VALUATION LAND & BUILDINGS UNIT-8
Chapter-1 Valuation of Real Estate
Valuation is an art of judgment based on experience and relevant statistical data to forecast the value of a property at present.
1.1 Cost, Price and Value
1.1.1 Definition of Price
Price is the amount of money paid by the buyer to the seller in exchange for any product and service. The amount charged by the seller for a product is known as its price, which includes cost and the profit margin. For example- If you buy a product for Rs 250, then it is the price of that product.
1.1.2 Definition of Cost
Cost is the amount incurred on the inputs like land, labour, capital, enterprise, etc. for producing any product. It is the amount of money spent by the company in the manufacturing of a product. For example- If a company manufactures shoes, then the expenses incurred on raw materials, salaries, rent, interest, taxes, duties, etc. determines the cost of the product.
1.1.3 Definition of Value
Value is the usefulness of any product to a customer. In terms of money and varies from customer to customer. For example- If you are going to a gym by spending 1000 bucks a month, the output seen is worth the expense, then it is the value that you create for a gym, regarding the service being offered there. Here the worth is its value.
Property value refers to the worth of a piece of real estate based on the price that a buyer and seller agree upon. According to economic theory, the value of a property converges at the point where the forces of supply meet the forces of demand. In other words, the value of a property at a given time is determined by what the market will bear.
What buyers are willing to pay for property depends on a number of issues, including how motivated they are is to make the purchase, their negotiating skills and the condition of other properties in the area.
The word ‘value’ is highly subjective. Value or worth of the property depends on individual persons own the property depends on individual persons own perception of ‘Better life’. Persons from different economic strata in the society will have different viewpoints on the fair value of an asset. Thus we can say that value is mainly person specific concept. But we must understand the difference between value to the individual and value to the market …. READ MORE
4.1 Methods of Cost Estimates for Buildings
Cost of Construction: In calculating the value of the building it becomes necessary to assume cost of construction, or what is primarily known as prime cost.
A cost estimate is predicted expenditure of a project which is generally prepared before the project is taken up. It is prepared in different types based on the requirement of project.
The construction cost estimates can be prepared either in a detailed manner by taking into consideration item by item or can be calculated approximately without going much into the details. Based on these criteria’s, there are mainly 8 cost estimates methods which are followed in construction:
- Preliminary Cost Estimate
- Plinth Area Cost Estimate
- Cube Rate Cost Estimate
- Approximate Quantity Method Cost Estimate
- Detailed Cost Estimate
- Revised Cost Estimate
- Supplementary Cost Estimate
- Annual Repair Cost Estimate
4.1.1 Preliminary Cost Estimate
The preliminary cost estimate is also called an abstract cost estimate or approximate cost estimate or budget estimate. .
Preliminary estimates are prepared with reference to the cost of similar type projects in a practical manner. In this estimate, the approximate cost of each important item of work is displayed individually to know the necessity and utility of each item of work. The items of work include the cost of lands, cost of roads, electrification, water supply costs, cost of each building, etc.
4.1.2. Plinth Area Cost Estimate
Plinth area cost estimate is prepared on the basis of plinth area of building which is the area covered by external dimensions of building at the floor level and plinth area rate of building which is the cost of similar building with specifications in that locality.
Plinth area estimate is obtained by multiplying plinth area of building with plinth area rate.
For example if we require plinth area estimate of 100 sq.m in a particular locality and plinth area rate of a building in same locality is 2000 per sq.m then plinth area estimate is 100 X 2000 = 200000.
- Open areas, courtyards, etc. are not included in the plinth area. If the building is multi-storied, the plinth area estimate is prepared separately for each floor level.
- Some of the limitations this method are:
- Ceiling Height: The height of the floor is not considered in this method.
- Large openings: If there are large openings in the building we have to make adjustments for them.
4.13. Cube Rate Cost Estimate
Cube rate cost estimate of a building is obtained by multiplying plinth area with the height of building. Height of building should be considered from floor level to the top of the roof level. It is more suitable for multi storied buildings.
This method of estimation is accurate than plinth area method. The rate per cubic meter is taken into consideration based on the costs of similar type of buildings situated in that location. Foundation, plinth and parapet above the roof level are not considered in this type of estimate.
- Approximate Quantity Method Cost Estimate
In approximate quantity method cost estimate, the total wall length of the structure is measured and this length is multiplied by the rate per running meter which gives the cost of the building. The rate per running meter is calculated separately for the foundation and superstructure.
In case of foundation, rate per running meter is decided by considering quantities such as excavation cost, brick work cost up to plinth. While in case of superstructure quantities like brickwork for wall, wood works, floor finishing etc. are considered for deciding rate per running meter.
4.1.5. Detailed Cost Estimate
This is very accurate type of estimate. Quantities of items of work are measured and the cost of each item of work is calculated separately.
The rates of different items are provided according to the current schedule of rates and total estimated cost is calculated. 3 to 5 % of estimated cost is added to this for contingencies as miscellaneous expenditure.
The detailed Estimated should consist following details and documents.
- General Specifications
- Detailed Specifications
- Drawings/plans – layout plans, elevation, sectional views, detailed drawings etc.
- Designs and calculations – In case of buildings design of foundations, beams, slab etc.
- Schedule of rates
4.1.6. Revised Cost Estimate
Revised cost estimate is a detailed estimate and it is prepared when the original sanctioned estimate value is exceeded by 5% or more.
The increase may be due to sudden increase in cost of materials, cost of transportation etc. The reason behind the revision of estimate should be mentioned on the last page of revised estimate.
4.1.7. Supplementary Cost Estimate
Supplementary cost estimate is a detailed estimate and it is prepared freshly when there is a requirement of additional works during the progress of original work. The estimate sheet should consists of cost of original estimate as well as the total cost of work including supplementary cost of work for which sanction is required.
4.1.8. Annual Repair Cost Estimate
The annual repair cost estimate is also called as annual maintenance estimate which is prepared to know the maintenance costs of the building which will keep the structure in safe condition. Whitewashing, painting, minor repairs, etc. are taken into consideration while preparing annual repair estimate for a building.
- Life of Building: Economic/Physical/Legal
4.2.1 Economic Life :Economic life is the actual service life of the building. Well maintained building has more or less same years of economic life. Nevertheless, bad or neglected maintenance and excessive wear and tear reduces economic life of the property. Economic life of a building indicates life of a building which is economic to use; where cost of repairs is not prohibitive.
4.2.2.Physical Life : Physical life of the building is the actual survival life of the building before it collapses. It may be either more or in some cases even less than the planned life of the building.
In case of old buildings which are in good structural condition and which have already outlived their planned life (Say 60 years), yet, total physical life is adopted for the purpose of depreciation. If the building is 80 years old, its total physical life is adopted at 100 years, estimating 20 years as future life of such good building.
Bad workmanship, use of inferior materials, careless alterations and over loading of structures reduce physical life. In some cases accidents like fire, explosion, earthquake, flood damage causes total collapse of the structure much before its planned life. On the other hand it is not uncommon to see palaces having 200 years and temples made of stone having 400 years or even more physical life.
- Life due to legal constrains – Life of building in some case depends on legal constrains. The building with 60 years life may be erected on a leasehold land which has only 30 years lease period. As per terms of lease on expiry of lease period the building is to be demolished and open land is to be handed over to the lessor. Income from building would cease after 30 years. Valuer in such a case has to adopt total life of building as 30 years only even though its economic and physical life may be 60 years.
- Factors affecting life of the building
4.3.1 Effects of Atmospheric conditions:
a. Moisture – This is by far the most common cause for deterioration. Almost all deterioration processes involve the physical transport of deleterious agents into the building materials and chemical or biological reactions that break down the integrity of the material. Moisture is required for almost all such actions. Hence, keeping building materials ……………… READ MORE
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