R.A.Sharma - Secunderabad
CHALLENGES OF VALUATION FOR HOUSING DEVELOPMENT ORGANISATIONS,
1. INTRODUCTION:
It is experienced that these days many customers including individual, housing corporations, select banks, financial institutions are too demanding in respect of quality info of valuation report. Additionally, they give detail checklist, guidelines, formats summary of reports, proforma etc. and insist that valuer must comply with that in respect of each & every point. They ask for draft, discuss, suggest changes, ask for more information. Sometimes they ask the valuation by different methods for counter checking. Without compliance of such requirements, the report is not accepted & payment is not made as experienced by the author. The paper starts with general information to be furnished which is not only normal but requires a great depth of infos / data including history, development, economic, social, financial, technical status. Further it includes – Types of assets which are normally mortgaged, valuation details / report which must consist of – a very detailed info / data - technical, general, Zoning, development plans, FSI, Liability, sale transactions, location, social, economic, legal, utility, transferability, market approach, income approach, legal requirements, alternative use, status of property, Project viability – discounted cash flow analysis, present value, profit, risks, market changes, review, valuation report or DPR (Detailed Project Report). Lastly paper concludes with the summary of report expected by the tough customers which includes detailed analysis of different methods of valuations say market approach, sales instances, income approach etc… I
INFORMATION & DATA: A few tough customers insist to comply with their guidelines & checklists. They give a checklist like a DPR & also their brief summary of valuation report is like a small valuation report of about 6 – 7 pages. It is possible to do but the cost is too high which customer does not pay – may be because of unhealthy competition among valuer brothers. Data collection becomes more difficult when ultimate customer is either not available/defaulted or non cooperative due to various reasons.
FINANCIAL INSTITUTIONS / BANKS LEGAL STIPULATIONS: There are a few Financial Institutions / Banks who have prescribed very stringent legal frame work / terms for empandment including compensation by not only valuers but there heirs in case of default / NPA ( Non performing assets ) There is a great challenge to the valuers handling such cases in respect of knowledge, Experience, data/info collection & time / mandays involvement etc.
2. GUIDELINES FOR VALUERS FOR VALUING THE PROPERTIES OFFERED FOR MORTGAGE FOR LOANS BY A FEW ORGANISATIONS A few organizations are giving guidelines to valuers for valuation to inspect and prepare valuation report taking info consideration these guidelines. Taking in positive way these are very good learning points & especially for new valuers but too time consuming.
I.GENERAL INFORMATION 1. Name of the Company / applicant, - Amount of the loan required. 2. Details of property to be mortgaged: - Address, - Title: Freehold / Lease hold / Life Estate, - Single / Joint /Co ownership-Shares- Divided/Undivided. - Names of owners/occupants with their Rights and Liabilities in use of the subject property as per title deed or lease deed. - Nature of interest of the applicant in property and its likely effect on the value of the subject property. - Area of land/property. 3. Detailed information of the town in which property to be mortgaged is situated or located: - Growth of population in last decade. - Main economic activity and its growth. - Demand and supply of housing, shopping, commercial and industrial as may be applicable. - Quantity and quality of infrastructure/ utility services. 4. Descriptive information about the area in which property to be mortgaged is located: - Character & type of locality, Housing HIG, MIG, LIG, Professional, Commercial-City center / District center, Type of shops. or - Industrial Small Medium, Large Availability of labour raw material, etc - Quantity and quality of infrastructure/utility services provided as well as proposed. - Development trend and future potential. 5. Site plan showing location of the property to be mortgaged / project site with reference to important land marks in the town / city be attached: (This may be prepared on the guide map or Master Plan)
II. TYPES OF PROPERTY WHICH ARE NORMALLY MORTGAGED. - Open Land, Built up properties.- Owner occupied single family residential building. - Owner occupied residential ownership apartments. - Owner occupied commercial complexes. - Hotel buildings, Cinemas & nursing homes. - School, Colleges & hospital buildings.- Special properties (i.e., town hall, marriage hall etc) - Projects for develop-ment of complexes for residential, commercial and industrial uses. - Rented – Commercial/ Residential, - Any other type of the property not covered above.
III. VALUATION OF OPEN OR BUILT UP LAND (a) Descriptive and detailed information to be furnished: Area and shape of land, Dimension of each side of the plot and ratio of depth to frontage, Frontage on roads and widths of roads, Demarcation of land, Soil bearing capacity, foundation conditions, level of land and cost of leveling if any, Tenure of land, Is it freehold or Lease hold land? In case of lease hold, Name of Lessor, Name of Lessee, Date of commencement of lease, Period of lease, Date of termination of lease, Premium paid, Ground rent per annum, Covenants of lease with regards to following points be mentioned in the valuation report of the subject property with their effect on the value of the subject property. i) Termination of lease, ii) Renewal of lease, iii) Payment of unearned increase in the event of sale or transfer, iv) Conditions of transfer, v) Conditions of Mortgage, vi) Any other important clause which may change / affect the use or value of the subject property. - Is Land affected by Land Reforms Act, Revenue Code of the State Government? Furnish details. - Zoning of land as per Master Plan / Development Plan. - Development Plan / Master Plan / Planning proposals affecting the land such as reservation for public purpose like health facilities, playgrounds, recreation garden, road widening, new road, transport facilities etc. Give details, if any. - What is permissible FSI/FAR? How much is it utilized? Other D.C. rules, Byelaws affecting land use / values be mentioned in the valuation report of the subject property. - Is there any outstanding liability for property tax, income tax or any other taxes, levies that can be recovered by attachment of subject property? - Collect data regarding comparable sale transactions: which have taken place in the vicinity and give appropriate weightages with regard to following factors to each sale instances with property in question by giving due consideration to already given weightages and prepare an analytical report.
Appropriate weightages to be given to following factors and any other issues, which valuer may think essential to prepare objective valuation. -
Date of valuation: date of report as well as date of sale instances be mentioned, Building ( Situation in floor, built up area in Sq m FSI consumed as well as balanced in percentage, construction quality, specification for material architectural aspect, light and ventilation, maintenances etc… - Physical factors of land (area in sq.m shape, frontage in meter, frontage on roads, ratio of depth to frontage, level, drainage, soil for depth of foundation, water table depth in meter etc.) - Location – including proximity to amenities and facilities like educational, health, shops and markets, transportation, municipal services etc… - Social (type and class of locality, cleaning habit of the residents, Anti-social elements in the building, in the vicinity, in the city, region, or state etc…) - Economic (economic status of residents, prevailing rent of accommodation (commercial / residential), prosperity of the areas as revealed by shops, markets, business establishments etc..) - Legal (no legal title, short term lease, long term lease, freehold, rented, permissible FSI, marginal open space etc..) - Utility and Zoning and potential use permissible under Zoning regulations published by the Municipal Authority / Development Authority. - Transferability (any condition or restriction regarding transfer of title. - Time (date of valuation, date of sale instances). - Plan as per town planning scheme: Scaled Plan showing property to be valued and instances of sales with rates of land values, dates of sale and areas sold should accompany the valuation report (this may be prepared in the development plan or Town planning scheme map prepared by the Municipal Authority / Development Authority). (b) While valuing large plots of land from sale instances of small plots of land, details of hypothetical development schemes with estimated values of laid out plots should be given as per principles laid down by judiciary. (c) Lease-hold land and Method of Valuation: Income approach to valuation be applied by keeping in mind terms and conditions of lease agreements and other relevant factors mentioned above with their effect on the future income of subject property and value of the subject property.
IV. VALUATION OF BUILT-UP PROPERTIES:
a) Construction as per plan: Is the construction carried out as per plans approved by Municipal Authorities / Local Authority? If yes; attach approved plan of the building. If no : give plan of the building showing the extent of illegal construction.
b) Is it owner occupied / vacant / rented / Leased / given on lease and license or any other manner permissible under the concerned law? Specify if there is any other occupancy.
c) Specifying the method of valuation: Market Approach: Owner occupied single family residential building, owner occupied apartment in a multi storied building, owner occupied shop and office in a multi-storied building to be valued by market approach.
SALE INSTANCES: Statement showing comparable sale instances along with names of seller / purchaser / dates of execution and registration, registration number. Plan/scaled map showing property: under valuation and comparable sale instances with overall rate of consideration, area and date to be submitted with report. Analysis of sale instances: Analyse the comparable sale instances and compare the same with the property to be valued and estimate value of the property as on relevant date, by such analysis. Analysis be made by considering the factors mentioned above. d) Specifying the method of valuation - Income Approach: All rented buildings to be valued by income approach giving due regards to the outgoing in the form of Property Tax, maintenance expenses, society charges and other outgoing. Balance potential if any, to be valued separately.
Rental instances & Statement showing comparable sale transactions and rental instances and plan showing sales and rentals to be submitted with Valuation Report Analysis of comparable sales and rentals instances for estimating market value of property be made by considering the actors mentioned above.
i) Specifying the method: Hotel and Nursing Home buildings to be valued by Income approach. These properties are sold fully operational business units and the valuation of operational entity includes. - Land and Buildings - Trade Fixtures, fittings, furniture, furnishings and equipment. - Market’s perception of the potential together with benefit of existing approvals, license, permits, contracted future bookings, existing membership which are an important part of the ongoing business. Valuer to report on the following: a) Legal requirements: Validity of various licenses, permits etc. required to carry on the business. b) Sustainability of the business and possible future fluctuations. c) Demand & Supply: Alternative use if existing use is not likely to be sustainable due to change in demand for particular trading activity or property likely to sell in the open market for a use other than the existing use, then value on alternative use also reported. d) Goodwill of the subject business shall be excluded from the value of the business. e) Unusual Status: The Housing Development Organization shall be made aware of the significant difference in value of the subject property in following cases: - The business is closed, - Inventory is removed, - Licenses / Permits / Certificate are removed or in danger. - The property is vandalized or other circumstances that may impair future. f) Exclude movable assets: i) When land & building are mortgaged, only value of same shall be mentioned in the report excluding the value of the trade fixture, fitting, furniture, furnishing equipment and any other type of movable assets.
ii) Public buildings like school, colleges and hospital buildings Value to the specific user: The buildings falling under this category are rarely being sold. Moreover, these buildings have value in use (i.e. value to the specific user or class of users). Conversion for better use: The buyer of such buildings will take into consideration (a) possibility of converting such buildings for profitable use and (b) investment required to be made to make it suitable for alternative profitable use. Cost approach: In case of such buildings, valuation by cost approach is worked out. However, flexibility of planning be discussed in detail for any alternative use in order to realize sum advanced. Replacement Cost: While applying cost approach, valuer shall give complete details of type of construction and compute reproduction or replacement cost, physical depreciation and / or obsolescence.
iii) Town Hall, Marriage Hall etc… by Income approach Such properties are given on rentals. Therefore, Income approach to valuation is recommended. Alternative Use: It is also necessary to highlight flexibility of planning in detail for alternative use. iv) Projects for development of complexes for residential, commercial, industrial uses. In case of projects for development of complexes for residential, commercial, industrial, institutional uses valuer shall submit the following: Submission by Valuer: Project Viability – Discounted cash flow analysis. (1) Present value of amounts receivable in future, which includes sale proceeds of accommodation to be sold over a project period. The assessment of sale proceeds shall be made on the basis of appropriate real estate, market survey and analysis of genuine and legitimate comparable sale instances of similar kind of accommodations and appropriate real estate market survey which includes demand and supply of the accommodation in the city and subject locality. (2) Present value of estimated expenditures including cost of land, cost of development, cost of construction, cost of management, interest on loan and capital etc… (3) Profit: Net profit as on date of valuation i.e. (1) - (2). (4) Market Changes: Adequately indicate anticipated market changes during the remaining period of development. (5) Risks: Property consider and indicate range of risks associated with the period of development. Mode and manner or timing of release of loan in installments at the beginning on land value and subsequently as per the progress of the project.
Mode and manner of repayment of principal loan amount in installments and annual payment of interest on loan / balance loan. For this purpose, it is necessary to give net annual income expected to be realized from the project either by way of rent or sale of accommodation. Review by Valuer: Project to be reviewed in respect of above by Valuer or Housing Development organization periodically.
v) Valuation as Valuation report + DPR (Detail Project Report): From the above it can be seen that if all above points are fully complied then it will be valuation cum DPR for which customer never pays.
vi) Unhealthy competition: Although it is possible to comply with all such requirements but at what cost? Does customer pays for so much manpower incurred plus efforts? No, it is because incase of tender our valuer brothers quite so low that even 25% of above work can’t be done in small amount quoted. It has so unhealthy competition as experienced by the writer.
3. SUMMARY OF VALUATION REPORT: The customer expects a detail summary consisting of a lot of data & analysis. A brief is given below.
Usual & Unusual - Our experiences: Customer’s demand: Some of the organization / corporations are highly demanding. They expect a lot of details to be given in the valuation report. A brief extract from a “brief summary of valuation report for the purpose of mortgage” is given as under: ( As per customer’s format)
1. Normal – Full, Address, Company / Name, Land marks, Inspection date, situation, Location, Distance from Airport / Station, surrounding, locality LIG / MIG / HIG, Industry, slum, Nallah, Safety, Hazards, Infrastructures – Civic, social transportation amenities, electricity etc, Property details Plot NO, Area, Freehold / Lease hold, rent, Year of Construction, Occupancy, Sanction particulars – Approval, authority, references of approval, verification of original copy of approved plans, construction as per approved plan, deviations from approved plans. Valuation: Approach used, building condition, structurally sound, life, residual life, completion certificate. Marketing approach – sales instances, value as per market & cost approach, cost of construction, Income approach, 3 rental instances, rate of capitalization, gross annual income in Rs, Net annual income, Year’s purchase, Capitalized Value of property, Adverse & Favourable features.
2. Little info generally not asked on regular basis: Some organizations / customers are particular for the following infos which need in depth study, data, collection, Analysis etc…. (a) Verification of original approved plans. (b) Attach completion certificate (c) For Marketing approach – sales instances – To use separate sheet for full info. (d) Value as per market approach & cost approach. (e) Income approach –3 rental instances. (f) Rate of capitalization, Gross annual income, outgoings, Net annual income, year’s purchase, capitalized value of the properly. (g) Adverse / favourable features.
3. Meetings / Review / Draft Review: There are a few customers who expect & act for several meetings, review & changes.
4. Incorporation of several changes: They make changes in several meetings and advise the valuer to incorporate changes.
5. Add Such Mandays Cost in Qtn: Valuers must consider such mandays in their Qtns.
6. Delay in Payment: Despite all the above compliances author’s experience is that the payments are not received on time. It takes several months.
4. SUMMARY From the above it can be seen that there are great challenges in valuation field especially when we find a tough / well informed individual / organization. If they have their own valuation cell then they further insist for different methods of valuations / approaches, analysis and several reviews / meeting etc.. Author’s experience is that some customer take valuation report cum DPR (Detailed Project Report) at much lower cost due to unhealthy competition. Even the summary of report asked is too elaborate. The info / data collection needs a lot of time beyond the professional fee. But in any case it is very professionally satisfying if valuer takes in right spirit and dates / info are furnished by the client. However, such valuation have great challenge for the valuers. With more education & developments, author feels further challenges are ahead for which the valuers must get ready.
REFERENCES: 1) Housing Development Organizations, Select Banks, Financial Institutions, OL Office, Guidelines, Valuation Summary 2) Valuation & Works of Sharma & Associates.
