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.

Conclusion

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.