REAL Estate

Purpose for Real Estate Valuation

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By Dr Sanjay Chaturvedi, LLB, PhD

Since real estate is having heterogenous in nature, no two proper- ties can have same value. Besides this, an authorized valuer must have documentary evidence to prove his assumptions. What ever methodology you adopt, future estimation must be substantially proven so that correction level margin should be between 10 to 15

%. When valuers value a property or assets for what ever reasons, the valuation must be nearer to Fair Market Value. It should be prac- tical.

Valuation is done for :

  1. Wealth Tax calculations
  2. Property transactions : sale or purchase
  3. Stamp Duty payment
  4. Mortgage
  5. Creating Charge
  6. Giving Collateral security
  7. Balance Sheet exposures
  8. Divisions
  9. Investment
  10. Price discovery for projects
  11. Margin Trading in Real Estate
  12. Lease discounting
  13. Determination of lease rentals
  14. Securitization
  15. Instruments issued on real estate as a security

Valuation of property is done taking into many aspects. Determining property rates for valuation purposes is major exercise. Documentary evidences can be produced taking following into consideration:

  1. Municipal property taxation depend on ratable value which is followed all over India except for city of Patna where capital value system is prevailing. Soon Mumbai will also have such system to determine property
  2. Income Tax auctions also is one of the most authentic way of determining property For revenue recovery or for other provi- sions of Income Tax, Income Tax authority acquire properties. These properties then put for public auctions. Rates are most authentic when auction sale takes place.
  3. Actual registration of properties with authorities are also vali- dated property
  4. Stamp Duty Ready Recknor rates or Circle Rates are also one of the important documentary evidence for valuation Housing a state subject and state government every year comes out with property rates with these documents.
  5. One cannot ignore builder opening a rate for his After all it is his prerogative to announce rate. This is also one of the most important documentary evidences when it is published through news- paper advertisements.
  6. Newspaper Classified for buying and selling properties also gives us an idea of the prevailing fair market rates in the property One must keep in mind that isolated cases like NCPA in Mumbai which sold the flat at Rs.1.50 lakh a sq.ft. cannot represent the entire area of Nariman Point. Or a purchaser wants your property at any cost and even pays it, cannot represent the rates for entire area. Or a seller is desperate need of funds sells it for lesser amount below the market rates also cannot be a representative rates. Isolated cases do not become the rates for a area since every property is unique in nature. It has its own advantages and disadvantages. In real estate, one person buys it and one person sells it. There is no exchange or place where unified transaction take place like Stock Exchanges. Comparing with index like for example Consumer Price Index, for calculating capital gain taxes. The year 1981 is most important year for calculating the value. Income Tax Department take 1981, now year 2000 as base year for all the value before it. Multiplying base year with consumer price index gives the current value of the property.

Value is a subjective rather than an objective term. A property might be more valuable to one person than to another, because different people may derive different utility from the same property. The forces influencing the value of a property include its environ- mental and physical characteristics, social standards, economic influences and political or government regulations

Then houses are both durable goods and tradable assets. They provide a flow of rents to the owner, or housing services to the occupier, and there is an active secondary market in which houses can be bought and sold. But the price of the housing is harder to measure than most of goods and assets due to the following reasons:

Dwellings are Heterogeneous. No two dwellings are exactly identical, as they cannot occupy the same location. Transaction price is reached through negotiation and auctions so advertised price is not a correct indication of the actual price.

Lastly houses are sold infrequently so the recent price observation can act as a poor guide for the latest transaction

Real Estate valuation is a service provided by licensed or certified appraiser, who gives an opinion of value based on the highest and best use of the real property. The highest and best use is that use which produces the highest value for the land, as if vacant. This use is based on 4 parts; physically possible, appropriate, legal, and economically feasible.

About Dr. Sanjay Chaturvedi

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