Immovable property needs to be valued for sale and purchase to determine the price
payable. Financial Institutions, Banks and moneylenders insist on valuation of
immovable property to ascertain the margin available, worth of the security
offered to Loans. It is a prerequisite for financing Home Loans. Generally the
financial institutions or the housing fiancé companies get the property valued
by their appointed approved
values, while the tax authorities follow valuation as per tax laws and the land and building method.
values, while the tax authorities follow valuation as per tax laws and the land and building method.
Valuers :
Valuers are usually engineers or
architects appointed by the Central Board of Direct Taxes under Section 3A of
Wealth Tax Rules 1957. They are also members of the Institution of Valuers,
which, incidentally, has a branch in Bangalore. These valuers do not have any
personal interest in the properties, which they value.
Factors
that determine Fair Market Valuers
There are various factors, both
controllable and non-controllable, which affect the fair market valuation.
Non-controllable factors are macro-economic conditions, political stability,
government policy, and price index. Controllable factors are location, ondition
of the property, its surroundings, reputation of the seller; whether the
property is free hold or Lease hold, purpose for which the property can be
used, whether the building bye-laws are applicable, floor area ratio permitted,
nature of the soil, size of the plot, occupant of the property, the shape of
the property frontage available and infrastructure available. With the vaastu
being the rage of the day, the shape, road facing also play vital roles.
Fair
Market Value
Any seller who is moderately
intelligent and prudent, would not accept a price lesser than the market value.
The same goes for any purchaser who would definitely not pay more than the
market value at any given time. Thus, fair market value is the price, that a
normal prudent willing owner/seller, not obliged to sell; may reasonably hope
to get from a normal prudent and willing purchaser, with regard to its existing
conditions, with all its merits and demerits, and its potential possibilities.
It is to be noted that the fair market value of the same property keeps
changing and valuation is relevant to the time of valuation. Various methods
and techniques are adopted to value the property and arrive at a fair market
value. They are as under:
Land
and Building Method
This is most the frequently used
method and is used by direct tax authorities with slight modification. The cost
of the land is arrived by referring to the recent sales in the area. The cost
of the construction of the building is arrived which is reduced by the
permitted depreciation. Other infrastructural factors like availability of
water, power connection and the relevant deposits are also considered. Some
valuers consider the government rates fixed for the land instead of market
value. Tax authorities follow this method by some modifications, wherein the
cost of rebuilding the structure on the land less allowable depreciation is considered.
Comparable
Sale Method
In this method, sales of the
adjacent immovable properties having similar merits and demerits; with bonafide
intentions; transactions between willing seller and willing purchasers are considered. The proximate date of valuation and the date of sales are very important.
Generally it is assumed that an actual transaction, with respect to specific
property of recent date is a reasonable guide. Unregistered sale transactions
and agreement to sell are not considered. All the available sales of adjacent
immovable properties with the proximate dates are to be considered and one
cannot pick and choose. This method is more convenient, reducing the element of
speculation to minimum.
Rent Income Capitalization Method
This is based
on rental income of the property. In this method gross annual rental income of
the property is arrived. From out of the gross rental income and the outgoings
to maintain the building and statutory outgoings are deducted.
The available net rent is multiplied by certain preconceived number of years.
The multiplier factor is very important. In early part of 1950's, the
multiplier factor was 20 years rent, having regard to the rate of interest on
gilt-edged securities.
This was
gradually changed in 1960 during which period the banks offered interest at the
rate of 7 % to 10% and at present, the rate of interest is reduced on bank
deposits as well as gilt edged securities. In certain cases the net rental
value is multiplied by the remaining age of the building. This method suffers
from certain limitations. The rent may be unreasonably high or unreasonably
low. The property might have been let out long ago and rent might have remained
unchanged for years.
This method is
more suitable in case of residential property where is the property is let out
recently on prevailing rents / standard rent.
Average method
In this method,
the value of the property is arrived by adopting different methods such as Land
and Building Method, Rent Capitalization Method etc., and the average value of
all these methods is arrived at.
This is akin to
rent capitalization method. However, the Standard Rent under rent control act
is used to arrive at the gross rent.
Obtaining expert opinion
There are
experts in valuation of immovable properties with necessary expertise on
subject of valuation and have acquired sufficient practical experience in the
field. They are capable of forming independent opinion. The expert must be
given sufficient time to analyze the issue and arrive at the valuation of
immovable property. The opinion of the expert is admissible in evidence.
Other Sources Wealth tax returns
The person who
owns property falling under Wealth Tax Act 1957 has to disclose the market
value of the property and pay taxes accordingly. The disclosures made by the
owner in his wealth tax returns should be a good indicator of the market value
of the property. This market value is more relevant and finds favour with the
government while compensating the owner on acquisition. However, the values
disclosed in Wealth Tax Returns cannot be deciding or conclusive in determining
the fair market value but throws some light on the issue.
Valuation on the basis of the rate fixed under urban land
(Ceiling area regulation act 1976)
Central
government has repealed the act during 1999, but many states have not yet
repealed the said act. The Government of Karnataka has, however repealed the
act. Under this act government fixes the rates of market value of the land in
exercise of its power for particular localities from year to year, which will
be guiding factor in arriving at fair market value of the property. Usually the
Land and Building Method, comparable sale method are the much favored methods
with the seller and the purchaser.
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2BHK Apartments in Bangalore
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