Land and Building Valuation Concepts and Principles
What this domain tests
This domain tests whether you can define the valuation problem before calculating: which right is valued, on what date, on which basis, and subject to which constraints. IBBI-style questions reward precision on bases of value and highest and best use (HABU).
Core rules
- Market value is the estimated amount for which an asset should exchange on the valuation date between a willing buyer and a willing seller, after proper marketing, each acting knowledgeably, prudently and without compulsion. Fair value is a financial-reporting construct and may differ. Investment value is entity-specific; forced-sale or liquidation value assumes a constrained marketing period.
- Value attaches to rights, not only to the structure: freehold, leasehold, sub-lease, easement, licence, tenancy and encumbrance all matter. A shop with a below-market lease is worth less than the same shop with vacant possession.
- HABU is the reasonably probable use that is legally permissible, physically possible, financially feasible and maximally productive. Test it before selecting a method.
- Record the valuation date, title status, tenure, zoning/FAR and all assumptions.
Worked example
A 1,000 sq m plot may be developed as residential or commercial. Residential: gross development value (GDV) ₹12.0 crore; construction and fees ₹6.6 crore; developer profit 20% of GDV = ₹2.4 crore; residual land value = ₹3.0 crore. Commercial: GDV ₹13.5 crore; cost and fees ₹8.2 crore; profit ₹2.7 crore; residual land value = ₹2.6 crore. HABU is residential, so the land is valued on that basis at about ₹3.0 crore, subject to title and approvals.
Traps
Treating fair value and market value as synonyms; ignoring leases or encumbrances; adopting a HABU that is not legally permitted; omitting the valuation date; double-counting fees or profit.