| Valuation cannot be
tiedup by rigid laws of nature or science. It also
can not work under fixed and unflexible set up of
principles because it has great dependence in human
nature and individual's thinking. It can not be said
that vacant flats are always required to be valued
on comparable sales method. Some times circumstances
may demand value estimation by Rental Method. Hence
two flats in same building may have different values
for same area. |
It is human nature to create controversy
even where it does not exist. Expert valuers 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
it is possible".
Thus valuation cannot be tied up by rigid
laws of nature or science. It also cannot work under fixed
and unflexible 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 interesting case of human intelligence
affecting value of property, though an old case, is worth
study. 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 inspite 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
convenant. 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. Let us see how meaning
or value of property goes on changing 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.
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 daughters
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.
Movable or immovable property has value
in the market because of four basic attributes. (i)
Utility, (ii) Scarcity, (iii) Demand, (iv)
Transferability. 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. These are the basic known attributes of
movable and immovable properties.
But valuation of immovable property is
more complex in nature. Many more factors are required to be
considered for valuation. 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
categorised into the following four broad groups :-
(A) 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.
(B) 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.
(C) Technical Aspects: Land
characteristics like size, shape, frontage, topography, soil
conditions, building specifications and amenities.
Environmental conditions and weather.
(D) Social Aspects: Proximity of
civic amenities like market, station, cinema, garden etc.
Class of neighbourhood, political conditions in area,
prestige factor, personal factors, community factors, stigma
or religious aspects.
Depending upon facts and circumstances in
each given case the property is valued by any one or
combination of methods. There are basically three approaches
to value an immovable property and under each approach there
are different methods.
(A) Income Approach :
Rental Method,
Discounted cash flow technique,
Profit Method,
Statutory Method.
(B) Cost Approach :
Land and Building Method,
Book Value Method,
Belting Theory,
Hypothetical Plotting Scheme,
(C) 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 and (3) Cost Approach. However depending upon
purpose and facts and circumstances of the case, selection
of method goes on changing. |
