What Is Building Valuation?
Valuation of the 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 the plinth, the height of the building, the thickness of its walls, and the nature of the structure (such as Load-bearing or framed structure).
What Is the Valuation of Building
Valuation is the technique of estimating and calculating the fair value of the property such as a building, a factory, or other engineering structures of various types, buildings, land, etc.
The location of a building also plays an important role in deciding its 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 freehold land generates a higher valuation amount compared to a building located on 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 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, a 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, a 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 a 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,
- Rental Method of Valuation
- Direct comparison with a capital value
- Valuation based on profit
- Valuation based on cost
- Development method of valuation
- Depreciation method of valuation
1. Rental Method of Valuation
In the Rental Method of Valuation, the net income from the building is calculated by deducting all the outgoings from gross rent. A 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 a building or property is found by multiplying the net income by the 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 in 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:
- Walls
- Roofs
- Floor
- Doors and windows
The cost of each part of the property or building at the present rate is calculated based on detailed measurements 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 |
The valuation calculated for any building or structure is exclusive of the cost of land, amenities, water supply system, electrical fittings, 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 and 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 is 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 is 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 valuation of Land,
- Comparative Method
- Development Method
- Allocation Method
- Extraction Method
- Income Capitalization Method
- Belting Method
1. Comparative Method
This is the most popular method of valuation. In this method, the value of land or plots is estimated by analyzing recent selling prices of comparable land in the vicinity of that area, and 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 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 the 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 capitalization 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. The 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 the remaining income (residual) to the land.
6. Belting Method of Valuation
Following is a Building Valuation example,
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.
Conclusion:
In conclusion, building valuation is a critical process which determines the actual worth of the any property, it involves assessing various factors such as the size of property, condition of property, location of property, and most important thing is market demand of the property or any building.
Accurate building valuation ensures fair pricing of the property, projects investment, and facilities transparency in real estate transactions.
FAQs:
What is building valuation?
Building valuation is the process of determining the market value of a building or property. It involves assessing the condition, location, age, and other factors that can impact the value of a building or property.
What is the income approach to building valuation?
The income approach to building valuation involves assessing the income potential of the property. This method is often used for income-producing properties, such as rental units or commercial buildings.
What is land valuation?
Land valuation is the process of determining the market value of a piece of land. It involves assessing factors such as location, size, zoning, and development potential to determine the fair market value of the land.
Who performs building and land valuations?
Building and land valuations are typically performed by licensed appraisers or assessors. These professionals have the training and expertise to determine the fair market value of a property using accepted valuation methods and industry standards.
Watch Video: How to Calculate Market Value of Building or Property
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