Methods of valuation of property

Valuation

Valuation is the technique of estimating the fair price or worth of a property (land, building, plant) at a given date, in terms of money, for a stated purpose.

Methods of valuation of properties

1. Rental (income) method: the net annual income of the property is capitalised using the year's purchase (YP): Value = Net income × YP. Used for rented or income-producing property.
2. Direct comparison (market) method: the value is found from recent sale prices of similar properties nearby, with adjustments. Mostly used for land and residential houses.
3. Cost (replacement) method: value = cost of land + present cost of construction − depreciation. Used for buildings that give no income, such as schools, hospitals and government buildings.
4. Plinth area (or cubic content) method: plinth area × local plinth area rate, less depreciation, plus land value. Used for a quick or approximate valuation.
5. Development (residual) method: for large land to be developed: Value = expected sale value of the developed plots − (development cost + profit). Used for land to be sub-divided.
6. Profit-based method: for business properties such as hotels, cinema halls and petrol pumps, the net profit is capitalised.
7. Land and building method: land and building are valued separately and added. For land, the belting method divides a deep plot into belts parallel to the road, each valued at a different rate.
8. Depreciation methods: straight line, constant percentage (declining balance), sinking fund and quantity survey methods, used for finding the building value.
9. Rent-based / lease-hold valuation: value of lease-hold or freehold interests, from the lease rent and period.