Under the sales comparison Method, the most popular comparison technique is the “Adhoc Comparison Technique” This Adhoc comparison technique is very well known and it has been in use for several years. In fact even today, many valuers adopt this technique to save time and to do quick reporting of valuation to the clients. This method is also known as Hedonic Pricing Model. Under this model, the price of the property is expressed by the formula.
P = f (STLA)
P = Price of the property in the market. f = Stands for function of
S = Size or covered area of the premises.
T = Time factor at which asset is traded in the market.
L = Location of the property.
A = Age or physical conditions of the property.
It will be seen that out of several factors which affect the value of the property in the real estate market, only four factors are considered in this model. Under this Adhoc comparison model, the valuer compares these four factors of both properties viz. sale instance property and subject property. The valuer arrives at the rate to be adopted after doing this Adhoc comparison. There is no doubt that the price of the property is the function of area, location, and time period. Location in respect to the proximity of civic amenities is a major factor affecting value. Similarly, the time factor indicates the demand and supply position and environment of the market at a relevant period of time which determines the price of an asset. However, the age factor is only for buildings and that too in a small way. It does not apply in the case of land value comparison where the characteristic of land decides its value in the open market. Similarly, the size or area factor also is not a major or a very important factor for building values but it does constitute an important attribute for land values. Demand for more areas is comparatively less than demand for smaller areas.
Under this Adhoc comparison method, the valuer normally follows steps as detailed below.
- Valuer first collects data of sale instances in the locality for the relevant period of Nongenuine instances of sales are excluded.
- Rates and attributes of genuine sales are compared with the attribute of subject All relevant factors and weight ages applicable are recorded.
- The valuer then arrives at a concluding overall effect of these It may be positive weightage over sale instance rate or negative weightage over said rate.
- The valuer then finally estimates the final rate for the subject property based not only on his experience and expertise but also on the basis of the overall impression.
Hence it is called Adhoc analysis.
The following examples will explain the steps.
Example-1: An industrial gala, 5000 smt area, on the ground floor of the building was recently sold at Rs.20,000/smt. Find out fair value for 1000 smt gala which is on 1st floor of the same building.
Solution: Consider location and size factor. For industrial units, the upper floor is a disadvantage and hence fetch a lower rate. The smaller size may or may not be so much important for the industrial unit as compared to the upper floor situation aspect.Rate of Rs.17,000/smt for the subject gala is estimated. Market value of subject gala = 1000smt @ Rs.17,000/smt = Rs.1,70,00,000/-
Example-2: A residential flat, 175 smt area in 15 years old building is sold at Rs.20,000/smt in May 2009. The building is on the main road and it has garden and parking facilities in the plot. The advice of fair purchase price in April 2010 for 150smt flat, in nearby by-lane, in a building which is 30 years old and having inferior specification than sale instance flat.
Solution: Consider age, location and time factor of sale instance flat as against these aspects of subject flat. Equated rate of sale instance flat for April 2010 could be
+ 10% for 1-year difference i.e. time factor.
- 10% for 15 years age and specification difference.
- 10% for main road location
- 10% (Overall % decrease)
Equated rate of sale instance flat =(0.90 x 20,000)
= Rs.18,000/smt
Same rate is estimated for the subject flat.
Fair value of subject flat = 150 smt @ Rs.18,000/Sm
= Rs.27,00,000/-
