Method of valuation of Building & Properties
1.Rental Method of Valuation:
The rental method of valuation, also known as the income approach, is used primarily for income-generating properties such as rental apartments, commercial buildings, and office spaces. It involves estimating the property's value based on its potential to generate rental income. This method considers factors such as the prevailing market rent, vacancy rates, and operating expenses. The value is often determined by calculating the net operating income (NOI) and applying a capitalization rate (cap rate).
2.Direct Comparison with Capital Value:
This method, also known as the direct sales comparison approach, involves comparing the subject property to recently sold properties with similar characteristics. The goal is to find comparable properties that have been sold recently and have similar features such as size, location, condition, and amenities. By analyzing the sales prices of these comparable properties, an appraiser can estimate the value of the subject property.
3.Valuation Based on Profit:
Valuation based on profit, or the profits method, is often used for valuing properties that generate income through business operations, such as hotels or restaurants. The value is estimated by considering the profits generated by the business and applying a suitable multiplier. The formula is:
Value = Annual Profit × Multiplier
4.Valuation Based on Cost:
The valuation based on cost, or the cost approach, estimates the value of a property by calculating the cost required to replace or reproduce it, considering depreciation and obsolescence. This method is useful for new properties or properties with unique features that may not have sufficient comparable sales data. It involves estimating the current construction cost and deducting depreciation to arrive at the property's value.
5.Development Method of Valuation:
The development method of valuation is used to estimate the value of properties with development potential. It involves estimating the value of the property based on the cost of development and the potential profits from the completed development. This method is commonly used for land parcels that are suitable for new construction or redevelopment.
6.Depreciation Method of Valuation:
The depreciation method of valuation is used to estimate the value of a property by considering the accumulated depreciation over time. Depreciation can result from physical wear and tear, functional obsolescence, or external factors. This method assesses the impact of depreciation on the property's value and adjusts the cost or income value accordingly.
Calculation of Depreciated Value for Each Part:
For each building component (walls, roofs, floors, doors, and windows), the depreciated value is calculated using the formula:
D = P * [(100 - rd) / 100)]^n
Where:
D = Depreciated value of the component
P = Original cost (present cost) of the component
r = Rate of depreciation for the component
d = Depreciation factor (percentage)
n = Age of the building or component in years
Example:
Let's say you have a building with the following information:
Original cost of walls (P): 100,000
Rate of depreciation for walls (r): 10% per year
Depreciation factor for walls (d): 5% (0.05)
Age of the building (n): 10 years
Using the formula:
D = 100,000 * [(100 - 0.05 * 10) / 100)]^10
D = 100,000 * (0.95)^10
D ≈ 59,874.98
In this example, after 10 years, the depreciated value of the walls would be approximately 59,874.98.
Terms In Valuation
1. **Cost Index:** An indicator that tracks the cost of construction materials and labor over time, used in cost-based valuation methods.
2. **Comparable (Comp):** A property that is similar to the subject property in terms of size, location, features, and other relevant characteristics. Comparable are used to estimate the value of the subject property through the sales comparison approach.
3. **Appraiser:** A qualified professional who assesses the value of real estate or property through various valuation methods. Appraisers are licensed and trained to provide accurate and unbiased valuations.
4. **Capitalization Rate (Cap Rate):** The rate of return used to convert the income generated by a property into an estimate of its value. It's a critical component of the income approach to valuation.
5. **Net Operating Income (NOI):** The income generated by a property after deducting operating expenses but before deducting financing costs and income taxes. NOI is a key figure in the income approach to valuation.
6. **Depreciation:** The decrease in the value of a property over time due to factors such as physical wear and tear, functional obsolescence, and external influences.
7. **Cost Approach:** A valuation method that estimates the value of a property by determining the cost to replace it with a similar new property, adjusting for depreciation.
8. **Sales Comparison Approach:** A valuation method that estimates a property's value by comparing it to recently sold similar properties (comparables) in the same or similar area.
9. **Income Approach:** A valuation method that estimates the value of an income-generating property by analyzing its potential income, expenses, and capitalization rate.
10. **Plinth Area:** The built-up area of a building at its floor level, typically at or above the ground level. It excludes open areas like balconies and terraces.
11. **Market Analysis:** An assessment of the local real estate market conditions, trends, supply and demand, and other factors that influence property values.
12. **Reconciliation:** The process of reviewing and analyzing the results obtained from different valuation methods to arrive at a final estimate of the property's value.
13. **Contingency:** An allowance added to the estimated value to account for unforeseen events, risks, or uncertainties.
14. **Obsolescence:** A reduction in a property's value due to factors such as functional obsolescence (outdated design) or external obsolescence (changes in the surrounding environment).
15. **Highest and Best Use:** The most profitable use of a property that is physically possible, legally permissible, financially feasible, and maximally productive.
16. **Income Potential:** The anticipated revenue that a property can generate based on its rental income or potential profits from business operations. This is a crucial consideration in the income approach to valuation.
17. **Market Analysis:** An assessment of the local real estate market conditions, trends, supply and demand, and other factors that influence property values.
18. **Reconciliation:** The process of reviewing and analyzing the results obtained from different valuation methods to arrive at a final estimate of the property's value.
19. **Contingency:** An allowance added to the estimated value to account for unforeseen events, risks, or uncertainties.
20. **Obsolescence:** A reduction in a property's value due to factors such as functional obsolescence (outdated design) or external obsolescence (changes in the surrounding environment).
21. **Highest and Best Use:** The most profitable use of a property that is physically possible, legally permissible, financially feasible, and maximally productive.
22. **Zoning:** Local regulations that determine how land and properties can be used, including restrictions on building size, height, and purpose.
23. **Easements:** Legal rights that grant specific use of a property by a third party, such as utility companies or neighboring properties.
24. **Right of Way:** A legal right allowing access to a property through another property, typically for public utilities or transportation.
25. **Eminent Domain:** The government's power to acquire private property for public use, typically with compensation to the property owner.
26. **Feasibility Study:** An analysis of a property's potential for development or investment, considering factors such as costs, potential returns, and market conditions.
27. **Title:** Legal ownership of a property, often confirmed by a title search and title insurance.
28. **Encumbrance:** A claim or liability attached to a property, such as mortgages, liens, or easements.
29. **Leasehold:** A property interest that grants the right to use and occupy a property for a specified period, often involving rental payments.
30. **Appreciation:** An increase in the value of a property over time due to factors such as market conditions, improvements, and demand.
31. **Assessment:** The valuation of a property for tax purposes, often conducted by government authorities.
32. **Liquidation Value:** The estimated value of a property if it were to be sold quickly, often under distressed conditions.
33. **Market Rent:** The prevailing rental rate for a property based on current market conditions.
34. **Survey:** A detailed measurement and description of a property's boundaries and features
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