VARIOUS PURPOSES

OF VALUATION

PREPARED BY:
Mr. Vimal K. Shah
(9426159641)
vimalkshah1@gmail.com
Mrs. Kavvita N.Choksi
(9512333666)
kavitachoksi21@gmail.com
 PURPOSES OF VALUATION
In real properties, there are various
purposes for which valuation may be
required. It is essential to know exactly for
what purpose the valuation is being
prepared. Valuation is an art and
professionals have to consider all pros and
cons of the various factors affecting
valuation. Broadly speaking, valuation may
be required to be done for the following
purposes. 2
• Use of Valuation Reports in the Sale of Property

• If the owner of any property wishes to offer the same for sale, it is
necessary first and foremost to find out what it would fetch him in
monetary terms. Then only can he make a realistic decision on
whether to accept or reject an offered price.

• When manufactured articles such as foodgrains, etc. are offered in

the market their price can easily be ascertained. In this case, a
valuer is not required. However, in the case of real estate or in the
case of certain other items when identical properties do not exist
the services of a valuer become necessary. In many cases large
public companies, trusts or even private individuals, in order to
protect their own interests, ask for professional help before selling
or purchasing a property.
• Use of Valuation Reports in the Purchase/Sale of Property

• Unlike, say the machine or foodgrains no two properties are identical. For
instance, a ton of wheat may be similar to another ton of wheat if some
factors remain the same such as agricultural requirements, locality where
grown, etc. However, a square meter of a particular plot is never exactly
the same as another square meter of land, even if it is adjacent to
it. Therefore, as properties are always different they require an expert
opinion when a purchase is made. An independent valuation is always
welcome in this case.

• In addition to getting a monetary value or a numerical figure for his

property, a prospective purchaser would normally like to get an opinion of
other aspects of the property also. This might include age, future
expected life, condition of building, etc. in case of a structure. If it is only
land then the type of plot of land, its suitability for a particular purpose,
its proximity to a transport head, a market, etc. are factors to be
considered. Other factors could be zoning laws, municipal approval,
liability of property tax, mortgage, etc.
• Valuation for Central Government Taxation under Direct
Tax Laws

• Valuation of property is required under

various direct tax laws administered by the
Central Board of Direct Taxes, Ministry of
Finance. These include the Wealth Tax Act,
Capital Gains Tax, etc. These valuations are
normally required to be done under the
particular act for a specific purpose as of a
specific date.
• Valuation Reports used for Fixing Rents and
for the Purpose of Forecasting Earnings

• Any property owner would like to receive a

return on his investment that is in conformity
with return on other investments. If the
owner has constructed a building on his land
with the purpose of renting it for whatever
purpose, he would like to work out the rent.
From these rental incomes and expected
outgoings he can forecast the earning capacity
of his property.
• Valuation for Insurance Purpose

• Insurance policies can be made out against

fire damage, theft and loss, earthquake, etc.
Insured parties normally bring their valuation
reports up-to-date at frequent intervals.
Correct insurance coverage is necessary. If the
property is overinsured, a higher premium is
paid unnecessarily. On the other hand if the
property is underinsured, then full loss against
actual losses cannot be recovered.
• Valuation under Land Acquisition Act

• Normally all democratic governments pay ‘just

compensation’ for any property that may be acquired for
public good. When property is taken for a public project or
for public good, compensating the original owner at a fair
market price is necessary. In such a case the acquiring
authority as well as the owner of the property may employ
different and independent valuers in order to determine
the amount of compensation. The competent authority
hears evidence from both sides and then decides on the
compensation.

• In some cases, a government agency may occupy private

property for a certain limited period of time. Under such
circumstances, rental value of the property has to be fixed.
• Valuation in Connection with Mortgages

• Property of various kinds can be pledged as security against

loan. The property may be land, a residential house or any
other asset. In such cases, a valuation report on the
current market value of the property is necessary. Also, the
valuer should give an idea of the property forecast, i.e.,
probable future trends regarding the property. If the
property is income producing, the earning capacity of the
property should be indicated. This data will allow the
lender to set specific targets for repayment of loan and
return of capital.

• Many institutional lenders such as banks and state financial

corporations are bound by law to have pledged real estate
valued and not to lend more than a certain fixed
percentage of this valuation.
• Valuation for Partition of Properties

• The distribution of property under a family

settlement or a will or on dissolution of a
partnership between various claimants
warrants valuation of the property. Such
valuations form the basis of the settlement or
they may be used in any legal proceedings.
• Valuation for Mergers/Take-overs/Acquisition
by Companies

• In case two or more businesses or enterprises

come together, it is necessary to place a value
on each so that stocks or shares of the new
merged corporation can be apportioned
between shareholders. Also when properties
are exchanged each asset should be valued.
• Valuation for Liquidation

• Very often it happens that a Company has

become sick or is not operating for any of several
reasons. There may be creditors of the Company
who have gone to court for affecting liquidation.
The court, in turn, may have appointed an ‘official
liquidator’ to liquidate assets and pay off the
creditors. The official liquidator will require an
inventory of items and the value or minimum
price at which the assets are to be sold. Here
also valuation will be required for the liquidation
proceedings.
• Valuation for Leasing Properties and Fixing
Lessor/Lessee Interests

• When properties are leased by an owner (lessor), it is

necessary to determine the fair market value of the
property in monetary terms. Also, since the lessor is
likely to ask for a rent together with a premium (a one
time lump sum payment) which may or may not be
returnable on expiry of lease, the lease terms would
first have to be settled. Valuation in such cases would
include present value, estimated future life, annual
maintenance costs, and rental value of property.
• Valuation Requirement in Probate Matters

• The grant of probate, i.e., for the successors to

get the property transferred to their name, is
a state subject in India. A valuation for this
purpose is necessary as all state governments
collect stamp duty under their own laws.
• Valuation Requirements for Calculating Court Fees and for Other
Specific Requirements in Court Cases

• When legal proceedings are started in court for whatever purpose,

normally a court stamp fee is to be estimated. For this purpose, if
the subject matter happens to be a real estate immovable property,
plant & machinery, etc., a valuation may be necessary. Further,
sometimes valuation may be required in court cases involving fraud
and damage. A situation may arise when one party, may claim that
false facts were presented to it. In such cases a valuation may have
to be made taking into account the position that actually existed at
the time of sale. The difference in sale price and actual valuation
may be assessed as monetary loss to the party
• Valuation for Accounting Purposes (Asset Valuation)

• Very often, large companies or other organizations revalue

their assets and bring up-to-date the ‘historical value’ in
their books of accounts and balance sheet. This concept is
popular in western countries and is gaining ground all over
the world whereby the concept of ‘current cost accounting’
has been introduced. In fact, Britain has introduced
legislation whereby large companies adopt this new
concept of current cost accounting against the traditional
historical accounts so that a true picture of the prevailing
actual fixed assets can be reflected in the balance sheet.
Valuation will frequently have to be done to keep in line
with this concept.
• Valuation Reports to Study Alternate
Investment Opportunities and
Economic Feasibility

• Very often an investor is faced with a choice

between alternative investments. Again, in
each investment proposal there are several
questions likely to arise, i.e., the cost of actual
acquisition, the market value of the property,
the likely return on investment, etc.
 Transferable Development Rights:
• TDR- Land Acquisition Act, 1894, Sec-126

• I) Meaning of TDR – Making available certain amount of additional built up area in lieu of
the area relinquished or surrendered by the owner of land, so that he can use extra built up
area either himself or transfer it to another in need of extra built up area for an agreed sum of
money. / “TDR is a voluntary incentive based program that allows landowners to sell their
development rights from their land to a developer or other development rights from their land
to a developer or other interested party who then can use these rights to increase the density
of development at another designated location”.

• Purpose – For public purpose like road widening, parks, play grounds, school etc.

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Benefits of TDR –

1) Alternative method of land acquisition

2) Process of land acquisition act is comparatively lengthy.

3) Easy to get land without any litigation.

Development right certificate – (DRC) –

If the owner of any land which is required for road widening for formulation of new road or
development of parks, play grounds, civic amenities etc. those proposed in the plan shall be
eligible for the award of TDR. Such award will entitle the owner of the land in the form of a
development right certificate (DRC), which he may be use it for himself or transfer to any
other person.

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Valuation for Time Share Property
• Time Share Concept
• Evolved in France
• Providing cheaper hotel accommodation for Regular visiting people/tourist
• Selling hotel room on temporary ownership right basis (or) fixed time period
occupancy basis
• Stay for - Specific number of days without paying charges. But food charge has to be
paid. Pro Rata Maintenance charges are applicable
• Time share Right - Saleable in the manner to third party
• Time Share ownership
– Right to occupy on lease ownership
– Part time Ownership
• Lease Ownership
– Time Share period - Number of years is fixed (Example 20 years)
– Purchaser gets right to use specific number of days (1 week) in a years for 20
years period
• After 20 years the time share rights reverts back to Developer.
• During the 20 years period, the purchaser (Lessee) can sell his right to third parties.
52 week are classified into
• Max value: Season class – May, June – Maximum charges
• Classic
• Premium Class
Part time ownership
• Temporary ownership for specified period in specified resort
hotel
• 52 weeks - 50 ownership – Pro rata Maintenance Repair
and Property tax
• UDS also conveyed
• Temporary ownership Rights can be saleable
Valuation of Time Share Rights
• Comparable sale Method
• Rental Income Method
Role of a Valuer
• Advisor
• Giving opinion to his client.
• Fair Market Value and Interest
• To take financial decision
• Advise on change in possible rental and capital value
• For investment suggestion on policy matter, sinking fund
• Land acquisition case - Date of valuation / Date of notification
• Estate management Maximum income and capital value
Securing good maintenance
– Increase or decrease in capital value
– To check reasonableness of present rent and outgoings.
– Provisions for reserve for future repairs.
• Must deliver own independent honest and conscious opinion.
• Not a advice tailored to suit what the client desires.
1. Site Inspection
2. Collection of Information and Data
– Interest to be valued
– Purpose of valuation
– Date of valuation
3. Study of Property Market
– Sales instance
– Rental instance
– Compare rate of rentals
– Compare sale price /unit area
– Genuine of sale instance
– Year’s Purchase
– ROI yielded
– Compare ROI with other alternate form of investment
4. Analysis of Sale
• Purchase price(including block money) = YP
Net Annual Income
• Remunerative Rate of Interest- Perpetual income
• Accumulative Rate of Interest – Terminable income
5. Estimating Fair Rent
• Property to be Valued Vs. Property involved in
the genuine instance of
sale
6. Weightage Scene System
i. Weightage comparison factors
ii. Land
iii. Location with amenities and facilities
iv. Building
v. Utility services
vi. Legal
vii. Economic
viii. Social
Appropriate weightage is assigned TWS (Total Weightage Scene)
7. Capital Value
• Block and white money
8. Rate of interest
• Yield is 4 to 5 % - Residential property
• Yield is 6 to 10 % - Commercial property
9. Economic condition
• Compare with rate of interest yield with various
economic indices like BSE, NITFY, State and Central
Government securities, internal rates on lending by
banks, inflation rate and Foreign Exchange Rates
10. Capital Appreciation and Capital Erosion
11. Economic Factors
Value of the property subject to
• Physical factors
• Change in legislation
• Change in government policies
• Economic factors
• Gross domestic Production (GDP)
• Per capital income
• Domestic savings
• Investment in domestic savings in FD, Gold and SB
Duties of Valuer
1. Duty to the Client
2. Duty to the profession of Valuers
3. Duty to the Societies
Duty to the Client
• Reasonable care to performing his functions
• And reasonable care in performing as a professional
Valuer
Duty to profession
• Perfect integrity
• Full involvement in the subject matter
• No bias in performing job
• Honesty is the best policy
• Own conscious
• Professional is a person who converts his training, skill,
knowledge, intelligent, etc., into ‘Service’ which he imparts
to the client / customer and in turn earns money in lieu of
his service. Eg. Lawyer, Engineer, Doctor, Charted
Accountant and Valuer
• Ethics in a profession:
There should be healthy competition among the fraternity.
To maintain healthy environment in the profession all
professionals have to follow certain norms of professional
ethics and observe certain code of conduct in their
behavior .
Ethics in Valuation profession
Value involves in financial matter
Code of conduct prescribed by the institution of Valuers for is members
include, among other, the following rules, by following which professional
ethics can be practiced by a Valuer.
1. To ensure mutual co-operation amongst members by free interchange
of opinion and experience.
2. To endeavor to protect the profession of valuation concerning all
categories from misrepresentation and misunderstanding.
3. To express an opinion only when it is founded on adequate
knowledge and honest conviction if he is serving as a witness before
a court or commission.
4. To hold in regard the professional reputation of other Corporate
Members and not to injure directly or indirectly the professional
reputation or practice of another Corporate Member.
5. To exercise the restraint in criticizing the work of another Corporate
Member
6. To refrain from associating in work with other valuer who does not
conform to ethical practice.
7. To refrain from misrepresenting his qualifications to a client or to the
profession.
8. To treat all information acquired during the course of the business
strictly confidential unless released b the client or demanded by a
court of law.
9. To present clearly the consequence to be expected if the
professional judgment is overruled by a non-professional adequacy
of work.
10. To observe integrity and fair play in the practice of the profession of
valuation
11. To refrain from undertaking to review the work of another Corporate
Member of the same client except under Government orders and /
or with the knowledge of the first Corporate Member
12. To present the information to the Council of the Institution for action
if a Corporate Member considers that another Corporate Member is
guilty of the unethical, illegal or unfair practice
13. To order his conduct according to the professional standards and
customers of country when a Corporate Member is engaged in
Valuation work in a country abroad and to adhere as closely as is
practicable to the principals of his code.
14. To give unbiased valuation reports conforming to the objective
opinion of the property and not to attempt merely to accommodate
the interest of the client
15. To steer clear of situations where interest and duty clash
16. To refrain from entertaining a client who either fails to declare that
he had not engaged another value for the same valuation work or
produce a clearance certificate of non-objection from the Valuer if
already engaged.
17. To conduct yourself and the profession in a manner which will not
prejudice your professional status or the reputation of the institution
18. To follow this code as amended and or revised from time to time.
Conclusion
To maintain the healthy relationship amongst the
professionals and between professional and the client, it is
must for every professional to follow the professional code
of conduct and maintain certain ethical standards to
ensure the smooth functioning of the profession and to
reach the highest level of imparting the professional
service.