious stones,
diamonds, gold, etc., and value was determined by them based on their
experience without detailed and critical analysis of facts and circumstances.
Merely expressing an opinion on the value of any property not backed by
critical analysis of facts will not carry one a long way. The present day
requirements of the valuation procedure demand that valuation done by a
valuer should stand to reasons and the valuer Is not expected to act like a
prophet prophesying the price the property would fetch if offered for sale in an
open market. It is utmost Important for him to weigh the data, circumstances,
etc.. in the scales of cqmparables before arriving at the Judgement.
.
Valuation is> an adventure in economic research, leading to an economic
decision of a valuer which Indicates the conclusions arrived at after taking In
to consideration all factors like^gconornic,, social, political, legal and physical
which affect the value one wayor another.
Procedure refers to an orderly process of estimating the value of a
property at a stated time and plaice depending upon the definition of "Market

ELEMENTS OF VALUATION

value" or "Fair market value" as given in the Act.and the methods by which the
quantum of this value is estimated. Today's valuation practice depends heavily
on tlie ideas and knowledge created by the economists, Hon*ble Judges and
valuers in the field.
""
Value, Price and Cost '

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Every individual makes use of the art of valuation without realising it

because when he purchases a commodity, he balances the value of money
parted by him against the value received by him in the form-of other
commodity. The word "Value" is very difficult to define precisely and a number
of books on economics have dealt with the problem. The simple definition by
Hadley is "A price is a fact and a value is an estimate of what the price ought
to be".
Value, price and cost do not come into existence unless and until an
exchange of commodities or services takes place and the exchange usually
takes place depending upon utility, satisfaction, transferability and the extent
to which a commodity is scarce. The exchange of commodities helps a person
to satisfy a few of his wants from among his bundle of unlimited wants. Today
the process <of exchange comes in between wants, efforts and satisfaction.
Essential Characteristics

1. Value/

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(a) In order that a commodity can have value, it must possess three
'essential qualifications, namely:
(I) It must possess utility.
(II) It must be scarce.
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(ill) It must be transferable or marketable.

It is necessary that all these essentialities must'go hand in hand and in

the absence of any one of them, the commodity will have no value, e.g., air
possesses utility but is not scarce and hence it has no economic value. Rotten
apples may be scarce but since they possess no utility hence they have no
value. A property has got a value because it satisfies all the above three
requirements.
At times, arguments are also advanced that a bungalow in a desert (a
property) has no value as it has no utility. The bungalow at present has got a
demolition value and it is likely to have a value in future if developments like
oil explorations take place in the desert and at that time it will find a proper
class of purchasers for it. If the proposition of a bungalow in a desert is
critically analysed, it will bi observed that no
investor will construct a bungalow in a desert for Its future utility, or "A
bungalow in a desert" can be said to be a bungalow in a deserted place
and it is likely that the deserted place may develop once again In future
in which case the bungalow will have a future utility. In the absence of
development the value will negligible or may tend to zero when the cost

PROFESSIONAL PRACTICE

383

of demolition'and transportation of old building materials of the bungalow to the place of sale may exceed their sale value.
\*?jt

Likewise, the "Kohinoor" diamond when put in the open market for sale
may not find a buyer. It does not mean that it has no value. It has a value but
the class of purchasers to whom it is offered for sale is not suitable for it.
(b) It can be said to be a ratio between the price of money and the
price of commodity in return.
(c) It is not necessarily the price of a commodity.
(d) It can be an unearned increment or an unfortunate decrement in
the price.
ty *

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2 , Price

(I) It is the cost of a commodity plus additional reward to the

producer for his labour and capital.
(II) It is a special form of value. \

'

(ill) It is fixed depending upon the demand from consumers as compared

to their other wants and this adjustment of price brings Into existence the
"value".
(lv) It depends on utility, durability, satisfaction and the extent to which a
commodity is scarce.
3. Coat
(i) Expenditure to produce a commodity having a value.
(11) Depreciation is usually worked out on the cost of a commodity rather
than on its value.
Market Value

The market value has been defined as the amount which might be
expected to realise from a willing purchaser on a sale of a property by a willing
seller in the open market:
(i)

"In the open market" means the property is offered for sale in
such a manner that every person who desires to purchase can
make an offer and that the necessary steps are taken to adver tise
its sale in papers and all necessary means are adopted to bring
to the notice of all the purchasers that the property is for sale in
the market under the most favourable condition.

(ii) "A willing seller" is a person who will not sell the property unless
he obtains something more than his reserve price. He is given
the necessary advantage to fix a reserve bid-for the property, thus
making him a free person to sell and not forced to sett due to certain
unforeseen difficulties. In short it must be a "Free will sale".
(iii) "Might be expected to realise" refere to the expectations of the
purchasers after they have been supplied with all the necessary
data, etc., and after they know the conditions of the market.

ELEMENTS OF VALUATION

Essential Characteristics of Market Value

(i) Vendor must be willing to sell(ii) Purchaser must be willing to purchase and must be a prudent
one who can put the land to the most beneficial use.
(iii)
(iv)
(v)
(vi)

No compulsion on either in the transaction.

Urgent necessity of purchase or sale to be discarded.
Disinclination of vendor to be ignored.
Sentimental value to the vendor will have no place.
(vil) Present and future uses known as potentials are to be taken into
account.

Walue Classification
Assessed Value: The value of a property which is recorded in the register
of a local authority and used for the purpose of determining the amount of
property taxes to be collected from the owner of the property.
Book Value; It is also known as book cost which shows the original
investment of a company on its assets, Including properties and machineries less depreciation for the period passed.
ts^j
Salvage Value: Value of a machinery realised on sale when its " useful
span of life is over but it has not become useless.
Scrap Value or Junk Value: Value of a machinery realised when it
becomes absolutely useless except for sale as junk. It also applies to built-up
propef ties which have outlived their useful span of life and in such cases the
value of the old materials of such buildings less cost of demolition will
represent the scrap value or break up value. It is also known as "Demolition
value".
Replacement Value: It Indicates the value of a building or portions
thereof if these have to be replaced in the form of acceptable substitutes, at
the current market rates.
If the substitutes form substantially identical new ones, in other words
constructed or manufactured to order, the value in such a case will
be known as "Reproduction value".
Earning Value: It is the present value of a property which will start
yielding an Income in future, ^jsl
Potential Value: The land has got an inherent value which may go on
increasing due to passage of time or due to some alternative use fetching
more return. This inherent value is known a "Potential value".
It Includes the following:
.. .
* jt'*
(I) Beneficial present use of land.
(II) Future usefulness.
(ill) Special suitability for a definite purpose. ' (iv)
Better lay out

PROFESSIONAL PRACTICE

383

Distress Value: When a property is sold at a lower price than that which
can be obtained for it in an open market, it is said to have "Distress
value".
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It may be due to the following:
(a) Financial difficulties of vendor.
(b) Indirect benefit to vendor or purchaser.
(c) Part consideration paid otherwise.
(d) Panic due to war and riots.
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Speculative Value: When the property is purchased so as to sell the same
at a profit after a short duration, the price paid is known as speculative value
and the chief aim behind the purchase is not-that of development so as to earn
rent but that of speculation. A speculator generally tries to purchase the land at
as low price as possible so as to make the maximum profit. Moreover, the
speculator will try to find out such buyers (except, prudent purchasers) who
would give something more than the market value of the property.
Monopoly Value: Following the law of supply and demand as the
number of availab le plots in a locality goes on decreasing, the value of the land
goes on increasing and a time comes when very few plots remain In the market.
The fancy price demanded by the vendor for those few remaining plots will be
known as monopoly value.
Sentimental Value: The fancy price which is demanded by a vendor when
he attaches some sentimental value to his property is known as sentimental
value having no relationship with the market value. The property may be worth
Rs. 10,0007- and it is likely that the owner may not be willing to part with the
same even for Rs. 50,000/ - on the other hand the purchaser may have a fancy
for the property and may pay an exorbitant price for it. These aspects will not
represent the market value.
Accommodation Land and Accommodation Value: The land on the
outskirts of a town used for the purpose of play grounds, gardens, etc is known
as accommodation land. It has a value greater than that of agricultural land
and less than that of building land.
At times small strips of land cannot be developed Independently due to
their restricted lengths, depths, areas, etc., and as such the same will not find
prudent purchasers, in the open market. The only persons who can utilise the
said strips of land most beneficially will be the adjoining
ELEMENTS OF VALUATION

385

owners and such the price offered for the same will be more or less as compared
to the market value of n bulldable plot and the same wul depend upon the needs
of a purchaser; such price offered is known as accommodation value which
cannot be compared with the market value.
It is likely that a purchaser who is not the adjoining owner may also purchase
the said strip of land and the only intention behind such a purchase is to exploit
the situation and get the maximum benefit out of the same.

^Classification of Ownership E
In valuation one is usually concerned with "Immovable property" which
Includes land, benefits to arise out of land, and things attached to the earth or
permanently fastened to anything attached to the earth.
Generally speaking there are two forms of ownership: namely,
freehold and leasehold and this qualification of the property is designated by the word "Tenure".

. I

/Tenure

It indicates the terms- and conditions under which a property consisting of

land or land with building can be owned.
In wider sense there are two types of tenures, namely: (a) freehold, (b)
leasehold.
Treeho Id Tenure: This type of tenure indicates that the land can be owned
without any restrictions whatsoever so far as Its use is concerned. It does not
require payment of any charges or ground rent. However, the rules and regulations
of the Government or local authority will have to be complied with, for its
development as the freehold tenure is not exempted from the said restrictions which
are meant for the welfare of citizens in general. The ownership of a freehold land
can be said to be for a period of indefinite duration and the owner can deal with the
land as he may please that is either develop the same or gtve it on rental basis, or
sell or transfer the same at his sweet will. The use of land by an owner should not
be a source of nuisance to o<3tertvThe freehold land will be subject to the Law of
Easements that tt can acquire the prescriptive rights of easements over and
above the adjoining properties and vice versa. It is the highest form of ownership of
land.
Thus, the freeholder has got:
(i) Right to its occupancy and use. (11)
Right to sell in whole or in part, (ill)
Right to gift.
(iv) Right to contract for its use to others for a period of time.
Leasehold Tenure: The property is a "Bundle of Rights" which can
be retained as it is; or can be divided by a lease or leases so as to create
two or more interests in the property like lessor's interest, lessee's
interest, sublessee's interest, etc.

.'. Rs. 20.000

X x 7.678
* Rs. 2,605/-

Sitting rent

Rs. 3.000 + Rs. 2,605 a

Rs. 5,605/- p.a.

Restrictions in Case of Leasehold Lands

1. If the lease convenants restrict the user of the plot to residential one,
it will not be permissible to use the same for a commercial purpose even if
the Municipal rules permit.

2. If at all the permission is granted by the lessor for the change of

user, it will be after payment of heavy premium.
3.'Expenses for maintaining the property as per lease terms.
4. Payment of premium and other expenses to obtain the permission of
the lessor for additions and alterations to the building or for repairs
5. Restrictions on the free use of compulsory open spaces, the lessee
cannot construct a pump house, suction tank, etc., in the compulsory open
space except with the permission.
6. Prohibition on putting up or displaying illuminated signs or sign
boards or sky signs and advertisements.
7. Payment of ground rent in time. Wjm
8. Permission of lessor for assignment.
Incase of breach of covenant or failure to pay the ground rent in time
the lessor will be entitled to forfeit the lease and as such the risk involved
will be more.
Purpose of Valuation (A Pew Purposes]
(1)
(2)
(3)
(4)
(5)
(6)
,(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)

Purchase for Investment or for occupation.

Sale.
*
Mortgage.
Rent fixation.
Land acquisition.
Betterment charges.
Auction bids.
-'
Probate.
Speculation.
Insurance. '
Wealth tax.
Capital gains etc.
Stamp duty.
Gift tax.
General court purpose in order to determine the amount of Court
Fee Stamp in a suit, etc.

The purpose of valuation plays an important part in determining the

market value of a property. Hence, it is most essential that the purpose
of valuation should be known in advance as the values will differ with different
purposes for which they are required. To a non-technical person it is a packet
of surprises when he finds different values for the same property but he hardly
realises the differences In the function of a valuer which depends upon the
purpose of valuation, namely.
(a) For Mortgage: In case of a mortgage proposal, the valuer has to
advise the mortgagee as to what sum can safely be advanced on the
property.. Thus, the function of the valuer here is'to safeguard the
position of the mortgagee, his client.
(b) For Sale or Purchase: In the case of purchase, the valuer desires
that his client should get a bargain proposal, whereas In case of sale, he

will value at a price that could be obtained in the market depending upon
the conditions of the money market and rate of interest on securities.
* - , (c) For Acquisition Proceedings: For acquisltion.proceedlngs, the
valuer is likely to take a liberal view .as the seller is an unwilling person
and due to acquisition he may have to undergo a lot of trouble and
expense:
,
,",'
(d) For Government Taxes: For the purpose of Government taxes the
valuer determines the market value of the property that is what a willing buyer
would pay to a willing seller.
\/Factors Affecting the Value, of s Property
1. Supply and Demand: A number of properties having the same
rent fetching capacities available for sale as compared to few buyers will
result in low prices for the properties and vice versa.
-

Few buyers as compared to a number of plots available for sale in a locality

will result in a low price for land and vice versa. Rise in population due to influx
or by multiplication will result in heavy demand for housing and to satisfy the
said demand more land is required. If sufficient land is not available to satisfy
the demand fully, the same may result in the increase in value of land. Land is a
commodity Which cannot be manufactured and if the demand goes on Increasing
agricultural land and waste land will be converted into building land and the
agriculturist will be paid such a price as has not been dreamt of by him.
2. Cost of Replacement: When a built-up property is available for
sale with vacant possession for the beneficial occupation of a purchaser,
he will always consider the cost of replacement of the same building at
present. If the vendor has built the building for Rs. 2 lakhs a few years
back and if the same can be constructed at present for Rs. 1 T50 lakhs the
pur chaser.will consider the present cost of Rs. 1.50 lakhs less depreciation for the age passed in preference to the original cost of Rs. 2 lakhs and
depreciation based thereon,
3. Occupational Value: When a property is required for the
purpose of residential occupation, the price paid is generally more than
its market value arrived at by rental method. It has been observed that a builtup property, part vacant, will fetch a good price even If the premium for vacant
portion is taken into consideration. In the purchase of such a properly, the
return forms a secondary consideration, j* 'i" ', 4. Interest and Security of
Capital: Every person expects some reward in return if he allows the use of his
capital. This reward is known as interest. The amount of reward expected by an
individual depends upon a number of factors, the most important being
interest available in general investment market and security of his capital If the
capital is secured and is realisable at any time, then,, the rate of interest
expected will be low as compared to one where there is no security of capital It
is for this reason that the rate of interest charged for financing a film
production is the highest, part of which represents the payment towards
insurance against risk and trouble of interest collection, whereas part
represents interest on capital.
5 . Kent Restriction Act: The value of a property depends upon its annual
rental and in case of an old building let out prior to 1.9.1940 the same is not
allowed to be increased under the Rent Act except for permitted increases. Thus,

thenet return is pegged down to the economic level of 1940 whereas the cost of
living has gone up. This has resulted in the capital drifting away from the property
market into the industries which pay a handsome rate of interest and as such the
property market haa been affected considerably. vVi.r
6. Abnormal Conditions: The value of properties may .go down due to
abnormal conditions like war, riots or due to insecure conditions.
7. town Planning Act: Due to declaration of a Town Planning Scheme in a
particular area whereby the said area is proposed to be provided with all civic
amenities like roads, gardens drainage, etc., the value of open plots in that locality
will go up.

PART-n

METHODS OF VALUATION (VALUATION TECHNIQUES)

Income Capitalisation Technique
The properties may consist of land or land and buildings arid the same may
have been let out, self-occupied or profit is being made by carrying on some
business activities there. Depending upon the circumstances, they can be valued by
any one of the following methods, namely:
(1) Income capitalisation technique or call it rental basis.
(2) Land and building basis.
(3) Profit basis.
(4) Development method or plotting scheme.
Rents! Method of Valuation
The main principle of this method of valuation Is the "Present worth or future
benefits" and since the receipt of benefits is the receipt of net. income and as such true
basis upon which to Judge the value would be net income. The capitalised value of the
net Income at appropriate figure of year's purchase will represent the value of property
provided the building on the plot has got a future life of more than 60 years or so and
reversionary value of the land is negligible.
Net rent

Gross rent outgoings

Capitalised value = Net rent x year's purchase This method of valuation calls for
a detailed study of a number of factors like rent, outgoings, and factors on which the
year's purchase wflf . .depend.
Rent for the Purpose of Valuation
(I)

It must be fair rent which is maintainable over a considerable period of

duration with no threat of being reduced in future.
(II) Its limit will be the standard rent.
(ill) Chance higher rent need not be considered.
Outgoings.
v

The outgoings usually met with in case of valuation of urban pro* pertles are:
(i) Municipal taxes. . (11)
Repairs, (iii) Insurance.

. (iv) Collection and management charges. cost of services and amenities. * ' (v)
Vacancies and bad debts.
(vi) Ground rent in case of leasehold properties.
Municipal Taxes
For the general welfare of the people and for day-to-day administration, every
Government and local body need money which is raised from the public by way of taxes.
It is compulsory payment by the public for public purposes Irrespective of the quantum
of services rendered to the tax payers in proportion to the tax paid by them; for example
general tax collected by a Municipality also includes fire tax which is utilised for the
maintenance of fire fighting squads and every owner of a property-Is bound to pay this
tax though he may not have a fire in his property for years together. .
Finance needed by a local body like Municipality for maintenance of its public
utility services, execution of public welfare projects and for its administrative works are
collected by imposing taxes on the properties which are known as "Rates".
394

PROFESSIONAL.

PRAcncr

Rate
It has been defined as a public charge equally assessed on property, the proceeds
of which are applicable to local purposes of a public nature and which Is leviable on
the basis of an assessment In respect of the yearly value of property.
* i

A rate Is a particular kind of tax and Is levied on properties baa/xi on the

principles of rating. A property will have different values depending upon the
purpose like sale, purchase, mortgage, etc., and if the taxes are collected on such
values, property owners will be required to pay different taxes at different times and
as such there Will not be uniformity of taxation for different properties. Hence, the
reasonable yearly rent of & property is taken as its yearly value over which taxes are
charged. This yearly value Is known as the, "Annual letting value" or "Gross value*.
Gross Value

It means the rent at which a hereditament might reasonably be

expected to let from year to year, if the tenant undertook to pay all the
usual tenants' rates and taxes and if the landlord undertook to bear the
~ost of repairs. Insurance and other expenses if any,' necessary to
maintain the hereditament in a state to command the rent. This is also
known as "Annual letting value", "Annual value" or "Annual rental
valUe".

The above definition clearly Indicates the principle of rating, namely:

(1) Rent that can reasonably be expected, that is hypothetical rent expected
from a hypothetical tenant.
(2)
(3)

Let from year to year or principle of "Communlbus Annis".

Hypothetical rent should pertain to the existing condition that is the
principle of "Rebus Sic Stantibus".

Hypothetical Rent
The assessment of a property for the purpose of fixing its rateable value
depends upon its rent fetching capacity which can either be low or high depending
upon a number of circumstances. The rent paid may be high when it includes extra

services agreed to be provided by the landlord, e.g., the landlord may provide a
servant for all the tenants to bring their vegetables twice a day. It will also be high
when the premises are given on leave and licence for short duration or on a
company lease Weekly or daily rents will be more as compared to monthly rents.
The landlord is likely to demand more rent when he finds that the tenant Is not
entirely trustworthy and a default in payment is certain sooner or later.
The rent paid may be low when:
( 1 ) The tenant has paid a premium for the premises. (21 The
tenant is a relative of the owner.