VALUER WORLD # METHODS FOR BUILDING VALUATION

METHODS FOR BUILDING VALUATION

1. Rental Method of Valuation

In Rental Method of Valuation,the net income from the building is calculated by deducting all the outgoings from gross rent. Year’s purchase value is calculated by assuming a suitable rate of interest prevailing in the market.The net income multiplied by the year’s purchase gives the capitalized value or the valuation of the property. This method is used only when the freight is known or probable rent is determined by inquiries.

1. Direct Comparison with Capital Value

When the rental value is not known, this method of direct comparison with the capital value of a similar property of the locality is used. In this method, the valuation of the property is fixed by direct comparison with the capitalized value of similar property in the locality.

1. Valuation Based on Profit

This method of valuation is suitable for commercial properties such as hotels, restaurants, shops, offices, malls, cinemas, theaters etc. for which the valuation depends on the profit. In such cases, the net annual income is used from the valuation after deducting all the outgoings and expenses from the gross income.The valuation of building or property is found by multiplying the net income by year’s purchase. The valuation, in this case, can be too high in comparison with the actual cost of construction.

1. Valuation Based on Cost

In this case, the actual cost of construction of the building or the cost incurred in possessing the building is considered as the basis to determine the valuation of the property. In this case, necessary depreciation is allowed and points of obsolescence are considered.

1. Development Method of Valuation

This method is suitable for properties that are under the developmental stage. For example, if a large place of land is to be divided into plots after provision for roads and other amenities, this method is used.The probable selling price of the plots, the area required for amenities, and other expenditures for development are considered for valuation.

The development method of valuation is also used for properties or buildings which are required to be renovated by making alterations, additions, improvements, etc. The value is calculated based on the anticipated net income generated from the building after renovation work is complete.

1. Depreciation Method of Valuation

Based on the depreciation method, the valuation of the buildings is divided into four parts:

1. Walls
2. Roofs
3. Floor
4. Doors and windows

Cost of each part of the property or building at the present rate is calculated based on detailed measurement of the structure. The life of each part is calculated by the formula:

D = P [(100 – rd)/100)] n

Where, D = depreciated value
r = rate
d = depreciation
n = age of building in years

rd values are considered as per the following table:

 Life of Building rd 100 years 1.0 75 years 1.3 50 years 2.0 25 years 4.0 20 years 5.0
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