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LAND VALUATION TECHNIQUES

Property Valuation is a crucial as well as a tricky aspect of any property transaction. Whether you wish to buysell property, get a home loan against property or even execute your will, correct valuation of property is extremely important.
How to assess the value of a property?
  • Either opt for self-assessment or
  • Make use of an external source like professional agencies and government registered valuers.
  • In fact some real estate agents also assess properties based on the prevailing market rates.
 
Property valuation methods in India are as varied as the property laws in various states.
Property valuations made by district administration are often not in sync with the market dynamics and therefore, do not represent the actual trading price of the property.
Certified property valuations also come in handy to expedite the bank loan approval process for loan against property as security.
Methods for Property Valuation
Though there is no formula or scientific technique for valuing a property, there are various methods to estimate the value of property.
• Comparable Property Method:
Can estimate the value of your property on the basis of the average value rate per unit area at which similar property in your vicinity was actually sold.
Multiply this by the actual area of your property and make upward or downward adjustments on account of some specific advantages or defects in the property under consideration.
• Discounted Value of Rentals:
Discount the future cash flows i.e. future projected rent earning capacity of the property to the present at the current interest rate. This will give an estimate of the monetary value of the property.
Factors Affecting the Market Value of a Property
The important parameters that should be keep in mind while coming to a decent value for the property are:
• The demand and supply conditions.
• The quality of the property viz. the material used, building design, age of the property and the credentials of its developers.
• The location of the property, the local infrastructure in the area, safety and security, basic amenities and connectivity by road, rail or air.
• Maintenance of the property and its premises.
• Layout of the premises in terms of space utilization etc. 
METHODS USED TO ASSESS LAND VALUE
Three Approaches to Valuing Real Estate
Valuation of the land involves
· Determining the highest and best use of the site,
· Estimating the value by current appraisal theory, and
· Reconciling to a final estimate of value.
DETERMINING THE HIGHEST AND BEST USE OF THE SITE.
The four criteria that highest and best use must meet are:
· physically possible,
· legally permissible,
· financially feasible, and
· maximally productive.
Two types of analyzes are made in determining the highest and best use.
· The first is the highest and best use of the site, if vacant;
· The second is the highest and best use of the site as improved, or if undeveloped as proposed to be improved.
There are three standard approaches to estimating market value:
· The cost approach,
· The sales comparison approach and
· The income approach.
The cost approach is based upon the principle that
  • the informed purchaser would pay no more than the cost to produce a substitute property with the same utility as the subject property.
  • applicable when the property being appraised involves relatively new improvements which represent the highest and best use of the land or when relatively unique or specialized improvements are located on the site and for which there exists no comparable properties on the market.
The sales comparison approach
  • utilizes prices paid in actual market transactions of similar properties to estimate the value of the site.
  • It is dependent upon utilizing truly comparable market or sales data which have occurred near enough in time to reflect market conditions relative to the time period of the appraisal.
  • This method could also be used to estimate the rental value.
The income capitalization approach is
  • widely applied in appraising income-producing properties.
  • Anticipated present and future net operating income, as well as any future reversions, are discounted to a present worth figure through the capitalization process.
  • relies upon market data to establish current market values and expense levels to arrive at an expected net operating income.
The resulting indications of value from the three approaches to value are correlated into a final estimate of value for the site.
It is not always possible or practicable to use all three approaches to value. The nature of the property being appraised, and the amount, quality, and type of data available dictate the use of each of the three approaches.
Specific Methods Used in Appraising Land Value
In the valuation process the land value estimate is a separate step accomplished by applying either sales comparison or income capitalization techniques.
The most reliable way to estimate land value is by sales comparison.
In all, seven procedures can be used to obtain land value indications.
1. Sales comparison -- Sales of similar, vacant parcels are analyzed, compared, and adjusted to provide a value indication for the land being appraised.
2. Proportional Relationship -- Relating a site to a known standard site. The difference can be expressed as a percentage. This procedure can be used when there is little value evidence in existence.
3. Land Residual Technique -- It is assumed that the land is improved to its highest and best use. All operating expenses and the return attributable to other agents of production are deducted, and the net income imputed to the land is capitalized to derive an estimate of land value.
4. Allocation -- Sales of improved properties are analyzed, and the prices paid are allocated between the land and the improvements.
5. Extraction -- Land value is estimated by subtracting the estimated value of the depreciated improvements from the known sale price of the property.
6. Ground Rent Capitalization -- This procedure is used when land rental and capitalization rates are readily available, as in well-developed areas. Net ground rent -- the net amount paid for the right to use and occupy the land -- is estimated and divided by a land capitalization rate.
7. Subdivision Development -- The total value of undeveloped land is estimated as if the land were subdivided, developed, and sold. Development costs, incentive costs, and carrying charges are subtracted from the estimated proceeds of sale, and the net income projection is discounted over the estimated period required for market absorption of the developed sites.
With the appraisal process and the approaches to value understood, it is appropriate to consider the methods and procedures used to analyze and interpret the land data. The choice is based upon what data is available, its reliability and usefulness in making a value estimate.
Standard Units of Measure
Land markets can be estimated on the basis of a certain value per unit and the unit is often one of the following:
1. Per Dwelling Unit site
2. Per square-foot
3. Per acre
4. Per front-foot
The selection of the most appropriate unit, or combination of units, is important. It is a decision which can only be made after a careful analysis of the market and the available data.
Land is not always sold on the same basis, but rather on the value in the eyes of the user. The measure can be used to assist in the interpretation of market evidence for a few sites (the sample), so that all of the sites can be properly estimated (the population).
  • The standard residential site may respond well to a value Per Dwelling Unit Site.
  • A commercial use may be better estimated by using a value Per Square-Foot or Per Front-Foot.
  • A farm or rural site may be better estimated by using a value Per Acre.
Once the market value per unit of measure has been established for the standard site representative of the area, the value will become a base to which all other sites can be compared.
Adjustments will have to be made for differences between the standard site and every other site.
  • Positive adjustment for desirable characteristics, such as superior location, view, topography, services or access.
  • Negative adjustment for undesirable characteristics, such as poor location, longer distance to transportation, longer distance to the civic center, wet ground in the winter, over-abundance of rock or poor access
Site valuation may be summed up in the manner of a Unity Rating which will be X% greater or lesser than unity (1.0) when compared with the base standard site characteristics adopted for tile area.
Adjustments for Unique Features
After the base value has been estimated, the individual sites must be considered. Some sites have unique advantages or disadvantages compared to other sites. Actual real estate market values vary for each site and are dependent upon numerous individual features, qualities, characteristics and restrictions such as:
location
utilities
topography
traffic
zoning
use density
river
regulations
site
view
transportation
noise
access
frontage
parks
utilities
The difference can then be converted to an adjustment of value. For example, if a site were better than the standard in a district because of
  • distance to downtown of 5%, site size of 5% ($4,000),
  • location of transportation 10% ($8,000) and
  • convenience of recreation of 5% ($4,000),
The site being appraised would be 25% ($20,000) superior to the standard site.
Per Square-Foot -- The value per square-foot unit of measure has application in
  • estimating value for commercial and industrial lands where the applied rate will be more constant over the entire site.
  • The size of the site limits or enhances the use and market value of a site.
  • The application of a market value per square-foot to residential lands is not common.
Per Acre -- Beyond the limits of the urban area,
  • There will be those parcels that are so much larger that they will not respond well or at all to dwelling unit site value, a square-foot or front-foot unit measure.
  • They might relate to agricultural benefits, such as soil fertility, distance to markets or water supply.
PROPORTIONAL RELATIONSHIP
If a jurisdiction has very limited land data, such as permitted use (zoning) and density of population, but no assessment system, it might be possible to build a simple model. An assessor might draw a grid, showing the potential use on the Y axis and the resulting land market value on the X axis.
USE - LOCATIONMAJOR CITYSUBURBANDEVELOPINGRURAL
COMMERCIAL    
Central business20.00+   
Downtown area10.005.002.50 
Standard3.002.001.00.75
Secondary1.50-1.00.60.50
INDUSTRIAL    
Prime2.50+1.751.50.95
Standard1.501.00.75.65
Inferior.75-.50.40.25
HOME    
Prime1.50+1.00.75.50
Standard1.00.75.60.40
Inferior.65-.45.40.25
RURAL AND FARMING    
Acreage close-in.20+.15.10.05
Acreage distant .10.05.02
Intense farming  .03.02
General farming  .02.01-
Basis for comparison:
An home site of standard quality in a major city = 1.00 Moving toward a superior location and potential use would influence the land market value in a positive manner. Moving away from the base location and use to one which was inferior would influence the land market value in a negative manner.
 

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