Techniques, Approaches & Comparison of Valuation- A Case Study of Residential Property of Nashik City
Mr. Vrushabh Kale1 , Dr. Nitin Bharadiya2 , Dr. P. L. Naktode3
1M.Tech. Valuation Student, Sandip University, Nashik, Maharashtra, India
2Associate Professor, Department of Civil Engineering, Sandip University, Nashik, India
3Professor and Head of Department, Department of Civil Engineering, Sandip University, Nashik, India
***
Abstract – A Valuation is combination of arts and science which regulates the value of property. Social & legal science factors are the part of arts and technical or physical factors are the part of science. While determining the fair market value of property it is important to see the interest of person in the property. Best and highest possible use of property is must while calculating the fair market value of property. There are various approaches available to calculate the fair market value of property. Each approach has is unique direction & feature while determining the fair market value of property. It is important apply most suitable approach to given kind of property. This dissertation attempt to examine the residential property using various approaches. Approaches like Income approach, Cost approach, Market approach are examined in the given dissertation. This study is carried out under supervision of Government registered valuer.
Key Words: Market value, Approach, Residential, Income, Cost,Depreciation,Replacementcost.
1.INTRODUCTION
ThefactorsaffectingvalueofpropertyareEconomical,Social , Legal & Technical. The intersecting relation between the Aspects of Valuation decide fair market value of the property. TheValuationofLand&Buildingassetisdepends onthesubjectmatterofvaluation.Itisainterestofaperson intheproperty.Thelegalandbestpossibleuseofproperty canonlygivefairmarketvalue.InRecenttimetheValuation ofLandandBuildingrequiredforCompaniesAct,Mortgage Purpose,VisaPurpose,Bankloanpurpose.TheMethodsof ValuationaredependingupontheAspectsofProperty.
InCurrentsituationtheneedofAppropriateapproachfor givenValuationishavingextremesignificance.
CaseStudytoevaluateFairMarketValueshouldbasedon natureofpropertyanditsfinancialbehaviour.
1.1 GENERAL
The research required for method to evaluate fair market value is proposed in the same research work. In India the PopularApproach for Valuation isCostApproach whichis basedonthe“PrincipleofSubstitution”.
PractisingValuersusedsinglemethodforeverykindof Land & Building. But it is important to categories the approachofvaluationbasedonFinancialPotential&Price equilibriumofasset.
Theresearchtoexaminetheapplicabilityofapproach ofValuationshouldbedone.
This dissertation examines the suitability of given approachforgivenkindofProperty.
1.2 Objective of Study
i) To Compare Techniques of Valuation of Land & Building.
ii) ToComparetheApproachesofValuationofLand& Building.
iii) To Calculate the percentage difference between approachesusedtocalculateFairMarketValue ofLand&Building.
2. LITERATURE REVIEW
i) A Andrew, M Pitt (2000)
InthegivenliteraturetheAuthorsillustratedapplicabilityof DepreciatedReplacementCostMethodforPublicBuildings. TheDepreciatedReplacementCostMethodisappliedbyRed Bookforthevaluationofspecializedlistedbuildingsinthe private sector. The other Valuation alternative / Valuation approachesarealsodiscussedingivenresearch.
ii) O Connellan, et al (1993)
InthegivenliteraturetheAuthorsdiscussedaboutthenew classification system & Methodology for buildings that is discountedassetrents(DAR)
TheAuthorsreferredtheDawkins(VO)vLeamingtonspa BC & Warwickshire cc (1961) RVR 291 for explanation of contractorstest.
Thetestingofthecostapproachisbasedonthreetestswhich are Starting point objective which based on opinion or judgment?
In the given literature the authors illustrated the factorsaffectingthevalueofproperty.Theauthorstookthe considerationoffactorslikeLocation,Marketability,Size, ageofproperty.
The authors carried out the comparison of two Building
Property Valuation revisited : The hierarchy of valuation approaches,methodsandmodels.Inthegivenliteraturethe authorsillustratedaboutthemethodsorapproachsuitable fortheparticulartypeofproperty.
ii) Scrutinyofdocuments&verificationofauthorized papers.
iii) Physicalsiteinspection&verificationofproperty.
iv) Demarcationofsite.
v) Preparationof valuationreportasperpurposeof valuation&banksrequirement.
vi) Adopting appropriate approach for given kind of property.
vii) Assigningfairmarketvaluetoproperty.
viii)Remarksregardingviolationofrules®ulations.
3.1 Valuation Approaches & Methods
INCOME APPROACH :-
The valuation approach in relation to the model of privatizationforthelanddevelopmentadopted.Inthegiven literaturetheauthorsillustratedaboutprivatizationofland propertydevelopmenthasbeencarriedoutinMalaysiasince 1980’s
3. METHODOLOGY
TheValuationofresidentialpropertyisbasedonthreekey factorswhichareutility,marketability,bestpossibleuseof property.Therearevariousapproacheswhichcanforecast thevalueofproperty.
Beforeapplyinganyapproachtopropertyitisimportantto make sure the marketabilityand enforceability. Document scrutiny is foremost thing before doing physical site inspection.Inthegivendissertationthedocumentswhichare examine before valuation were which was Deed, Building plan, Building commencement certificate, Building completion certificate , electricity bill, Nashik municipal housetaxreceipt,waterbillwereexaminedunderguidance ofgovernmentregisteredvaluer.
Physicalsiteinspectioniscrucialbeforedoingvaluation.Itis importanttodoverification&identificationofpropertyby valueritself.Thepropertyboundariesshouldmatchasper deed&buildingplan.
Thedetailsofthepropertylikesurveynumber,CTSnumber, finalplotnumber,buildingname,wingnumber,flatnumber, premisesbuiltupareawereverifiedundersupervisionof governmentregisteredvaluer.
Thestepsinvolvebeforeassigningfairmarketvaluewereas flows:-
i) Collectionofdocumentsfromclients.
Income approach is most suitable for investment property.Thisinvestmentpropertyconsiderthesignificance ofutility,liquidity,marketability.Theinvestmentproperty consisttheleaseholdland,rentedasset,cinemahouses,hotel, petrol pump, marriage hall. This method is based on capitalization of net income incurred from property. It is basedontheprincipleofanticipationofbenefits.
The chronological procedure in income capitalization method,itisasunder:-
i) Obtain data from market, which is documents of property,rentalstatusofproperty.
ii) Physical site inspection of property and survey of rentalsinthatarea.
iii) Tocalculategrossrentobtainingfromproperty.
iv) Adoptproperrateofinterest.
v) Deductallexpense.
vi) Capitalizenetreceivableincome.
vii) Toreachcapitalvalue.
COST APPROACH :-
This method is used when asset having the capacity of marketabilitybutnothavinganyincomegeneratingfeature. Costapproachisbasedontheprincipleofsubstitution.Itis basedontheideaofthattheprospectivepurchasewouldnot spend more money than original expenditure cost of property.
The cost approach works on the calculating the cost of acquiringtheasset.Bycalculatingvalueoflandatprevalent timezone&costofconstructionincurred.Ifbuildingisold thendepreciationisallowedtoapplyonreplacementcostof property.Themostpopularmethodincostapproachisland &buildingmethod.
Value of property = prevalent land value + replacement valueofbuilding-depreciation.Incostapproachthevalueof landiscalculatedbyeitherBeltingmethodorHypothetical plottingscheme.Thereplacementcostcancomputebycost index method or by detailed quantity survey method.
Depreciation is deterioration of property value due to physical,economical,functionalobsolescence.Theamountof depreciationcancalculatebystraightlinemethod.
MARKET APPROACH:-
Thisapproachisveryvital&widelyusedamongthevaluer while doing valuation for various purpose. The market approachisbasedontheeconomicprincipalofcomparison &substitution.
Sales comparison method:- Insalecomparisonmethodthe subjectpropertyforvaluationisdirectlycomparewithsale instances of recent sale of property happen in particular area.Theattributesofpropertyhavesignificantimportance insalescomparisonmethod.
In sales comparison method each attribute of property having certain weightage. In land valuation the attribute whichplayimportantrolewhilevaluatingthepropertyby salecomparison methodaretimezone,size, location,age, amenityprovided.Theimportanceofattributesaredepends onthechoiceoflocalpopulationinthatarea.Itisimportant for valuer to do the physical site inspection of each sale instances involve valuation of subject property and verificationof genuinedocuments.Studyofwholeeconomic situation in the subject property is situated. If the comparablesalesofproperty
4.CASE STUDY :-
TheAimtothiscasestudyistodeterminethefairmarket valueofresidentialpropertyofNashikcityusingdifferent approachofvaluation.Thedocumentscrutiny,physicalsite inspection & Depiction of remarks and circumstance was done by “Vrushabh kale” in presence of government registeredvaluer.
4.1 Case Study 1:-
Detailsofproperty:-
Locationofproperty:-FlatNoD-2,C-wing, ThatteNagar,Gangapur Road,Nashik(M.S)
SurveyNo:-715/A/8/1A
FinalplotNo:-455
AgeofBuilding:-20years
Builtuparea:-111.20SQ.M(parkingarea=40.89
SQ.M,Gardenarea=92.90SQ.M)
Valuation by Income approach:-
Capitalvalue=NetAnnualincome*Years Purchase
Capitalvalue={(25000-5000)*12}*{1/0.03}
Capitalvalue=₹80,00,000
Thefairmarketvalueofpropertyis₹8000000by incomeapproach.
Valuation by Market Approach :-
Aftersalesinstancescomparisonofvariouspropertythe prevalentMarketrate areadoptedundermarketapproach.
Valuation by cost Approach:-
Valuationofland=Prevalentmarket rateofland*Areaof land
=₹34432/SQ.M*(101.09+40.89+92.90SQ.M)
=₹80,87,388.16
Replacementcostofbuilding=(Replacementrate* Builtuparea) =21520/SQ.M*111.20
=₹23,93,024.00
Totalamountofdepreciationofbuilding= (Depreciation/year*Ageofbuilding) =35895.36*20 =7,17,907.2
Valuation of property = (Value of land + Replaceme Depreciation)
=₹80,87,388.16+₹23,93,024-7,17,907.2
=₹97,62,504.96
4.2 Case Study 2 :-
Details of Property:-
Locationofproperty:-Plot&Construction, “AashraVrudhashram TakliRoad,Dwarka Nashik(M.S)
SurveyNo:-432/1/1B/2/4
plotNo:-4
AgeofBuilding:-30years
PlotArea:-211.35SQ.M
Builtuparea:-195.66SQ.M
Valuation by Income Approach:-
Capitalvalue=NetAnnualincome*Yearspurchase
Capitalvalue={(20000-5000)*12}*{1/0.025}
Capitalvalue=₹72,00,000.00
Valuation by Market Approach :-
Aftersalesinstancescomparisonofvariouspropertythe prevalentMarketrate areadoptedundermarketapproach.
Capitalvalue={(14000-4000)*12}*{1/0.035}
Capitalvalue=₹34,28,571.43
Valuation by Market Approach:-
Aftersalesinstancescomparisonofvariousproperty the prevalent Market rate are adopted under market approach.
Valuation by Cost Approach:-
Valuationofproperty=(Valueof land+ Replacementcostof Building–Depreciation)
=₹56,85,315.00+42,10,603.2-18,94,771.5
=₹80,01,146.7
Round up Value of property by cost approach is ₹80,01,000.00
4.3 Case Study 3:Details of Property:-
Locationofproperty:-RowHouseNo.02, SukamalRowHouse, Near“BafnaBazar”,Audumber Nagar,AmrutDham,Panchavati, Nashik(M.S)
SurveyNo:-246/10
plotNo:-3/A(part)
AgeofBuilding:-05years
Builtuparea:-76.17SQ.M
Valuation by Income approach:Capitalvalue=NetAnnualincome*Years
Valuation by Cost Approach :-
Valuationofland=Prevalentrate*LandArea
=₹22,596/SQ.M*(69.24SQ.M)
=₹15,64,547.04
Replacementcost=Replacementrate*Builtuparea ofbuilding
=21520/SQ.M*76.17
=₹16,39,178.40
TotalDepreciation=Depreciation/year*Ageofbuilding =24,587.68*05
=1,22,938.40
Valuationofproperty=[Valueofland+Replacement Costofbuilding-Depreciation]
=₹15,64,547.04+₹16,39,178.40-₹1,22,938.40
=₹30,80,787.04
Round up Value of property by cost approach is ₹30,81,000.00
3. CONCLUSIONS
Eachpropertyhaveitsuniquefeaturewhiledeterminingfair marketvalue.Everyapproachcangivedifferentfairmarket value based on its nature, market forces & economic potential. Market value of property can be positive or negativeinnaturewithrespecttootherapproach.Income approach is based on the income generating attributes of propertywhilecostapproachisbasedonphysicalnatureof property. From the results it is observed that the general percentagechangebetweenapproachesisabout20%.
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