This technique of land valuation is also indirect method of deriving land rate by residual technique and not by direct comparison of open land sales. This technique involves preparation of a hypothetical building project scheme first. Then valuer is required to work out sale value of flats/shops designed and planned under hypothetical building scheme. After deducting for profits, cost of construction, management expenses and other outgoings in implementing project are worked out,the same are deducted from sale price to arrive at final net proceeds. Said amount is taken as value of the land component and rate is derived there from.
This hypothetical building scheme should not be confused with hypothetical plotting scheme which is used to value large open plot of land. Hypothetical building scheme is normally used for under utilised property with existing structures on the plot. Either F.S.I. is under utilized or the user aspect is not highest and best.
This working enables developer to offer fair and reasonable land price to the owners of partially developed or under utilised properties. Some times high price is offered for probable commercial use of land vis-à-vis existing residential use.
The process under this method consists of following steps.
- In this method best possible plan of the hypothetical building scheme is first prepared visualizing new building in the plot as per municipal rules. It is assumed that old existing structure in the plot will be demolished. Highest and Best user of the plot is considered for redevelopment e. for new building in the plot.
- Encumbrances on the plot in form of existing tenanted building are determined. Builtup area in occupation of tenants is worked out and probable cost of rehousing each tenant in new building on the plot or else where in the locality is found out. There are four or five possibility or options available for tenant and case of each tenant may The possibilities could be any one of the following.
- Tenant may agree to take some lump-sum amount for surrender of tenancy right and he may go away else where on his own.
- Tenant may want free of cost flat of equal area in new building on same plot on ownership basis instead of tenancy basis.
- Tenant may accept free of cost alternate accommodation else where in the locality and may ask for some additional sum over and above free flat.
- If it is a small town and prices of flats are not very high, to make the project viable, the tenants may agree to pay some cost, say cost of construction of flat, to acquire flat in new building on the plot on ownership basis.
- There may also be a tenant who will not accept any of these proposals and may prefer to go to Court to obtain stay against redevelopment project to protect his tenancy rights.
Developer has to assess all possibilities and arrive at total cost of removing encumbrances from the plot.
- Now developer should conduct market survey to find out probable sale price of all flats, shops, garages proposed under the hypothetical building scheme as per prevalent rate of such ownership premises in the locality. Area of flats for rehousing tenants, should be excluded from total area.
- Developer should also estimate total likely expenses for construction of new building on the plot. Apart from building cost, these expenses should also include for professional charges for Architects, Engineers and other Consultants, municipal taxes, water charges, development expenses like filling in plot, compound wall cost, providing amenities, if any, etc.
- In other outgoings, developer should deduct for interest on borrowed capital, brokerage charges, advertisement charges and legal charges.
- Developer should also deduct for his profit for management of entire project.
- Final land values are determined by deducting total expenses from total realizable amount.