Chapter 2 Literature review 2.

1 key growth drivers in real estate There are several factors which are fuelling the growth of real estate sector. 1. Growing population and demand supply gap 2. Government 3. Customers 4. Banks/HFCs 5. Developers/Builders 1 Growing population and demand supply gap Ever growing population of India has led to huge demand supply gap in housing sector. Average age of Indian has increased significantly after independence. However, housing sector has failed to bridge the gap between demand and supply. Post economic liberation, housing loan interest rates have gone down significantly and this has enhanced the loan availing eligibility of Indian people. Growing population 1. Total population of the country as per 2001 census a. Urban: 285 million (27.8%) b. Rural: 742 million (72.2%) c. No. of cities with population of 1 million+ units: 35 Wide demand supply gap Estimated housing shortage: 20.41 million units a. Rural: 12.18 million units b. Urban: 8.23 million units Impact of lowering of interest rates: Increase in loan eligibility. FY 97 ROI (p.a. in %) EMI (per lac) Incom e per month (Rs.) Loan eligibili ty (Rs in lacs) % increas e over FY 97 Proper ty value 16.00 1468.7 0 25000. 00 FY 00 12.75 1248.8 4 25000. 00 FY 02 11.00 1136.6 0 25000. 00 FY 03 9.75 1059.3 6 25000. 00 FY 05 7.50 927.01 25000. 00 FY 08

9.75

1059.3 6

25000. 00

9.36

11.01

12.10

12.98

14.83

12.98

17.61 11.01 12.92

29.22 14.23

38.64 15.27

58.43 17.45

38.64

15.27

(@ LTV of 85%) 2. Government: From the last decade all the governments have propelled the disinvestment process. Government norms have been eased like never before. Pro-American capitalist governments of Congress and BJP have pumped in the enormous foreign investment. This has enthused the bankers and entrepreneurs to walk an extra mile and bankers have opened up the gates of home loans to common Indian. Following are some of the decisive steps taken by Indian government which has propelled the growth of real estate and housing sector. 1. NHB (National Housing board) has given certificate of registration to 24 HFCs to raise FDs out of 44 registered HFCs. 2. Government committed to simplifying mortgaged backed securitization (MBS) to be viable proposition. 3. NHB has helped the industry raisin more than Rs 664 crores by way of MBS. 4. Government implemented securitization and reconstruction of financial assets and enforcement of security interests (SARFAESI) act 2002 5. Tax benefits to the customer a. Interest benefits u/s 24B up from 30000 p.a. to 150000 p.a. b. Deduction on principal repayments up to Rs 100000 u/s 80C 6. Rationalisation of stamp duty 7. Urban Land Ceiling Act (ULCA) repealed in nine states. 8. Banks to deploy 3% of incremental deposits for housing 9. Thrust on rural housing in 2004-05 budget. Customers: Mindset of Indian people has changed drastically in last two decades. Average income of common Indian is rising and new avenues of earnings and career opportunities are opening up. Once narrow minded Indian is now splurging on comforts, basics and luxuries like never before. This has propped up the growth of Indian real estate. Following are some of the factors which are driving customers to purchase and invest in real estate. 1. Steep growth in nuclear families 2. Emergence of double income households thus enhancing the repayment capacity 3. Rising income levels of individuals 4. Growing tendency of investing at a younger age 5. Increase in NRI demand in real estate 6. Increased urbanization 7. Owning property now more economical than renting. Banks/HFCs: Modern day bankers like Deepak Parekh of HDFC and K.V.Kamath of ICICI bank have taken the Indian banking to new heights. Products have been made user friendly, door step services, and pro-customer banking systems have encouraged more and more people to avail loans. Following are some of the points by which new age banks have fuelled the growth of real estate in India.

1. 2. 3. 4.

Passing of the benefit of lower cost of funds to customers. Extending distribution reach Simplification of process to avail loans New products for specific customer segments.

Developers/Builders: Builders and developers are not far behind in contributing towards the growth of this sector. With changing mindset of customers, builders have also changed their mindsets. Once this sector was highly unorganized but with the constant efforts from new age builder it is becoming organized. Apart from focusing only on profits, builder and developers have also started to give due attention to quality, transparency and better service. 1. 2. 3. 4. 2 Builders are now focusing more on end users rather than investors Movement towards more transparency Improvement in quality of construction Developers association actively holding exhibitions to promote business current scenario and emergence of private sector leadership pie chart

2.3 home loan providers in India Real estate in India is currently one of the hottest investments options in Asia. A recent survey of the real estate scenario acknowledge the Indian metropolis of Mumbai, Bangalore and New Delhi as the top three investors' choices for real estate investment in Asia. But there were concerns mainly related to the availability of necessary funds for investment and in the more recent times, the boom in the real estate market opened the doors for a host of realty funds from financial institutions. Prior to ten years, the real estate segment in India was neither organized nor were there too many large institutions in the construction industry. But now with an organized finance sector and with the increase in transparency levels, it has become easier to create financing vehicles. The decrease in housing loan interest rates and an increase of disposable income has contributed largely to an increased demand in the residential segment. In spite of a rise in home loans interest rates and qualitative sanctions being levied by the RBI on banks, buying interest has not waned because home loans are still cheaper than ten years ago. The retail markets are also undergoing a defining change with the introduction of larger retailing formats. The financial institutions also wasted no opportunity in tapping the fund requirement catering to the inflow of potential buyers in the retail sector. While most funds were initially floated by financial Institutions or banks such as HDFC, ICICI Bank and IDBI Bank to name a few, real estate developers like DLF Universal and even retailers such as Pantaloons Retails (India), Godrej have now entered the real estate sector for creating more retail facilities and have been hugely successful. As the realty prices in India had been skyrocketing in last few years, housing complexes are mushrooming and city landscapes becoming unrecognizable, the growth across all real estate segments and experts think demand will be reasonably fair even during recession time. These property prices encourage banks and financial institutions to lend more with the increase in collateral values. Although the home loan providers have hiked their rates twice in last

year, home loans continue to be nearly 45 per cent cheaper than what they were in early 2001. Because if statistics are referred to, the interest rates which now range between 9-10 per cent, are still much lower than what they were ten years ago, at 16-17 per cent. In addition to funds being raised by the Indian financial institutions like HDFC, ICICI and IDFC abroad, the money could be used to develop business and IT parks and townships. A study has revealed that as many as one million homes are financed every year in India now with an estimated home mortgages market of US$ 10.7 billion - contributing to India's phenomenal realty prospect. Following are the major home loan providers in India. Major Home Loan Providers Banks & Public Sector Housing Finance Companies Financial Institutions State Bank of India, Corporation Bank, Punjab National Bank, Central Bank, Dena Bank, Allahabad Bank, Bank of Maharashtra, Bank of Baroda Housing Finance, Can Fin Homes, GIC Housing Finance, LIC Housing Finance, PNB Housing Finance, SBI Home Finance, Centbank Home Finance, HUDCO, LIC, etc. HDFC, ICICI Ltd, Citibank, HSBC, StandardCharteredGrindlays, IDBI Bank, etc

Home Insurance in India The Home Insurance sector in India has seen considerable transformation in the last few years. One of the key responsible factors has been the booming real estate sector in the country. Recent statistics reveal that the home insurance premium touched the Rs 150 crore-mark registering a growth of 25% in the last financial year and the trend is predicted to continue. As per individual estimates, 60% of the revenue in premium is generated in the new housing development areas; prominent among which are the real estate investments in the fast developing National Capital Region (NCR) and Navi Mumbai. Home Insurance plays a categorically pivotal role in protecting your house and valuable possessions as this insurance policy is a guarantee provided by the insurance company that combines insurance on the home, its contents the personal possessions of the homeowner, as well as liability insurance for accidents that may happen at the house like fire and natural calamities. The extent of the risk covered however depends on the type of policy. A formatted Home Insurance policy usually covers calamities - natural and man-made. Fire Earthquake Lightning, Storm, Cyclone, Flood Tsunami Riot, Strike, Malicious damage Terrorism Aircraft laws Impact from rail/ road vehicles Landslide Burglary Moreover, influencing the home insurance sector are the financial institutions, which in their latest inclusion have made home insurance obligatory, for housing

loans approval. The housing finance sector contributes to a major chunk of the home loan market. Industry sources point out that, if this sector continues in its stand to make home insurance mandatory for seeking home loans, then the insurance segment is soon set to achieve a 100%growth. Another responsible factor for an upswing in the home insurance sector is the recent spate of natural calamities that hit the country. The extent of losses met by calamities like the earthquake, floods, storms and tsunami have also made people become more aware contributing to an additional upsurge in the current financial year. And as home insurance become obligatory and people are more interested in protecting their homes, the home insurance sector are providing their customers with attractive policy plans to suit their needs. The initial procedure for home insurance begins with the evaluation of your property. The value of your house is evaluated as per the area of your home multiplied by the rate of construction per. sq. feet, as on the date of taking the policy. For example, if your home is 1500 sq. feet and the construction rate till date per sq. feet is Rs1000/-, then the sum insured for your homes building structure is Rs. 15,00,000. The insurance of household possessions or contents are ascertained on the market value of the goods. This means that if there were a loss, the claim would be paid on the value of purchasing a similar new item, less reduction for the usage. The thriving real estate sector in India is considered to be the driving force in the resurgence of the Home Insurance sector. Predicting a booming market, more and more companies are making their foray into the home insurance sector. Apart from the predominant players in the public sector like New India Assurance, United India Insurance, Oriental Insurance and National Insurance Company, the companies which have played a significant role in the revolutionary growth in this sector are private insurance companies like ICICI Lombard General Insurance, Bajaj Allianz General Insurance, IFFCO-TOKIO and Royal Sundaram Alliance to name a few. There is a huge untapped market in the home insurance segment and with real estate expanding beyond metropolis to the Tier II and Tier III zones, the sector is expected to touch new heights. Knowhow of home loans in India Housing Finance Companies (HFCs) offers housing loan options for Resident Indians ranging from buying a house either from the developer or a second owner or for the improvement and renovation of the existing building structure. Following are a few questions regarding home loans which come to your mind when you think of buying a home. Sanctionable amount HFCs sanction loan amounts is based on eligibility depending upon your repayment capacity (which takes into account your age, qualifications, assets, liabilities, stability of occupation, savings history) and according to your income. The maximum loan that can be sanctioned varies with housing finance companies and the generally, the maximum loan amount is 80 to 85% of the cost of your home. Application procedure An application for home loans can be made any time after you have decided to acquire/construct a property, even if the property has not been selected or the construction has not commenced. An application form along with the necessary documents has to be submitted to the respective finance company after which they would review the application and decide on its

status. TAT (Turn Around Time) The processing of a home loan application, if the documents are in order takes around fifteen days and it takes another week for the company to check out the property papers and make the disbursement. Fees and Charges Processing fees and administrative fees, both payable upfront; are the charges payable to the Housing finance companies for sanctioning of Housing loans. The processing fee (fees at the time of application) could range between 0.8% to of the loan amount applied for, and is generally levied to cover the costs incidental to the application. Once the loan is sanctioned, an administrative fee of 1% of the loan amount sanctioned will have to be paid. Loan Tenure The maximum home loan amount one can borrow depends on many factors, which include the purpose of the loan, whether for purchase of property, or improvement or purchase of land for development. Also the residential status of the applicant, whether resident in India or non-resident will also have a bearing on the maximum quantum of loan that one can borrow. Typically, a Resident Indian can borrow up to 85% of the cost of the property, including cost of land, subject to a maximum of Rs 5,000,000. Fixed interest rate A Fixed interest rate for Home loans is one where the rate charged by the HFC on the loan amount is constant over the tenure of the loan. A fixed interest rate protects the borrower from a rise in home loan rates. While on the flip side, he may not benefit if the market rates were to fall. Therefore, it is advisable to go in for a fixed rate if you feel that the rate of interests in the market have touched rock bottom and the rates can only move upwards. Floating interest rate A Floating interest rate for home loans is a loan where the interest rate which is payable is linked to the market rate e.g. the bank lending rate. The interest rate payable by you will also rise and fall as per bank lending rates which may fluctuate. EMI (equated monthly installments) calculations Home loans interest rate in India is usually calculated either on monthly reducing or yearly reducing balance. In the Monthly reducing system, the principal on which you pay interest reduces every month as you pay your EMI. While in the Annual Reducing system the principal is reduced at the end of the year, thus continuing to pay interest on a certain portion of the principal which you have actually paid back to the lender thus making EMI for the monthly reducing system effectively lesser than the second system of calculating interest. Collateral Securities taken by the Housing Finance Companies Collateral securities are the additional securities taken by the HFCs which may be in the form of guarantee from one or two persons, assignment of life insurance policies, deposit of shares and units or other securities. These additional securities are taken so that if a loan is not paid back, recourse may be taken to such securities instead of depending upon the mortgage of the property which is the last resort. Repayment period options Repayment period options range generally from 5 to 15 years. A 20-year repayment period option is also provided by a few HFC's usually at a higher interest rate.

Pre EMI Pre EMI is the amount of loan paid in simple interest as agreed upon with the HFC for a property that's yet under construction. The HFC makes the disbursement in parts as per the stage of construction of your property. Once the property is ready for possession and the possession letter is produced to the HFC, the final disbursement is made. You start paying your EMI from the month following which the full disbursement is made. EMI (Equated Monthly Installment) An EMI refers to the fixed sum of money that you will be paying to the housing finance company every month against a loan amount borrowed for a fixed period of time. An EMI has two components, the principal component and the interest component. . The amount of the EMI depends on the quantum of loan, interest rate applicable and the term of the loan. The loan carrying the lower EMI for the same tenure is the cheaper option. Fore payment of home loan It is possible to repay a loan ahead of schedule. A form of a penalty termed as a pre-payment penalty is payable to certain institutions which varies from one HFC to another. Tax benefit on the loan There is eligibility for certain tax benefits on principal and interest components of a housing loan under the Income Tax Act, 1961. Moreover, you can get added tax benefits under Sec 88 on repayment of principal amount. Moreover, you can get added tax benefits under Sec 80 C on repayment of principal amount up to Rs. 1, 00,000 p.a. that can further reduce your tax liability by about Rs. 30,000 p.a. Agreement for sale registration norms In many states in India, registration of the property is lawfully mandatory the Agreement for Sale between the developer and the home buyer. You are advised, in your own interest to lodge the Agreement for Sale at the office of the Sub-registrar appointed by the State Government under the Indian Registration Act, 1908 NRI housing loan NRIs can avail of a housing loan to buy a property in India. However, the terms and conditions for a NRI loan offered by the banks and HFCs are different than Housing finance granted to Residents of India. Types of home loans available in India A person seeking investments for house or a property opts for Home Loans for a variety of purposes ranging from construction to renovation. The Housing Finance Companies (HFCs) now offer individuals with various alternatives to choose from while buying a home loan. And the availability of Home Loans offered is as varied as their requirements. Home Purchase Loans Home Construction Loans Home Improvement Loans Home Extension Loans Home Conversion Loans Land Purchase Loans Stamp Duty Loans Bridge Loans Balance Transfer Loans Refinance Loans Loans to NRIs Home Purchase Loans: This is the basic home loan for the purchase of a new home. This type of home loan is applicable when customer buys directly from the

builder or developer. This can be also applied in the case where customer buys the property in resale from the particular property owner. Home Construction Loans: This loan is available for the construction of a new home on a said property. The documents that are required in such a case are slightly different from the ones you submit for a normal Housing Loan. If you have purchased this plot within a period of one year before you started construction of your house, most HFCs will include the land cost as a component, to value the total cost of the property. In cases where the period from the date of purchase of land to the date of application has exceeded a year, the land cost will not be included in the total cost of property while calculating eligibility. Home Improvement Loans: These loans are given for implementing repair works and renovations in a home that has already been purchased, for external works like structural repairs, waterproofing or internal work like tiling and flooring, plumbing, electrical work, painting, etc. One can avail of such a loan facility of a home improvement loan, after obtaining the requisite approvals from the relevant building authority. Home Extension Loans: An extension loan is one which helps you to meet the expenses of any alteration to the existing building like extension/ modification of an existing home; for example addition of an extra room etc. One can avail of such a loan facility of a home extension loan, after obtaining the requisite approvals from the relevant municipal corporation. Home Conversion Loans: This is available for those who have financed the present home with a home loan and wish to purchase and move to another home for which some extra funds are required. Through a home conversion loan, the existing loan is transferred to the new home including the extra amount required, eliminating the need for pre-payment of the previous loan. Land Purchase Loans: This loan is available for purchase of land for both home construction or investment purposes. However, most of the banks and financial institutes offer land loans only on the lands which are under municipal area. Stamp Duty Loans: This loan is sanctioned to pay the stamp duty amount that needs to be paid on the purchase of property. Bridge Loans: Bridge Loans are designed for people who wish to sell the existing home and purchase another. The bridge loan helps finance the new home, until a buyer is found for the old home. Balance-Transfer Loans: Balance Transfer is the transfer of the balance of an existing home loan that you availed at a higher rate of interest (ROI) to either the same HFC or another HFC at the current ROI a lower rate of interest. Re-finance Loans: Refinance loans are taken in case when a loan for your house from a HFI at a particular ROI you have taken drops over the years and you stand to lose. In such cases you may opt to swap your loan. This could be done from either the same HFI or another HFI at the current rates of interest, which is lower.

NRI Home Loans: This is tailored for the requirements of Non-Resident Indians who wish to build or buy a home or property in India. The HFCs offer attractive housing finance plans for NRI investors with suitable repayment options. 2.4 Tax Benefits on Home Loans As the Indian real estate market makes an upward swing, and investors opt for housing finance or home loans, tax benefits obtained from them is a lucrative option. Customers availing of Home Loans can claim a certain portion of the interest and principal that they pay towards the loan instalments for reducing tax liability. Resident Indians are eligible for certain tax benefits on principal and interest components of a loan under the Income Tax Act, 1961. Moreover, an added tax benefits under Sec 80 C on repayment of principal amount up to Rs. 1,00,000 p.a. can be availed that can further reduce your tax liability by about Rs. 30,000 p.a. Tax benefits can be claimed on both the principal and interest components of the home loan as per the Income Tax Act, 1961. These deductions are available to assesses, who have taken a loan to either buy or build a house, under Section 24(b). Interest on borrowed capital is deductible up to Rs 150,000 if the following conditions are satisfied: Capital is borrowed on or after April 1, 1999 for acquiring or constructing a property. The acquisition/construction should be completed within 3 years from the end of the financial year in which capital was borrowed. The person, extending the loan, certifies that such interest is payable in respect of the amount advanced for acquisition or construction of the house A loan for refinance of the principle amount outstanding under an earlier loan taken for such acquisition or construction. If the conditions stated above are not fulfilled, then the interest on borrowed capital is deductible up to Rs 30,000 though the following conditions have to be satisfied: Capital is borrowed before April 1, 1999 for purchase, construction, reconstruction repairs or renewal of a house property. Capital should be borrowed on or after April 1, 1999 for reconstruction, repairs or renewals of a house property. If the capital is borrowed on or after April 1, 1999, but construction is not completed within 3 years from the end of the year, in which capital is borrowed. In addition to the above, principal repayment of the loan/capital borrowed is eligible for a deduction of up to Rs 100,000 under Section 80C from assessment year 2006-07. Terms and conditions for availing Tax benefits on Home Loans 1. Tax deductions can be claimed on housing loan interest payments, subject to an upper limit of Rs 150,000 for a financial year. Interest on the fresh loan can be claimed as a deduction, subject o the stated upper limit. 2. An additional loan for extension/addition to the same house and the person's deductions on the existing loan are less than Rs 150,000; he can claim further benefits from the additional loan taken, subject to the upper limit of Rs 150,000 for a financial year.

3. Tax benefits under Section 24 and deduction under section 80C of the Income Tax Act can be claimed only when the payment is made. If a person fails to make EMI payments, he cannot claim tax benefits for the same. 4. According to the Income Tax Act, only the person who has taken the loan can claim tax rebates. 5. The interest on home loans taken for repairs, renewals or reconstruction, also qualifies for the deduction of Rs 150,000. 6. A husband and wife, both of whom are tax-payers with independent income sources, get tax deduction benefits, with respect to the same housing loan; to the extent of the amount of loan taken in their own respective name. 7. If a person buys a house and sells it within the same year/after 3 years, and if any profit is made, then a capital gains tax liability arises on the same for which the individual is liable to pay short-term capital gains tax since the sale took place in the same year. But, if the sale had taken place after 3 years, then a long-term capital gains tax liability would have arisen. 8. If it is proved that the home loan is simply an arrangement between the loan-seeker and the builder or with a third party for the purpose of claiming tax benefits, then tax benefits will not be allowed and benefits, previously claimed, will be clubbed to the income and taxed accordingly. 9. Tax benefits on interest on housing loans are allowable only for the original loan and for a second loan taken to repay the first loan and not for subsequent loans. This means that if you have already availed of one loan to refinance the original loan and want to now avail a third loan to refinance the second loan, tax rebate on interest payments will not be permissible. This is because the Section 24 (1) only talks of the second loan and not of subsequent loans. Even if you take the second loan at a rate of interest higher than the original loan, you will be eligible for a tax rebate on the second loan. 2.4 Valuation 2.4.1 Definitions of cost, price and value The terms cost price and value are used in connection with the exchange of commodities or goods. It is absolutely necessary for a valuer of real estates to know clearly the meanings attached to these three terms. Each of these terms will now be explained. Cost: The term cost is used to indicate the actual amount incurred in producing a commodities which possesses some value. It is used to find out loss of value of the property due to wear & tear. Such loss of value is technically known as the depreciation. The expenditures or charges incurred in terms of quantitative as well as quantitative labour and capital for production of a commodity are termed as the costs of the commodity. The expenditures or charges represented directly in the commodity produced are called the prime costs and other expenditures or charges like rent, management, salaries and services, depreciation, etc. represented indirectly in the production of the commodity are called the supplementary costs. A part of supplementary costs allocated to certain units and added to the prime costs gives the total cost of the commodity.

Thus, the terms cost will have primarily its natural meaning i.e. what was paid for the real property. it will also be necessary to add to the cost of acquisition of real property, the expenses like stamp duties, advocates remuneration for investigation of title, fees for estate broker and valuer, registration and preparation of document charges, cost of holding i.e. interest lost on a capital asset until that asset has become revenue-producing, etc. the total cost of acquisition of real property will assist in the determination of percentage return on the investment. Price: The term price is used to indicate the cost of the commodity plus profit of the manufacturer. As labour and capital are required to produce a commodity, the manufacturer is entitled to have some reward over and above the cost of commodity. The price of a commodity is determined by the supply and demand conditions prevailing in the market for that particular commodity and as such, a commodity may be sold above or below its cost of production. Value: In economics, the term value is defined as the corresponding exchange of one commodity in to any other commodity e.g. the value of a motor car may be expressed in terms of so many cycles or so many kg of wheat, etc. This system was known as the barter system and it suffered from the following disadvantages. 1) A man who wishes to purchase something may not be able to offer in exchange a commodity that the seller wants. 2) No common measure of value is available. In each exchange, the different objects are compared e.g. shoes for cotton, wheat for corn and the like. 3) The goods to be exchange could not be divided into units of the right value. In modern times, however, the relatives values of various commodities are expressed in terms of some recognized medium of exchange usually in the monetary unit of the country in which the property is located. For the international exchange purposes, the unit of worth adopted is usually an internationally accepted money unit such as the English pounds or us dollars. In other words, the terms money is defined as any commodity or token that serves as the common medium of exchange and the common measure of value. Following are the functions of money: To serve as a common measure of value. To serve as a generally acceptable medium of exchange. From the above two primary function of money, the following two important secondary functions of money can also be observed: 2.4.2 Types of value Following are the different terms or names which are used in connection with the value of a property: 1. Accommodation value 2. Annual value 3. Book value 4. Distress value 5. Market value 6. Monopoly value 7. Potential value 8. Replacement value

9. Salvage value 10.Scrap value 11.Sentimental value 12.Speculative value Each of the above form of value will now be briefly described. 1) Accommodation value: As the city or town develops, the surrounding agricultural area is to be converted into the accommodation land. For this purpose, the owner of the land has to obtain the permission from the competent authority to accommodation land. Such accommodation land possesses building potential value and hence, its value line between the value of nearby building land and agricultural land. Thus, the accommodation value Greater than that of agriculture land and less than that of building land. Annual value: The local authority has to decide the annual value of the property so that taxes can be calculated on that basis. Such annual value of the property has to be fixed by observing the principles of rating valuation. Book value: the book value is defined as an amount shown in the account book of a particular year after making due provisions for the depreciation of the previous years. Thus, the book value of a property depends on the depreciation allowed per year and it not affected by market conditions. In this sense, the book value represents the actual book cost. Distress value: a property is said to have distress value when it can fetch lower value then market value. The distress value is developed due to various reasons such as: Fear of war, riots, earthquakes, etc. Financial difficulties of seller; Intention to favour purchaser etc; Market value: the term market value is the most important term in valuation of real properties and it will be desirable to understand its meaning carefully at this stage.

2)

3)

4)

5)

6)

Fair market value: International asset valuation standards committee defines market value as Market value is the estimated amount for which an asset should exchange on the date of valuation between a willing buyer and willing seller in an arm length and transaction after proper marketing where in the parties had each acted knowledgeably, prudently & without compulsion First of all it will be worthwhile to know what is meant by the word market. The term market is used to indicate a place, a region geographical or otherwise, or a commercial activity where or by which exchange of commodities between buyers and sellers exchange of commodities. Thus the market is of the following three types; 1. It may be a central or public place in a village, town or a city where transportable commodities may be brought and exchanged by buyers and sellers. 2. It may be region wise at a place where transportable commodities like cotton, corn etc. may be brought and exchanged.

3. It may also seem a commercial activity where in actually commodities are not brought for display and inspection and wherein buyers and sellers themselves or along with brokers and agents or broker or agents on behalf of their principals meet and transact business of exchange of commodities. This type of market may be local, national, or international. The shares and stocks market embrace any of these three types of market because no commodities are to be displayed and transactions take place on the basis of information and paper work. The market for real property has peculiar characteristics and they are as follows: 1. The real property market (i.e. the commercial activity pertaining to buying and selling of real property) is generally local in region. For instance, the people in Ahmedabad will not be generally interested in real property of Mumbai, Kolkatta, Delhi etc. and vice versa. 2. The real property market is local in character because the commodity cannot be displayed and inspected easily. 3. Like other commodities, the real property s not standardized commodity and no estimate can be based from a sample. The units of even equal area, accommodation and appearance may be greatly differing in matter of internal things. Again, the situation, size, locality etc. generally influence the value. 4. The real property market is not an organized one like other commodities and hence, there is no central control whereby uniformity of information or rules and regulations or ethics can be regularized. 5. Due to non existence of central control, even though the market embraces generally a local region only, the correct information regarding supply and demand is not easily available because information passes orally through buyers and sellers themselves or through brokers and agents or advertisements displayed at site or at prominent places or through print in news papers. 6. The collection of information regarding the commodity takes a long time as legal and environmental issues have to be taken into consideration and many functionaries like a broker, a surveyor, a lawyer or a solicitor, a mortgage lender etc. participate in the transaction of a real property. At the end transaction is done in private between the parties personally or though their brokers or agents and absolutely correct information regarding the transaction is not easily available. 7. The supply and demand cannot be adjusted easily and in a short time like other commodities. Here the adjustment of supply and demand is a long range problem. 8. The general competition like other commodities is not possible. Due to these particular characteristics of real property, as well as its market, the buyers who participate in the transaction are generally of the following three types: 1. Investor for income: This type comprises the individuals or groups who desire regular income on their investments. 2. Investor for capital gains: This type comprises the individuals or groups who buy for a resale in future for making a profit. 3. Investor use: This type comprises the individuals or groups or institutions who buy for their own uses like residences, commercial purposes, industries or other activities pertaining to them.

Finding out market value is a sine qou non for taxation. compulsory purchase and other like purposes. The enunciation of the definition of the word market value of real property has engaged the attention of learned legal luminaries, professionals and intellectuals in the past and present and a simple all embracing definition can be said to have emerged as under : The market value is that sum of money which a willing wise buyer, buying without any restriction or necessity or any physical, sentimental or mental influence, gives for a particular place or parcel of real property with all interests therein, with all advantages and disadvantages in its existing condition to an offering willing wise seller who sells without any restrictions or necessity or any physical, sentimental, or mental influence, the aforesaid real property as on the date on which the value is to be ascertained. Thus, the market value will be that fair and reasonable sum of money which will be available at a particular time in a hypothetically ideal market where in all physical, legal and environmental aspects of the real property, the supply and demand factors, market trend and financial aspects of that time are fairly, reasonably, and duly considered. For this, the valuer will be required to bring into play his expertise knowledge, experience and intelligence of no mean calibre. 7) Monopoly Value: In some cases, the property posses certain advantages with respect to the adjoining properties due to its size, frontage, shape, location etc. The owner of such property may demand a fancy price of that property. Such a property is known as the monopoly value of the property and it does not represent the market value of the property. It may also happen the other way. The probable purchaser may be in a commanding position and he may be able to dictate the value of property. The value offered by such a purchaser will be the monopoly value of the property. 8) Potential Value: The term potential value is used to indicate the potential possibilities of the property when developed in its most advantageous manner. For instance, the agricultural land on the outskirts of town posses building potential. Similarly, an underdeveloped property posses potential value and it can be realized by fully developing the property. 9) Replacement Value: The cost to be incurred to replace the property, either fully or in part, at the prevailing market rates for labour and materials, is known as the replacement value. 10) Salvage Value: Sometimes, the property after being discard at the end of utility period, is sold as it is without being broken in pieces and the amount realized, over and above the cost of its removal and sale is known as the salvage value of the property. For instance, the sleepers used on railway track may be re-used as post posts of fencing or as buffer stops etc. 11) Scrap Value: At the end of the period of usefulness, a property is discarded and then, it can be scrapped off or broken into suitable units of disposal. The amount obtained by selling such units is known as the scrap value of the property. For instance, a building is to be demolished after its period of utility is over. Then, some amount may be realized due to the sale of old materials.

Such an amount is known as the scrap value or the junk value of the building and it is usually about 10% of the original cost. Similarly, in case of equipment, machines, etc, the broken metal will fetch some amount. It should be remembered that materials and equipments of special nature will have lower scrap value. For instance, the scrap value of an RCC structure will be less than a corresponding timber structure. Similarly an asbestos cement sheet will have lower scrap value than a corresponding corrugated galvanized iron sheet. 12) Sentimental Value: Sometimes, some sentiment or feeling of owner is attached to the property and because of such sentiment; he will not be ready to part with his property even when a fancy price is offered for the property. Such a price is known as the sentimental value and it has no relation with the market values of the nearby properties. 13) Speculative Value: There are certain purchaser`s who are interested in purchasing the property and the selling it with profit after short period. Such purchaser`s speculate on the properties and they are only in earning profit from them. They are not interested in developing the properties or for fetching more rents from the properties, the price paid by such purchaser is the speculative value of the property. In general, the speculative value will be less than the market value because the purchaser will try to buy the property at a lower price and to sell it at a high price in future. 2.4.3 Factors affecting changes in market value Having discussed that the market value of a property depends on the forces of supply and demand, let us now summarize the various factors which might influence the changes in the market value of a property. Following are such factors: 1. Changes in building technology: the improved building techniques will certainly result in changes in value. However, the adoption of such techniques should not prove to be prohibitive with respect to the cost aspect of the building. 2. Changes in fashion and taste: Many people desire to be up-to-date with the prevailing fashion and taste and they do not like to remain behind the time. However, it will be difficult, if not impossible; to satisfy such desire as far as costly nature of property is concerned. But changes in fashion and taste do affect the values of properties. For instance, the properties with concealed electric wiring are preferred to those with surface wiring. 3. Changes in proportion of single people to married people: It is quite evident that different types of accommodation will be required for single people and married couples. Hence, the change in proportion of single people to married people will be reflected in the adjustments of values of the respective properties. 4. Changes in quality of area: If a particular pocket of city assumes the status of fashionable or modern area, the values will go up in such fashionable area as compared to the remaining unfashionable part of the city. Similarly, a town or a city may also arraign such a status due to happening of certain event. 5. Changes in the age distribution of the population: The changes in the age distribution of the population of the area may also cause the changes in the values of the properties. For instance, if at one particular point of time, the majority of the population is say between the age group of below 30 years, there is likely to be more demand for flats or multi-storeyed buildings.

6. Designs of property: The overall design of property may also affect the values of properties. However, the unfashionable designs may become fashionable or fashionable designs of one area may prove to be unfashionable designs for other areas. 7. Means of communication: The transport facilities have a marked effect of the value of the property and the study of advertisements for properties easily reveals the importance attached to the existing good means of communication. Hence, any improvement or deterioration in the means of communication will have considerable effect on the values of properties which either benefit or suffer as a result of the change. 8. Migration tendencies: Due to sudden industrialization, there is heavy rush of people in the city and hence, the changes in property values have taken more rapidly with the corresponding dullness in the surrounding villages. 9. Money supply: If money can be borrowed on easy terms or spared without difficulty for the house-purchase, there will be competition among potential purchasers which may result in the sudden increase of property values. On the contrary, if it is hard to get or spare money for house-purchase, the property market will be dull and there will sudden fall in property values. In majority of the cases, it is found that the prospective purchasers have not enough capital of their own to effect the purchases of landed properties. They pay a small proportion of the purchase price and the remainder is obtained by way of mortgage from a financial institution such as a building society, an insurance company, commercial banks, big employers like govt. or semi-govt. bodies, private money-lenders, etc. Thus, the lending policy of financial institutions will have a marked effect on developing the effective demands from the prospective purchasers. 10. Planning control: The control of local authority over the planning aspect of the properties has a greater effect on property values than any other single factor or possibly than all other factors combined. For instance, if the planning authority of a locality decides to convert a particular residential zone into a commercial zone, there will be sudden shooting up of the values in that area. Similarly, if the green belt surrounding the city is removed, the land values of properties in green belt will suddenly rise because such lands can easily be converted to the non-agriculture use from the agriculture use. 11. Population strength: Other things being equal, the demand for properties will increase, if there is sudden increase of population and conversely, the demand for properties will decrease, if there is decrease of population. Similarly, if there is migration of population from one area to the other, the values will usually go down in the area which is vacated and they will rise where settlement is made. 12. Unstable time: Due to uncertainty in the economic or social climate of the country, the real property market may be totally upset in a relatively short time. From the above discussion, it is clear that one should not wonder if the market alue estimated by a valuer is totally upset due to unforeseen development in the circumstances of the real property market. 2.4.4 Role of the Valuer The valuation profession is not different from any other profession and just as in other profession skilled valuer gives benefits of his knowledge to the profession in particular and society in general. The valuer who has been properly trained in his subject can play a great role in arriving at the reasonable values of the

properties. In addition to basic courses of valuation, the valuer should also be sufficiently trained in economic geography, sociology, marketing research, commercial mathematics, investment principal, land economics ect. He must be in a position to understand why community prospers, why cities develop and the order of their growth. He must also be trained to appreciate the neighbourhood factors affecting the vales of real properties. Some of the important aspect of real properties which required the expertise knowledge of a valuer is as follows: 1. Knowledge of building costs: The valuer is equipped with the basic knowledge of costs of various civil engineering trades and hence, he can make accurate allowances for differences in two apparently looking similar properties. The layman does not possess the knowledge of building costs or building technology and it therefore becomes difficult for him to work out accurate estimates for items such as superior finish, nature of workmanship, quality of materials used, etc. this type of difficulty usually arises in case of commercial centres containing more or less identical shops and offices. Only an experienced valuer can reflect the differences in money terms in such similar looking units because he is closely in touch with the requirements of the users of such properties in the market. In a similar way, it will be possible for a skilled valuer to quantify the difference in value caused by a different geographical situation. 2. Legal complications: As such, the property itself cannot be owned in legal sense, but at law only an interest in property can be owned, it is for this reason that a valuer is trained in the subject of laws pertaining to the real properties. Hence, a valuer because of his training in legal education can solve the legal complications met with during the valuation process. A trained professional valuer can find out the leasehold 50 years. Similarly, the properties loaded by easements of third parties can only be seen in proper perspective by an experience valuer. 3. Specialized buildings: The trained valuer plays a great role in arriving at the reasonable values of specialized buildings such as petrol pumps, temples breweries, cinemas, hostels prayer halls, grave yards, funeral places, etc. The knowledge of valuing such properties can only be acquired by a good training and a thorough understanding of the market conditions coupled with fashions and customs of the society. 4. acknowledgment of market conditions: it sometimes so happens that there is considerable variation in values of the properties situated in nearby localities and in such cases, a layman in unable to understand the reasons for such development, for instance, the properties on one side of the road may be very costly due to pose locality and the properties on other side may be very chip due to slime a trained valuer acknowledges such abnormal market condition And makes suitable allowances in his valuation job. In the illustration citied above, he will not take the sale instance of the posh locality to arrive at the value in slum area 5. Competency: A trained valuer is competent to value a wide range of properties over a wider area and he is competent to get himself accustomed rapidly with the general market tone in respect of values of properties in an area in which he is a stranger. A local man can be a good guide for values of standing and simple properties in his owned immediate locality but a skilled valuation work out. Even from the basis principal of valuation, the values of complicated property spread over a fairly large geographical area. 6. Cost of outgoing: for rented properties, the assessment of reasonable amount for outgoings demands a high skill and only a skilled veluer can decide the

costs of various items of outgoings such as insurance premium, bed debts, repair charges, etc. 7. Effect of statutes: the passing of an act or granting of certain concessions in the existing rules, may develops completely new conditions from those previously existed. Such an action on the part of govt. may introduce factors in the property market which were not possible to be foreseen and as such, they are received by surprise in the property market. The effects developed on the property market may be gradual or immediate and it may be serious or light. Whatever may be the effect of such statutes, it is the valuers role to interpret such effect and convert them into changes in values of properties in money terms. 8. General experiences: it is evident that clients would not generally hire a novices or a beginner to act as an expert valuer. The general experience of the profession for a period of about 5 to 10 year will be necessary before people and concerned authorities are encouraged to be guided by the opinion of the valuer. In a sense, there is no substitute for experience in any field of life and so is the case with the profession of a valuer. 9. Knowledge of building costs: the valuer is equipped with the basic knowledge of costs of various civil engineering trades and hence, he can make accurate allowances for differences in two apparently looking similar properties. Key Factors that affects the value of the property and about which the information should be as accurate as possible a) Location of the Property Location of the property is extremely important. A flat or Bungalow located near city centre will fetch far more value than same quality flat or bungalow in an Industrial area. The distance of the property from mass transit routes like highways, bus terminuses, or railway stations is a contributing factor to the value of the property. b) Development of surrounding area A lot depends on the development of the surrounding area or neighbourhood of the property. People hesitate to pay for exclusive bungalows or flats surrounded by slums. Posh green surroundings with proximity to appropriate water supply, drainage and electricity and proximity to schools, offices and public transport services is preferred one. Neighbourhood development and convenient access of amenities have a high effect on actual valuation of a property and its saleability. c) Approach and society road Property should be easily accessible and approach road and internal society road should be smooth and comfortable. Difficulty in accessing the property has a negative impact on valuation and saleability, while ease of access enhances the value. Ease of approach also includes, in multi-storey buildings, facilities like elevators and their number. d) Construction quality and extra amenities of the Property This refers to the quality of the construction. Plaster spilling off from the walls, reinforcement bars segregating from the concrete, faded exterior and interior paint is some of the visible signs of poor quality construction. Extra amenities

like garden, swimming pool or gymnasium will fetch better value for a property or a project. Specifications of finishing materials including tiles, bathroom and kitchen finishing, marble or stone finishing of floors etc. directly influence the value of a property and are factors taken into consideration during valuation. e) Frontage and floor level of the property This is more relevant in commercial properties. Larger frontage will provide greater visibility to the customer and clients. Properties located at ground floor and with large frontage will fetch more value than property on the first floor with lesser frontage in the same complex. Hence different portions of the same project property will have different applicable rates. However, even in residential properties, the level of the floor in which the property is situated has a bearing on its price and valuation. f) Growth of the Area or City This is a very crucial factor. Cities with lots of infrastructure projects like Metro rail, Highways, power plants, Airports going on, have higher property rates and price escalation rates of property. The above listed are foremost factors which affect the valuation of any property. There are many more other factors which may or may not have an impact on the value of the like Vastu Shastra, reputation of the builder in local market, demography etc. 2.4.5 Methods of property Valuation Definition of Valuation In a very simple language, property valuation is a process of estimating and determining the value of the real estate property. Property valuation is a vast subject. Different properties have different features and different methods are available for the different types of properties. Valuer has to decide which method to apply for the property of certain nature. However, one or more valuation methods can also be applied for the single property. Properties can be mainly categorised in two parts. Open naked land Land with building

It is advisable for any good property valuer to know about all the methods available. However, the widely used method is comparison method. We would take a brief about all the valuation methods. However, comparison method has been explained with practical case studies in coming chapters. Comparative method: In these methods, 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 numbers of statistics available for comparison. it should however be remembered that the method involves few dangers, if the market is stable i.e.

resistant to sudden change of condition. It is for this reason that the valuer has to satisfy himself after a thorough inspection of all the under laying 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 very short interval of time, the evidence of sale chosen for comparison becomes unreliable. The price of the urban developed property would determine the value of the land. If the urban land has already been developed, but it possesses redevelopment potential, it will be the redevelopment potential which will determine the value of the land rather than the existing use. For instance, a higher price for the real property would be given by a developer, if he can see that he could make an adequate profit by demolishing the existing structure on a site and constructing a new one. The land values in an urban area are determined by the collective demands for real property, both present and future. Hence ultimately, the land values will be dependent on the factors which govern the prices of the developed real properties. The question often arise as to who creates a particular urban land value. Is it the private and public bodies which have made capital improvements to the other surrounding land by way of roads, transport facilities, garden, etc. or the developer who sees the potential views for the particular price of land? Following factors are to be taken into account while making analysis of sale instances. 1. Situation 2. Size 3. Shape 4. Frontage and Depth 5. Return Frontage 6. Level 7. Nature of Soil 8. Restrictions on Development 9. Land Locked Land 10.Encumbrances 11.Miscellaneous Advantages 1. Situation: The value of land which is situated in a busy location 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. 2. Size: The size of plot also plays and important part 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 land under consideration. 3. Shape: It is obvious that plots of land with regular shapes will be sold at a higher price than those with irregular shapes. There is, however, no hard and fast rule which connects the value of land with its shape and depending upon

the merits of each case, the valuer makes suitable allowance for these aspects of land. 4. 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 street5 increases. For a particular locality, there is a relation of frontage with depth, known as the standard depth. If actual depth of plot is more than the standard depth, the value of plot will be more because of the increased plot area. But the increase will not be in proportion to the increase in depth 5. 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. In residential area, a corner plot gives wide scope for better architectural planning. In business area, a corner plot permits better layout of shops or offices with greater space for showrooms and advertisements. 6. 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 lines and drainage lines and hence the extra earth will have to be excavated to make the plot reasonably level. 7. 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 foundations will be reasonable in proportion to the total cost of the building. If, however, the bearing capacity is poor, considerable amount will have to be spent to make the structure stable. It is thus clear that the land with good bearing capacity will command more rates as compared to the land with poor bearing capacity. 8. 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. It is interesting to know how such a situation arises in practice by taking a simple illustration. 9. Restrictions on Development: The permissible floor space index (FSI) should be studied for the plot to be valued and for the sale instances which are scrutinized. The plot of land having more permissible FSI will naturally be sold at higher price as compared to the one having less permissible FSI. Similarly, there may be restrictions on development in the form of minimum distance to be kept permanently open from the banks of a river, lake or sea for plot situated along river, lake or sea. In a similar way, for plots situated on national and state highways or railways, no development is permissible for the specified distance to be measured from the centre line of the road or railway line. Such land or portion of land will command less value because of the restrictions imposed upon its developments. 10.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 reduction in values of such lands. The other common type of encumberance found in practice is the

occupation of the open land under reference by the unauthorized hutment dwellers. The litigation process to get the peaceful vacant possession of such plots of land will be quite uncertain, lengthy and expensive. Hence, the value of such land will be far less than similar open land with no such encumbrances. 11.Miscellaneous Advantages: In addition to the above considerations, 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. It should also be remembered that the comparative method has some serious weaknesses or drawbacks as mentioned below: 1. The buyers and sellers may not be willing to disclose the information relating to actual prices settled and terms of transactions. 2. The property to be valued is so unique or the market is so stable that the market information is not available for comparison or that which is available is unusable because it is outdated. 3. Very few properties are really sufficiently similar to permit accurate comparison. Hence, the result obtained by this method may prove to be unreliable and inaccurate, if large adjustments have to be made for location, time, interval, property characteristics, sale terms, etc. If the urban open land is leased out or is producing earnings, it is clear that the comparative method will not be used. In that case, the net annual return from the land is worked out and it is capitalized at appropriate rate of interest to arrive at the value of such land. 2 Abstractive Method: The abstractive method becomes useful when no information is available regarding land transaction in the nearby area or in other words, the value of land where sales are not occurring frequently can be worked out by the application of this method. Following three steps are involved in this method: Step 1: A nearby property fetching rent is considered and its capitalized value is worked out by multiplying its net income by years purchase. Let us say this to be C. Step 2: The estimated cost of the replacement of the above building is worked out and then, after making due allowances for the depreciation, a figure representing the cost of the building alone at present is obtained. Call this as S. Step 3: The difference C S gives the value of the land and if A is the area of the land, the cost per unit area = (C S)/A. This unit cost of land is then used to find out the value of open plot under consideration. It is clear that in this method, the more nearer the selected land resembles the land under consideration, the more correct value of the land will be obtained. Also, the land value which is abstracted in this process depends for its accuracy on the following two estimating processes neither of which is simple: 1. The estimate of replacement cost 2. The estimate of depreciation The estimate of cost as if new involves the ability to calculate the cost of today, based on the use of the same or closely related materials which more or less similar specifications of work.

3. Belting Method: When a plot of big size is to be valued or when a plot with less frontage and more depth is to be valued, it is logical to adopt the method of belting. It is due to the principle that the value of land in general decreases as the depth of plot increases or in other words, that the front land abutting road is more valuable than the rear land away from road. The main problem facing the valuer while adopting this method is to decide the depth up to which the maximum land value extend and from that point onwards, it starts declining or diminishing. The next step would then to be fix the relationship regarding the value of back land to the front land. In this method, instead of estimating an average rate of land, the plot of land under consideration is divided into different sections and different rates of land are estimated for each section. Usually, the plot of land is divided into three belts. The depth of first belt near the road is suitably adjusted. The depth of the second belt is kept 50% more than that of first belt and the depth of third belt is kept 50% more than that of second belt. Methods in Use for lands with building The common methods in use for property valuations are 1. Comparison Method 2. Income approach Method 3. Summation or cost Method 4. Residual Method Every property is different from the other property and there are several methods available to derive the value of real estate property but the method which has been adopted largely by the banks and valuation agencies is the Comparison method for real estate property valuations. Summation or Cost method At the time of inspection the data collected should include measurement of the area of the building, quality of construction (Type of flooring, paint, etc.), storey height and other amenities provided. Once this data is available cost of the building structure can be calculated. Land value can derived from the market place depending mainly upon the size and location of the land. Final value of the property can be derived by adding land value and building vale. Income approach method This method used for mainly for the valuation of commercial properties. This approach estimates the income flow that would be generated at the maximum and best use of a property. The income is then capitalized into an estimate of value. The value of the property is hence directly related to income generation capacity of the property. Residual Method This method is used when a property has prospects for development or redevelopment. Property valuation of the project under development is made relative to its presumed market value upon completion and end of project period. For example, when five years is the time period for completion of a project, the finance available in stages for a property would be proportionate to the value the property is expected to fetch after five years from the date of valuation taking into consideration all factors like inflation, population and economic growth of

surrounding area, and completion of other developmental projects in the locality which can add or subtract value to the project. Comparison method The Comparison method is the most popular method contemporarily used by current valuation service providers. The principle of the comparison method is Comparing an apple to apple. The value of rate per unit area, at which similar properties in the same locality were actually sold or are expected to be sold by the time of completion of the project, is multiplied by the actual area of the property under consideration. Certain changes to the value of the property which have to be made depending upon the positives and negatives of the property under consideration should be decided by an engineer visiting the property. The problem with this method is sometimes value of two identical adjacent properties can differ drastically.