WHAT IS CONTRACTORS METHOD OF VALUATION OF COMMERCIAL PROPERTY
Contractors method of valuation is one of the methods used to value commercial property. This method is also known as the “cost approach” and is often used when valuing new or recently built properties.
The contractors method of valuation involves estimating the cost of replacing the property with a similar property of the same size, quality, and function. The estimated cost is then adjusted for any depreciation or obsolescence that may have occurred since the property was built.
To calculate the estimated cost, the valuer will need to consider the following factors:
- Construction costs: This includes the cost of materials, labor, and equipment required to construct the property.
- Land value: This is the value of the land on which the property is built.
- Site improvements: This includes any improvements made to the site, such as landscaping or paving.
- Contingencies: This is an allowance for any unforeseen costs that may arise during construction.
Once the estimated cost has been calculated, the valuer will then adjust it for any depreciation or obsolescence. This may include factors such as wear and tear, changes in technology, or changes in market demand.
The contractors method of valuation can be a useful tool for valuing new or recently built properties, but it may not be appropriate for older properties that have undergone significant changes or renovations. It is also important to note that the contractors method of valuation is just one of several methods used to value commercial property, and the most appropriate method will depend on the specific circumstances of the property being valued.
The contractors method of valuation is a way of valuing commercial property based on the cost of replacing the property if it were to be destroyed. This method is also known as the “cost approach” and is often used for new or recently built properties.
To use the contractors method of valuation, the valuer estimates the cost of constructing a similar property of the same size, quality, and function. This estimate includes the cost of materials, labor, and equipment required to construct the property, as well as any site improvements and contingencies. The estimated cost is then adjusted for any depreciation or obsolescence that may have occurred since the property was built.
For example, let’s say a commercial property has a total floor area of 5,000 square feet and is located on a plot of land with a value of Rs.100,000. The estimated cost of constructing a similar property in the same location is Rs.1,000,000, including site improvements and contingencies. However, the property has been in use for 10 years and has experienced normal wear and tear, resulting in depreciation of 20%.
To calculate the value of the property using the contractors method of valuation, the valuer would take the estimated cost of Rs.1,000,000 and subtract 20% for depreciation, resulting in a value of Rs.800,000. The valuer would then add the value of the land, Rs.100,000, to arrive at a total property value of Rs.900,000.
It is important to note that the contractors method of valuation is just one of several methods used to value commercial property, and the most appropriate method will depend on the specific circumstances of the property being valued.
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