Valuation of Immovable Properties

It is human nature to create controversy even where it does not exist. Expert values have been fighting, in vain, to find out whether valuation is an art or a science. To set this rift at rest, Justice Viscount Simon of the House of Lords in Gold Coast Selection Trust case held that “valuation is an art and not an exact science. Mathematical certainty is not demanded, nor indeed is it possible”. Thus valuation cannot be tied up by rigid laws of nature or science. It also cannot work under fixed and inflexible set up of principles because it has great dependence in human nature and individual’ thinking.

It can not be said that vacant flats are always required to be valued on comparable sales method. Sometimes circumstances may demand value estimation by Rental Method. Hence two flats in the same building may have different values for the same area. Similarly two adjacent plots in the same area may have different values because one plot falls in garden reservation and another plot is marked for commercial user. An old case of human intelligence affecting value of property is worth studying. An open plot of land was offered for sale in a posh locality of Mumbai.

But there were no buyers for the plot because it was subjected to the covenant that no construction above 5′ would be allowed to be put up in the plot. Owner failed to sell plot for 2 years in spite of his best efforts. One day a person came with an offer of Rs. 10 lacs with condition that the deal be completed in 2 days time. Owner was too happy and he immediately agreed to sell the property, but he also let the buyer know about the covenant. The purchaser replied that he was aware of that restriction.

After the deal was completed, the curious vendor asked the purchaser about the proposed use to which the land would be put and he came to know that the purchaser intended to put up a petrol pump on the said plot. Thus human intelligence changed a `bad covenant’ into a lucrative business use. The plot worth few thousands fetched a price in lacs. That is why it is said that stream of thoughts are the wings gifted by the nature to the whole mankind. With these wings of thoughts, we can solve many riddles.

One may wonder why Harshad Mehta’s flat in NCPA Apartment at Nariman Point in April 2000 fetched only 460 lacs whereas a similar flat of Chabrias at the same period of time in the same building fetched 603 lacs. Both flats were sold in the open market. The reason for low price in the case of Harshad Mehta’s flat was the forced sale under court’s auction order. Purchasers exploited the distress condition and offered less price. It was a case of a unwilling seller and sale in the shortest period of time. In the other case, plenty of time for the free sale was envisaged, hence higher price was available.

It is thus clear that value of property goes on changing depending upon facts and circumstances in each case at relevant period of time. Value assumes new colour and new meaning with the prefix or adjective attached to it. 5. 2 Meaning of value with different adjectives attached to it FAIR MARKET VALUE: It is an estimate of price likely to be fetched in the open market. BOOK VALUE: It is the written down value of the property as shown in books of accounts or Balance Sheet. Normally it is lower than the market value of the asset in open market. VALUE-IN-USE:

The net present value is a cash flow that an asset generates for a specific owner under a specific use. Value-in-use is the value to one particular user, which may be above or below the market value of a property. INVESTMENT VALUE: This is the value to one particular investor, which may be above or below the market value of a property. INSURABLE VALUE: This is the value of real property covered by an insurance policy. Generally it does not include the site value. DISTRESS VALUE: An owner in an urgent need of liquidation his asset may sell property much below its true value in market.

A person in urgent need of money for major surgery or for daughter’s marriage or to meet business loss may be such case. REPLACEMENT VALUE: It is an estimate of cost of producing similar property at current prices of materials and labour. A bungalow constructed in 1980 at cost of Rs. 2 lacs may have replacement value in year 2000 of Rs. 24 lacs. NET PRESENT VALUE: It is the present day value of the property derived by deducting depreciation amount from the replacement value of the property. The bungalow built in 1980 and having replacement value of Rs.

24 lacs in 2000 will have net present value of Rs. 16 lacs. 8 lacs are attributed to – depreciation. FORCED SALE VALUE: It is an estimate of price the property of an unwilling seller would fetch in open market in shortest possible time. Non performing assets of a bank if auctioned in the market will have a forced sale value. INTRINSIC VALUE: It is the actual value or true value of the property. In India, property owners understand this aspect very well because of black money involved in sale/purchase. Intrinsic value may be Rs. 10 lacs but sale agreement value may be hardly Rs.

6 lacs. STATUTORY VALUE: It is the value of the property estimated in accordance with the provisions of the concerned statute. Value for Wealth Tax purpose is worked out as per rule 3/schedule III of W. T. Act. It is not market value but statutory value and normally it is much lower than market value. SALVAGE VALUE: It is the estimate of sale price of the old building after it has completed its probable service life. An old bungalow of 70 years age still in occupation of owner will have only salvage value in the market. SPECIAL VALUE:

It is a value to an individual buyer or seller for personal reasons. A person may pay 20% higher price for a flat than its market price, because his brother stays in the adjoining flat. STIGMA VALUE: It is the estimate of price offered by unwilling purchasers due to some stigma attached to the property. House may be believed to be haunted or it is built on burial ground. It will have low price. RELIGIOUS VALUE: It is the value fetched in open market due to religious reasons or beliefs. In the South all plots at T road junction are considered inauspicious and such plots fetch low price.

Similarly `Vyagramukhi’ plots are considered inauspicious and Gaumukhi plots are considered auspicious by Hindus. Now people have started following “Vastu-shatra” principles or “Feng Shui” principles and accordingly they pay more or less price for good or bad plots as per these theories. SENTIMENTAL VALUE: It is a value to the individual buyer or seller who determines value on sentimental grounds. A person may pay 20% higher price to purchase a old house in his native place merely because his childhood memories are attached to it.

A person may sell at 20% lower price than its purchase price only because his son died in new house after shifting. ANNUAL LETTING VALUE: It is the rental value of the property fixed by the local authority for the purposes of levy of property taxes. BREAKUP VALUE: When any established production unit is closed down and individual sale of different asset is envisaged, it is termed as breakup value of the property. Each asset is valued in isolation of the other asset in same property. Land, building and plants/machineries are separately valued. GOING CONCERN VALUE:

It is an estimate of the price of the running (profit making) production unit or commercial establishment as a whole block with its tangible and intangible assets and liabilities. Sometimes it is lower than the breakup value of the individual assets of the unit. This situation many a time gives rise to disputes. In the recent merger of Andhra Valley and Tata Power, Ratan Tata had to clarify by Press notification that in a merger, greater weightage is given to profits of companies rather than asset values of each company. FOUR BASIC ATTRIBUTES OF IMMOVABLE PROPERTY (i) Utility.

(ii) Scarcity, (iii) Demand, (iv) Transferability. (Legal Complexity) Each of these four factors contributes to the ultimate value of the property in the open market. If utility is reduced, price is reduced. If asset is scarcely available, its price increases. If demand is increased, price increases and if it is difficult to transfer, its price reduces. If the property is under legal proceedings or under legal charges then no buyer is ready to buy that property or he will ask for huge price reduction. These are the basic known attributes of movable and immovable properties.

5. 3 FACTORS INFLUENCING VALUATION Valuation of immovable property is more complex in nature. There are perhaps infinite factors which may affect the value of any immovable property in an open market. All these factors may not be present in each single property but varieties of these factors do exist in different properties. That is why, like two human beings, two properties are never identical in every respect. Some difference is bound to exist, because there are perhaps as many factors affecting the value of the property as are the number of persons living on this earth.

Each individual may be a buyer or a seller, thinks differently and fixes different values. These innumerable factors can be broadly categorized into the following four broad groups:- Economic Aspects: Demand and supply, national and state economic policies, Income fetching capacity of property, money market and investment market, cyclic boom and recession periods etc. Legal Aspects: Rent Control Act, U. L. C. Act, Coastal regulations, Land Acquisition Act, Transfer of Property Act, taxation laws, Development Control Rules, Building Bylaws, Town Planning Act and permitted land user.

Technical Aspects: Technical aspect includes Land characteristics like size, shape, and frontage, and topography, soil conditions, building specifications, amenities, environmental conditions and weather. Social Aspects: Proximity of civic amenities like market, station, cinema, garden etc. Class of neighborhood, political conditions in area, prestige factor, personal factors, community factors, stigma or religious aspects.

5. 4 APPROACHES DETERMING VALUATION OF IMMOVABLE PROPERTY.

There are three usual approaches to determining the fair market value of a property: cost approach, market approach, and income approach. The appraiser will determine which of the approaches is applicable and develop an appraisal based upon information from each individual market area. Costs, income, and sales vary widely from area to area and particular importance is given to the specific location of the property. The sales comparison approach attempts to compare a target propertys value with similar properties and adjust the value of the target property accordingly.

Income Approach: Rental Method Discounted cash flow technique Profit Method Statutory Method Cost Approach: Land and Building Method Book Value Method Belting Theory Hypothetical Plotting Scheme Market Approach: Comparable Sales Method Residue Method Hypothetical Building Scheme General priorities of the Courts for these approaches are: (1) Market Approach (2) Income Approach (3) Cost Approach However depending upon the purpose and facts and circumstances of the case, selection of method goes on changing.