Valuation of Land & Building in India
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.
Land Valuation is the technique of estimating and determining the fair price or value of a land parcel. In this article, we explain you all major land valuation methods, any or all of which can be used for valuation of land depending on the amount of information available.
Land can be classified into agricultural & non-agricultural in both urban and rural areas. Generally, land in an urban area whether agricultural or non-agricultural is valued higher than rural land. Agricultural land which is more fertile is generally valued higher than barren land. Non-agricultural land can be classified into residential, industrial or commercial and the value of such lands primarily depend on the development potential by constructing appropriate structure over them.
Preparation of Valuation Report for your Property.
Depends upon case to case basis
- Preparation of Project Report
- Preparation of Business Proposal
- Preparation of Business Plan
- Business or Individual planning to strengthen documentation and get the valuation for their property.
- Purchase of Plan
- Expert Assigned
- Share the details as requested
- Preparation of Report/Proposal.
- Details shall be requested directly at the time of preparation.
What Is Land And Building Method Of Valuation?
The “land and building” method of valuation is the most common type of valuation for residential properties.
This method combines the two most common factors in determining a property’s fair market value into one formula, which works out to be about two-thirds of the property’s fair market value.
This type of valuation is based on the market price of that location and the norms and standards of property tax in that town or area. A land valuation is a process used to determine the value of a piece of land.
The appraisal will consider the land and all buildings on it, including their condition and age.
The appraiser will also look at comparable sales in your area, use the sales on similar properties to determine the value of your home (if it’s been listed), estimate any closing costs that might be incurred by a buyer, may also consider your home’s replacement cost or depreciated value before determining its value.
Some of the common methods of determining value include:
- Comparable Sales – This is one of the best and most proven ways to value a building. Using sales data on comparable properties, the appraiser calculates the value by exceeding sales prices, subtracting differences in size and condition, and then adjusting it to account for things such as location.
- Cost Approach – This method estimates a building’s value by estimating its replacement cost.
- Income Approach – This method uses cash flow techniques to determine a building’s value by using net income generated by typical uses of buildings (i.e., retail, office, industrial).
Purposes of Valuation of Building
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.
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.
This term represents the reduction in the market value of an asset due to age, wear and tear, and obsolescence.
Methods of Building Valuation
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 thegross 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 buildingswhich 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:
- 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
Factors for Valuation of Land
As they say, in real estate, its location, location and location. The biggest factor in land valuation is the location of land. Land in an urban area is more expensive than rural land, value of land in city centre is higher than the land in outskirts.
A commercial land is more valuable than residential or industrial land. Similarly, residential and industrial lands are more valuable than agricultural land. Hence, it is important to determine the usage of land to evaluate its price.
Smaller residential plot sizes generally fetch higher per unit rate as compared to larger plots because of affordability reasons. However, if the land can be used for industrial or commercial purposes, larger plot sizes may command a premium.
Generally, square or rectangular plots are preferred over irregular shapes. Hence, regular shaped plots of land command higher prices.
If the level of land is higher than the adjacent road, it will be difficult to lay water & drainage lines. Extra earth has to be excavated to make the plot at reasonable level. Similarly, if the land is considerably lower than the road level, substantial cost will be incurred in land filling. While valuing a piece of land, you should keep in mind all such levelling costs.
6. Frontage and Depth
A land with higher width facing the street or road commands premium. Similarly, the value of land also depends on its distance from the main road. A plot in the fourth or fifth street from main road is priced much lower than the one which faces the main road.
7. Return Frontage
A plot with multiple frontages commands premium over a plot with single frontage. For eg. a corner plot or a three side open plot will be priced higher than a plot with only one side open to road.
The value of land also depends on its accessibility. If a plot of land is land locked or if the access road is not wide enough, it will fetch much lower prices.
9. Floor Space Index (FSI)
Floor Space Index is the ratio of built up area to the area of land. The value of land also depends on FSI or in other words on the total floor area of the building that can be built on the plot.
10. Infrastructure & Development
The infrastructure & development in the vicinity of land have direct bearing on prices. A well-developed area which has schools, hospitals, wide roads, metro, 24X7 water supply & power will naturally fetch higher prices.
11. Nature of Soil
The bearing capacity of soil also affects the land valuation. If the soil bearing capacity is good, cost of foundation will be reasonable. However, the cost of foundation can go up significantly if the soil bearing capacity is poor. Hence, land with good soil bearing capacity will be priced higher.
Many people in India believe in Vastu Shastra. North facing and East facing plots command premium over West facing and South facing plots.
Plots of land which are subject to easement rights of air, light or passage will be less attractive to the prospective purchasers and depending on the inconvenience caused, there will be reduction in values of such lands.
14. Special Advantages
If a land has special advantages because of its location or any other reason, it should be considered in its valuation.
Land Valuation Methods
1. Comparative Method
It is the most popular method. In this method, value of land is estimated by analyzing recent sale prices of comparable land in the vicinity, adjusting the prices to account for any difference in size, shape, location and other features. But this method is useful where there is an active market and transaction prices are easily available. The valuation expert must check average prices over the years and check for any volatility in prices.
2. Development Method
This method is used to estimate value of such land which can be developed to unlock its true value. For eg. agricultural land after obtaining change in land use (CLU) to residential can be developed into a township of residential plots and multistoried buildings. Development method takes into account the full development potential of the land to arrive at fair market value. Important factors to be considered under this land valuation method are location, usage, FSI and nature of soil.
3. Allocation Method
This method assumes that in certain localities, a constant relationship exists between the land value and the total property value. For eg. in some location land value can be 50% of the total property value. But this assumption should be supported with enough statistics. This method is particularly 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 the vicinity by deducting the estimated value of the built up area from the sale price. Then the value 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 built up area. That is why, this method is generally used only for properties with newly built up areas that have negligible depreciation, or for properties where the built up area only represents a small component of the total value of the property.
5. Income Capitalization Method
Another method to value land is income capitalization method. This method has two sub-categories:
a) Capitalisation of Ground Rent
In this land valuation method, market rental value of land is estimated and then capitalized using a market-derived land capitalization rate to determine fair market value of land. Market rent and capitalisation rates should be taken for highest and best use case of land.
b) Land Residual Technique
In the land residual technique, the net operating income attributable to the land is isolated and capitalized to produce and indication of the land’s contribution to total property value. Following steps need to be followed:
- Hypothetically construct an optimum building on the land parcel i.e. highest and best use in all respects.
- Estimate the net operating income from the property as developed, using market rents and expenses.
- Calculate the amount of income required to pay a proper return on the building capitalization rate extracted from sales.
- Allocate remaining income (residual) to the land.
- Capitalize residual income into land value using a market-derived land capitalization rate.
6. Belting Method
This method of valuation of land takes into account the frontage and depth of the plot. A land with higher frontage will have more value. And, the value of land decreases as the depth of the plot (distance from main road) increases. In this method, the area is divided into belts with assigned values as a proportion of the value of a land on the main road. The main challenge in this method is to arrive at the rate of decrease in land rate as the distance increases from the road.
7. Guideline Value
In order to ascertain the value of the land for the purpose of stamp duty, property tax, wealth tax etc. government publishes guideline values for relevant period and location.