Fair Market Value (FMV) / Open Market Value (OMV):
Price is a fact, value is an estimate what the price ought to be and worth is what it is worth to an individual.
FMV / OMV is if one sells in open market under normal condition what it would fetch that has to be construed as FMV / OMV. The transaction is between a willing buyer and a willing seller.
Market Realizable Value (MRV): is the amount reasonably receivable from the sale of a property within shortest period in a transparent transaction and the bidder has to pay the remaining amount of the offer in short period as per the condition of auction upset value and in addition to that, the Forced Sale Value further depends on local real estate market driving forces.
It is the property type that determines method, not the purpose of the valuation.
Valuation Methods:
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Land and Building Method |
Income Method |
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Market Value of land is added to the depreciated reproduction cost of the building (The present value of the building), the result is value by land and building method. Market Value of land is assessed by comparable sales method proximate in time and type. Construction rates applied is based on CPWD or States PWD based rates for estimation purpose. This method is also known as Cost Method. |
Rental Method / Rent Capitalization Technique: Net rental income is capitalized by a year’s purchase. The security percent is market derived. When a property is valued by Rental Method, value by Land and Building Method also is declared. When valued for Fair Rent, fair rent formula can be applied to the value arrived by land and building method and that gross is the ceiling. |
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Contractor’s Method This method is used for properties usually not bought and sold and for technical (accounts or statutory) purpose only. Reproduction cost minus depreciation plus value of land. For land value Registrar’s guideline value can be adopted. |
Account or Profit Method: Commercial properties like Cinema Houses Hotels, Cold Storages, etc. are valued in consideration of their potentialities to produce income. Gross income less outgoings consisting of collection expenses, repairs, sinking fund to redeem capital assets, etc., are capitalized with market derived security percent or year’s purchase to determine the market value. When a property is valued by Profit Method, value by Land and Building Method also is declared. |
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Land plus break-up value of the structure: When the property has outgrown its utility and it is reasonably in capable of economic use, it may be valued as land plus the break-up value of the structure (R.C.Kooper vs. Union of India vide 1970 A.I.R S.C.564) |
Hypothetical Building Scheme: This method considered as the basis of market value provides evidence of a remote speculative and conjectural character. (Case of Ragunath Das 11 CLJ 612). Market value of the site is assessed by deducting the total cost of hypothetical structure including interest for capital outlay for an average period of construction from the market rental value of the scheme. Construction of building floor plate area hypothetically done respecting local building rules. Development Method or Residual Method: This method is used in those circumstances where the existing building value can be increased after carrying out development works. For example an old house has a potential to convert into an apartment buildings, the building is valued on the basis of its future worth after conversion. The cost of this work with developer’s profit is deducted and the result is value of the property in its original state and is known as its residual value. |
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Reinstatement Method: Reinstatement Valuation: Reinstatement is the act of restoring something exists again to a previous position. Replacement coverage is designed to replace or rebuild a property with similar type and specifications in the event of a loss, equal to its condition when new. The doctrine of pro prorate average applies, which is if at the time of reinstatement or replacement, their cost exceeds the sum insured at the time of loss, it is deemed to be underinsurance and insured has to bear a ratable portion of the loss. The cost of land is not included. |
Valuation of Building Estates: It is based on the principle as laid down in Government of Bombay vs. “Karim Tar Mohamed. I.L.R. 33 Bom. 325; The owner in claiming compensation can seek to prove either what the property would fetch, if sold in one block, or what is the present value if he plotted out the property and sold in lot.” Land must be valued at its best and most advantageous manner and if an estate is worth more, if sold in plotted layout, it can be laid out. Normally it will take time. Present value of estimated realization is deducted for adventurer’s share @ 20 percent; that amount is further deducted to the present value of cost of road making, and other modern infrastructures cost, plus engineering supervision charges, legal charges, advertisement and brokerage; the result is value of estate. |
Valuation of Building Estates
What is the present value of ABC estate which is now ripe for building development? The estimated cost of engineering works complete is INR 1,20,00,000/-. The estimated gross return from lands available for immediate sale is INR 6,00,00,000/-. 15 grounds of land worth INR 45,00,000 will not be sold immediately but reserved for commercial purpose.
Valuation Tables can be referred in: /forum/valuation-tables-258259.asp
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Description |
INR |
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Estimated gross return, Say “A” |
6,00,00,000 |
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Part of it will be received immediately and the last sale is expected in 4 years’ time, therefore defer the gross return for half the period, i.e. 2 years @ 7% Say “B” (From the Tables) |
0.873 |
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Present value of estimated part realization A x B = 6,00,00,000 x 0.873 Say “C” |
5,23,80,000 |
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Value of 15 grounds which may not be sold for 4 years. Present value for 4 years @ 7% for INR 1/- Say “D” (From the Tables) |
0.763 |
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Value of unsold lands in 4 years: Say “E” |
45,00,000 |
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Present value of unsold lands D x E 0.763 x 45,00,000 Say “F” |
34,33,500 |
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Present value of estimated realization C + F Say “G” |
5,58,13,500 |
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Deduct: Developer’s risk and profit at 20% of G Say “H” |
1,11,62,700 |
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Engineering works Say “I” |
1,20,00,000 |
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This will take 4 years, therefore defer for half the period. i.e. 2 years at 7% Say “J” |
0.873 |
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Present value of engineering works I x J Say “K” |
1,04,76,000 |
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Engineering and Supervision charges say 7% of G Say “L” |
39,06,945 |
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Legal expenses , Brokerage, etc. say 5% of G Say “M” |
27,90,675 |
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Advertisement cost Say “N” |
1,50,000 |
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H + K + L + M + N say “O” |
2,84,86,320 |
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Value of estate (G – O) |
2,73,27,180 |
In the author’s opinion, in layouts, Roads area requires a minimum of 20 percent. Normally under development control rules a minimum of 10 percent area is to be reserved for open space reservation for land extent exceeding 10,000 sm or 1,07,643 sf or 1 hectare area for plotted development.
The catena of decisions relating to the compensation in land acquisition case would mandate that sales relating to small pieces of lands, if they are genuine and reliable and comparable to the land acquired, the same could be relied on.
Under the land acquisition cases of Land Acquisition Act 1894, when comparable sales instances of small pieces of land are relied upon to a vast strip of land, the deduction for development charges allowed is from 33 1/3 to 53% percent as approved by the Madurai Bench of Madras High Court in Thanjavur Air Field Case. A vast piece agricultural land was acquired for Thanjavur Air Field. In assessing the market value small pieces of residential comparable sales instances were relied upon. The award is:
1). the value of land acquired: Rs. 1,744.00 per one cent
2). 53% deduction towards development charges: Rs. 924.32 Per one cent
3). the net value of land for awarding compensation: Rs. 819.68 Per one cent
1 Cent = 435.60 sf; the value of land acquired was Rs. 4 psf and the net value of award is: Rs. 1.88 psf.
The Madurai Bench of Madras High Court has allowed 53% and the Supreme Court has allowed 63% on the facts and in the circumstances of the case in K. Vasundara Devi vs. RDO, LAO ((1005) 5 SCC 426)) towards deduction for development charges. Source: http://judis.nic.in/judis_chennai/qrydispfree.aspx?filename=52554
In LAO vs. Adhi Narayana Setty (AIR 1959 SC 429) mandated method of valuation:
1). Opinion of experts
2). The price paid within a reasonable time in bonafide transaction of purchase of the lands acquired or the lands adjacent to the lands acquired and possessing similar advantages, and
3). A number of year’s purchase of the actual or immediately prospective profits of the land acquired.
Land value depends on its size, shape, location, abutting road width, and the land use to which it is put to use and has to be valued with all its potentials and advantages. Based on Chennai Building Rules as per the Second Master Plan 2026, building types, minimum land area required and its potentials are furnished below for Chennai City, excluding continuous building area.
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Building Type (1) |
Min. Abutting road width in feet (2) |
Min. Land area in sf (3) |
Min. Plot Size in feet Frontage x Plot Depth (4) |
Total built-up area permissible in sf (5) |
|
Ordinary Residential building |
20 |
860 |
20 x 45 |
1290 |
|
Ordinary Commercial building |
23 |
861 |
20 x 45 |
1290 |
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Special building residential (Still many category is available) |
30 to 33 |
3,229 |
30 x 110 |
4,845 |
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Special building commercial |
26 |
2,153 |
26 x 82 |
3,300 |
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Group Development |
33 |
7,104 |
40 x 180 |
10,660 |
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Multi storey building (MSB) Cat I (a) |
40 |
12,917 |
82 x 157 |
19,376 |
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MSB Cat 1 (b) |
50 |
12,917 |
82 x 157 |
22,606 |
|
MSB Cat II |
60 |
16,146 |
82 x 197 |
32,293 to 40,266 |
|
MSB Cat III |
100 |
26,911 |
131 x 205 |
53,821 to 67,277 |
The belt size in column 4 above is the size that can be called as 1st belt and value of land depends on its potentials. The first belt is minimum requirements to qualify to that category of building type. Within that category, belting method is not reasonable. Any area in excess in the rear side, its value will be less than the first belt. The value has to be decided according to its size, shape, access available and based on prevailing evidences and circumstances.
A. M. Ibrahim
Architect
CAclubindia
