An article about " Valuation Of Immovable Property For Sale And Purchase "

Valuation Of Immovable Property For Sale And Purchase

Immovable property needs to be valued for sale and purchase to determine the price payable. Financial Institutions, Banks and moneylenders insist on valuation of immovable property to ascertain the margin available, worth of the security offered to Loans. It is a prerequisite for financing Home Loans. Generally the financial institutions or the housing fiancé companies get the property valued by their appointed approved values, while the tax authorities follow valuation as per tax laws and the land and building method.

Valuers  : 

Valuers are usually engineers or architects appointed by the Central Board of Direct Taxes under Section 3A of Wealth Tax Rules 1957. They are also members of the Institution of Valuers, which, incidentally, has a branch in Bangalore. These valuers do not have any personal interest in the properties, which they value.

Factors that determine Fair Market Valuers

There are various factors, both controllable and non-controllable, which affect the fair market valuation. Non-controllable factors are macro-economic conditions, political stability, government policy, and price index. Controllable factors are location, ondition of the property, its surroundings, reputation of the seller; whether the property is free hold or Lease hold, purpose for which the property can be used, whether the building byelaws are applicable, floor area ratio permitted, nature of the soil, size of the plot, occupant of the property, the shape of the property frontage available and infrastructure available. With the vaastu being the rage of the day, the shape, road facing also play vital roles.

Fair Market Value

Any seller who is moderately intelligent and prudent, would not accept a price lesser than the market value. The same goes for any purchaser who would definitely not pay more than the market value at any given time. Thus, fair market value is the price, that a normal prudent willing owner/seller, not obliged to sell; may reasonably hope to get from a normal prudent and willing purchaser, with regard to its existing conditions, with all its merits and demerits, and its potential possibilities. It is to be noted that the fair market value of the same property keeps changing and valuation is relevant to the time of valuation. Various methods and techniques are adopted to value the property and arrive at a fair market value. They are as under:

Land and Building Method

This is most the frequently used method and is used by direct tax authorities with slight modification. The cost of the land is arrived by referring to the recent sales in the area. The cost of the construction of the building is arrived which is reduced by the permitted depreciation. Other infrastructural factors like availability of water, power connection and the relevant deposits are also considered. Some valuers consider the government rates fixed for the land instead of market value. Tax authorities follow this method by some modifications, wherein thecost of rebuilding the structure on the land less allowable depreciation is considered.

Comparable Sale Method

In this method, sales of the adjacent immovable properties having similar merits and demerits; with bonafide intentions; transactions between willing seller and willing purchasers are considered. The proximate date of valuation and the date of sales are very important. Generally it is assumed that an actual transaction, with respect to specific property of recent date is a reasonable guide. Unregistered sale transactions and agreement to sell are not considered. All the available sales of adjacent immovable properties with the proximate dates are to be considered and one cannot pick and choose. This method is more convenient, reducing the element of speculation to minimum.

Rent Income Capitalization Method

This is based on rental income of the property. In this method gross annual rental income of the property is arrived. From out of the gross rental income and the outgoings to maintain the building and statutory outgoings are deducted.
The available net rent is multiplied by certain preconceived number of years. The multiplier factor is very important. In early part of 1950's, the multiplier factor was 20 years rent, having regard to the rate of interest on gilt-edged securities.

This was gradually changed in 1960 during which period the banks offered interest at the rate of 7 % to 10% and at present, the rate of interest is reduced on bank deposits as well as gilt edged securities. In certain cases the net rental value is multiplied by the remaining age of the building. This method suffers from certain limitations. The rent may be unreasonably high or unreasonably low. The property might have been let out long ago and rent might have remained unchanged for years.This method is more suitable in case of residential property where is the property is let out recently on prevailing rents / standard rent.

Average method

In this method, the value of the property is arrived by adopting different methods such as Land and Building Method, Rent Capitalization Method etc., and the average value of all these methods is arrived at. 

Standard rent method

This is akin to rent capitalization method. However, the Standard Rent under rent control act is used to arrive at the gross rent.

Obtaining expert opinion

There are experts in valuation of immovable properties with necessary expertise on subject of valuation and have acquired sufficient practical experience in the field. They are capable of forming independent opinion. The expert must be given sufficient time to analyze the issue and arrive at the valuation of immovable property. The opinion of the expert is admissible in evidence.

Other Sources Wealth tax returns

The person who owns property falling under Wealth Tax Act 1957 has to disclose the market value of the property and pay taxes accordingly. The disclosures made by the owner in his wealth tax returns should be a good indicator of the market value of the property. This market value is more relevant and finds favour with the government while compensating the owner on acquisition. However, the values disclosed in Wealth Tax Returns cannot be deciding or conclusive in determining the fair market value but throws some light on the issue.

Valuation on the basis of the rate fixed under urban land (Ceiling area regulation act 1976)

Central government has repealed the act during 1999, but many states have not yet repealed the said act. The Government of Karnataka has, however repealed the act. Under this act government fixes the rates of market value of the land in exercise of its power for particular localities from year to year, which will be guiding factor in arriving at fair market value of the property. Usually the Land and Building Method, comparable sale method are the much favored methods with the seller and the purchaser.