valuation of building

Building Valuation | Building Valuation Methods | Valuation of Land and Building12 min read

What Is Building Valuation?

Valuation of building is the method of calculating the current marketable cost of a building or any structure.

Building Valuation depends on the type of structures, location, size, shape, and width of roads, frontage, types, and quality of building materials used, and the cost of these materials. Building Valuation also depends on the height of plinth, height of the building, thickness of its walls, and nature of structure (such as Load-bearing or framed structure).


What Is Valuation of Building

Valuation is the technique of estimation and calculates the fair value of the property such as building, a factory, other engineering structures of various types, buildings, land, etc.

The location of a building also plays an important role in deciding the value of a building. For example, a building located in a market area would have a stronger and higher valuation than the same building located in a residential area. Also, the buildings located in areas with proper municipal water supply, sewer, and electricity have increased values.

A building located on a freehold land generates a higher valuation amount compared to a building located on the leasehold land. The valuation of a building also depends on the demands for purchase which varies from time to time. More demands make the building more valuable.

The valuation in civil engineering also depends on the income the building can generate if let out. If a building is not let out, then 6% of the capital cost of the building is considered as the annual rent. It changes from time to time and location and depends on the prevalent market price.

Read More: Building Estimation With Plan


Purposes of Valuation

The main purposes of building valuation are as follows

1. Buying a Property

When it is required to buy or sell a property, its valuation is required.

2. Taxation

To assess the tax of property, valuation is required. Taxes may be included municipal tax, health tax, Property tax, etc, and all the taxes are fixed on the valuation of the structure.

3. Rent Function

In order to determine the rent of a property, it is required. Rent is usually fixed on a certain percentage of the amount of valuation e.g. 6% to 10% of the valuation of structures.

4. Mortgage or Security of loans

When loans are taken for the security of the property, the valuation is required.

5. Compulsory acquisition

When a property is acquired by law, compensation is paid to the owner. To determine the amount of compensation, valuation of the property is necessary.

6. Salvage value

It is the approximate resale value of a property at the end of its useful life. Salvage value is deducted from the cost of a fixed asset to determine the amount of the asset cost that will be depreciated.

7. Scrap value

It is defined as the Value of dismantled materials. For a building when the life is over at the end of its utility period, the dismantled materials like steel, timber, bricks, etc will fetch certain value which is called the Scrap Value of that building.

8. Market value

It is the property is the amount that can be obtained at any particular time from the open market if the property is put on for sale. Market Value may differ from time to time according to demand and supply.

9. Sinking fund

It is a technique for depreciating an asset while generating enough money to replace it at the end of its useful life. This fund sits in a sinking fund account and generates the interest value of the property.

10. Book value

It is the amount shown in the account book after allowing the necessary depreciation. The Book Value of the property at a particular year is the original cost minus the amount of depreciation up to the previous year.

11. Depreciation

This term represents the reduction in the market value of an asset due to age, wear and tear, and obsolescence.


Building Valuation Methods

Following are the 5 methods of valuation,

  1. Rental Method of Valuation
  2. Direct comparison with capital value
  3. Valuation based on profit
  4. Valuation based on cost
  5. Development method of valuation
  6. Depreciation method of 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.

2. 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.

3. 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.

4. 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.

5. 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.

6. 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 following table:

Life of Buildingrd
100 years1.0
75 years1.3
50 years2.0
25 years4.0
20 years5.0

 The valuation calculated of any building or structure is exclusive of the cost of land, amenities, water supply system, electrical fittings and sanitary fittings, etc. and is used only for buildings that are well maintained.

If it is not well maintained, then suitable deductions are considered in the valuation calculated above. The current values of the land, amenities, water supply system, electrical and sanitary fitting should be added to find the valuation of the property or building.

Read More: Structural Components Of Building And Their Standard Dimensions


What Is Land Valuation?

This method of valuation done according to the market price of that place and according to the norms and standards of property tax of that locality or area. A land valuation can be described as the technique by which the valuation of the land is ascertained.


Land and Building Method of Valuation

This method of valuation done according to the market price of that place and according to the norms and standards of property tax of that locality or area. A land valuation can be described as the technique by which the valuation of the land is ascertained.

Following are the methods of valuations of Land,

  1. Comparative Method
  2. Development Method
  3. Allocation Method
  4. Extraction Method
  5. Income Capitalization Method
  6. Belting Method

1. Comparative Method

This is the most popular method of valuation. In this method, the value of land or plot is estimated by analyzing recent selling prices of comparable land in the vicinity of that area, adjusting the prices to account for any difference in size, shape, location, and other features.

The valuation expert must check the average prices of that structure over the years and check for any volatility in prices in the market. But the comparative method is useful where there is an active market and the transaction prices are easily available for that particular structure.

2. Development Method

This method is used to estimate the value of such land which can be developed to unlock its true value or price. For e.g. Agricultural land after obtaining a change in land use to residential can be developed into a township of residential plots and multistoried buildings.

Essential factors to be considered under this land valuation method are the location of the structure, usage, FSI, and nature of the soil in the vicinity. The development method takes into account the full development potential of the land to arrive at the current market value.

3. Allocation Method

The allocation method assumes that in certain localities or in nearby areas, a constant relationship exists between the land value and the total property value. For e.g. in some locations land value can be up to 60% of the total property value.

But this assumption should be supported with enough statistics. This method is especially useful where land sales are scarce, but built up property sales are readily available.

4. Extraction Method

In this method of land valuation, the unit prices for comparable land are extracted from a developed property in that promises by deducting the estimated value of the built-up area from the sale price. Then the value of any property or building can be adjusted for any difference in size, shape, location, and any other features.  

The accuracy of this method depends on the quality of depreciation estimate of the built-up area of that structure and building. That is why, this method is generally used only for properties with newly built-up campuses that have negligible depreciation, or for properties where the built-up area only represents a small component of the total value of the property or buildings.

5. Income Capitalization Method

     This income capitalization method has two sub-methods:

a) Capitalization of Ground Rent:

 Market freight and capitalization rates or market price should be taken for the highest and best use case of land or open plot area. In the income capitalize method of land valuation, market freight charges of land are calculated and then capitalized using a market-derived land capitalization rate to determine the current market value of open plots or particular land.

b) Land Residual Techniques

In the land residue technique, the clear operating income attributable to the land is isolated and capitalized to produce an indication of the land’s contribution to full property value. Following steps are to be followed:

  • Build or construct an optimum building on the land parcel i.e. highest and best use in all respects.
  • Calculate the net operating income from the property as developed, using market rents and expenses.
  • Allocate remaining income (residual) to the land.

6. Belting Method of Valuation

Following is Building Valuation example,

Valuation of Building
Belting Method of Valuation

This method of valuation of land takes into account the frontage and depth of the plot. A land with a higher frontage will have greater value. And, the value of open land decreases as the depth of the plot (distance from the main road) increases.

The main challenge in the belting method is to arrive at the rate of decrease in current land prices as the distance increases from the road. In the belting method, the area is divided into belts (strips) with assigned values as a proportion of the value of the land on the main road.

FAQ:

Building Valuation Methods

There are 6 methods of valuation as listed below,
Rental Method of Valuation
Direct comparison with capital value
Valuation based on profit
Valuation based on cost
Development method of valuation
Depreciation method of valuation

Q.2 How do you calculate the value of a building?

To calculate the present value of a building, first calculate cost construction of building and then deduct depreciation of building per year still today.

Building Valuation

Valuation of building is the method of calculating the current marketable cost of a building or any structure. Building Valuation depends on the type of structures, location, size, shape, and width of roads, frontage, types, and quality of building materials used, and the cost of these materials.

Valuation In Civil Engineering

Valuation is the technique of estimation and calculates the fair value of the property such as a building, a factory, other engineering structures of various types, buildings, land, etc.

Watch Video: How to Calculate Market Value of Building or Property

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