Land Valuation Methods & Factors for Valuation of Land
Land Valuation is the technique of estimating and determining the fair price or value of a land parcel. In this article, 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.
Now let us first understand the factors on which valuation of land depends. Then, we will see various land valuation methods.
Factors for Valuation of Land
As they say, in real estate, its location, location and location. The biggest factor in land valuation is the location of land. Land in an urban area is more expensive than rural land, value of land in city centre is higher than the land in outskirts.
A commercial land is more valuable than residential or industrial land. Similarly, residential and industrial lands are more valuable than agricultural land. Hence, it is important to determine the usage of land to evaluate its price.
Smaller residential plot sizes generally fetch higher per unit rate as compared to larger plots because of affordability reasons. However, if the land can be used for industrial or commercial purposes, larger plot sizes may command a premium.
Generally, square or rectangular plots are preferred over irregular shapes. Hence, regular shaped plots of land command higher prices.
If the level of land is higher than the adjacent road, it will be difficult to lay water & drainage lines. Extra earth has to be excavated to make the plot at reasonable level. Similarly, if the land is considerably lower than the road level, substantial cost will be incurred in land filling. While valuing a piece of land, you should keep in mind all such levelling costs.
6. Frontage and Depth
A land with higher width facing the street or road commands premium. Similarly, the value of land also depends on its distance from the main road. A plot in the fourth or fifth street from main road is priced much lower than the one which faces the main road.
7. Return Frontage
A plot with multiple frontages commands premium over a plot with single frontage. For eg. a corner plot or a three side open plot will be priced higher than a plot with only one side open to road.
The value of land also depends on its accessibility. If a plot of land is land locked or if the access road is not wide enough, it will fetch much lower prices.
9. Floor Space Index (FSI)
Floor Space Index is the ratio of built up area to the area of land. The value of land also depends on FSI or in other words on the total floor area of the building that can be built on the plot.
10. Infrastructure & Development
The infrastructure & development in the vicinity of land have direct bearing on prices. A well-developed area which has schools, hospitals, wide roads, metro, 24X7 water supply & power will naturally fetch higher prices.
11. Nature of Soil
The bearing capacity of soil also affects the land valuation. If the soil bearing capacity is good, cost of foundation will be reasonable. However, the cost of foundation can go up significantly if the soil bearing capacity is poor. Hence, land with good soil bearing capacity will be priced higher.
Many people in India believe in Vastu Shastra. North facing and East facing plots command premium over West facing and South facing plots.
Plots of land which are subject to easement rights of air, light or passage will be less attractive to the prospective purchasers and depending on the inconvenience caused, there will be reduction in values of such lands.
14. Special Advantages
If a land has special advantages because of its location or any other reason, it should be considered in its valuation.
Land Valuation Methods
1. Comparative Method
It is the most popular method. In this method, value of land is estimated by analyzing recent sale prices of comparable land in the vicinity, adjusting the prices to account for any difference in size, shape, location and other features. But this method is useful where there is an active market and transaction prices are easily available. The valuation expert must check average prices over the years and check for any volatility in prices.
2. Development Method
This method is used to estimate value of such land which can be developed to unlock its true value. For eg. agricultural land after obtaining change in land use (CLU) to residential can be developed into a township of residential plots and multistoried buildings. Development method takes into account the full development potential of the land to arrive at fair market value. 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.
5. Income Capitalization Method
Another method to value land is income capitalization method. This method has two sub-categories:
a) Capitalization of Ground Rent
In this land valuation method, market rental value of land is estimated and then capitalized using a market-derived land capitalization rate to determine fair market value of land. Market rent and capitalization rates should be taken for highest and best use case of land.
b) Land Residual Technique
In the land residual technique, the net operating income attributable to the land is isolated and capitalized to produce and indication of the land’s contribution to total property value. Following steps need to be followed:
- Hypothetically construct an optimum building on the land parcel i.e. highest and best use in all respects.
- Estimate the net operating income from the property as developed, using market rents and expenses.
- Calculate the amount of income required to pay a proper return on the building capitalization rate extracted from sales.
- Allocate remaining income (residual) to the land.
- Capitalize residual income into land value using a market-derived land capitalization rate.
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.
7. Guideline Value
In order to ascertain the value of the land for the purpose of stamp duty, property tax, wealth tax etc. government publishes guideline values for relevant period and location.
You must conduct a site visit and carefully study all available documents to collect all information needed for land valuation. Depending on the information available, you should carefully select any of the above land valuation methods to value your land. You can also use multiple methods to cross check and compare valuations. In case you need a valuation report, you must appoint a professional valuation expert.
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