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 finance 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, condition 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 bylaws 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 the cost 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 favor 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.
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