METHODS OF OPEN LANDS VALUATION

Land Valuation is the technique of estimating and determining the fair price or value of a land parcel. We explain you all major land valuation methods, any or all of which can be used for valuation of land depending on the amount of information available.

Land can be classified into agricultural & non-agricultural in both urban and rural areas. Generally, land in an urban area whether agricultural or non-agricultural is valued higher than rural land. Agricultural land which is more fertile is generally valued higher than barren land. Non-agricultural land can be classified into residential, industrial or commercial and the value of such lands primarily depend on the development potential by constructing appropriate structure over them.

Valuation is defined as an opinion of an expert who assesses the worth of an asset, be it a property/ machine/gold or any other item. By valuation, the present value of land/ property is determined. In every valuation, land is one of the important components of valuation. The lands may be with single ownership or joint ownership with others or Hindu Undivided Family. Land may be defined as the balance available area of the Earth’s crust after deducting the areas of the sea. This landed area may be Agricultural lands, Open land, Forest land and Rocky and Hilly lands. A land is to be classified into two categories viz. agricultural and non agricultural.

The agricultural lands can further be classified as purely agricultural and semi-agricultural lands. Further, the agricultural lands in the periphery of a city or a municipality are likely to be declared as urban land. Broadly lands can be classified as urban lands and farm lands. The urban open lands may be residential/ industrial, and the value of such lands primarily depends on the potentiality of their development by constructing appropriate structures over them. The farm lands are agricultural fields on the basis of which, people can earn their livelihood.

The necessity of Valuation: The valuation of open plot or any other property is required for the purpose of Income Tax, Wealth Tax, Banks and Embassies. For submitting annual returns in Income Tax department, valuation is required for purposes of income & wealth tax. Even for the purpose of getting loan from banks and for showing assessts to the embassies, (For getting visas) the valuation is required.

LAND VALUATION METHODS:-

1.    Comparative Method

Comparative Method: In this method, the various transactions of nearby lands are properly studied and then a fair rate of land under consideration is decided. Thus, the comparative method will be useful only in case of an active market where there are large number of statistics available for comparison. The Valuer has to satisfy himself after a thorough inspection of all the underlying factors in the market that there have been no changes in conditions since the transaction took place. The element of time plays a vital role in this method. In case of volatile markets, it is found that within a very short interval of time, the evidence of sale chosen for comparison becomes unreliable.

Following factors are to be taken into account while making analysis using comparative method:

i) Location: The value of land which is situated in a busy locality or centre of city or shopping district will certainly be more than that of land which is situated far away from the town. The location of the property is very important and it is quite likely that a slightly different location can cause a vast difference to the market value. The location is said to be a prime factor in demand for land.

ii) Size: The size of plot also plays an important role in fixation of its value. The rate of a large land cannot be compared to that of a small land. Usually, there will be keen demand for plots of certain sizes in a particular locality. The rate of land with such sizes should be considered as the trend prevailing in that locality for arriving at the value of open lands under consideration.

iii) Shape: People prefer to have land having regular shape. It is observed that plots of land with regular shapes will be sold at a higher price than those with irregular shapes.

iv) Frontage and depth: It is quite clear that the most valuable part of a plot of land is its street frontage and the value of rear portion of plot decreases as the distance from street increases.

v) Return frontage: A corner plot gets an additional return frontage and depending upon the importance of intersecting streets or roads, there will be corresponding increase in the value of such plots. The corner plot has better facility of entrance and egress & gives more light and ventilation. In residential area, a corner plot gives wide scope for better layout of shops or offices with greater space for show-rooms and advertisements.

vi) Level: If the natural level of land is lower than the road level, considerable amount will have to be spent for filling and there will also be substantial increase in the cost of foundations. On the contrary, if the natural level of land is considerably higher than the road level, there will be difficulty in laying water / drainage lines and hence, the extra earth will have to be excavated to make the plot reasonably level.

vii) Nature of soil: For lands with building potentiality, the bearing capacity of soil should also be considered. If the bearing capacity is adequate, the cost of foundation will be reasonable in proportion to the total cost of the building. If, however, the bearing capacity is poor, considerable amount will have be spent to make the structure stable. It is thus clear that the land with good bearing capacity will command more rate as compared to the land with poor bearing capacity.

viii) Land-locked land: It sometimes so happens that a plot of land has no well-defined legal access and it is surrounded on all sides by plots belonging to other owners resulting in less value.

ix) Restriction on development: The permissible floor space index or F.S.I should be studied for the plot to be valued and scrutinized. The plot of land having more permissible F.S.I. will naturally be sold at higher price as compared to the one having less permissible F.S.I.

x) Encumbrances: The plots of land which are subject to the easement rights of air, light or passage will be less attractive to the prospective purchasers and depending upon the inconveniences caused, there will be reduction in values of such lands.

xi) Miscellaneous advantages: In addition to the above consideration, if the property possesses some special advantages because of its location or any other reason, the same should be considered while arriving at the reasonable rate of open land.

2. Development Method

This method is used for Lands which are not developed but bears potential strength to appreciate to a considerable value if converted to residential/commercial or an industrial layout depending upon the location, size, shape, frontage & depth etc. If an NA Land is developed, the net plotable area is only 50%. Working back, one can arrive at the present Value of NA Land of Residential area. Important factors to be considered under this land valuation method are location, usage, FSI and nature of soil.

3. Allocation Method

This method assumes that in certain localities, a constant relationship exists between the land value and the total property value. For eg. in some location land value can be 50% of the total property value. But this assumption should be supported with enough statistics. This method is particularly useful where land sales are scarce, but built up property sales are readily available.

4. Extraction Method

In this method of land valuation, the unit prices for comparable land are extracted from a developed property in the vicinity by deducting the estimated value of the built up area from the sale price. Then the value can be adjusted for any difference in size, shape, location and any other features.

The accuracy of this method depends on the quality of depreciation estimate of built up area. That is why, this method is generally used only for properties with newly built up areas that have negligible depreciation, or for properties where the built up area only represents a small component of the total value of the property.

6. Belting Method

This method of valuation of land takes into account the frontage and depth of the plot. A land with higher frontage will have more value. And, the value of land decreases as the depth of the plot (distance from main road) increases. In this method, the area is divided into belts with assigned values as a proportion of the value of a land on the main road. The main challenge in this method is to arrive at the rate of decrease in land rate as the distance increases from the road.