The blog consists of three methods of calculating the fair market value of the property. The step by step method of calculation is briefed with Sales comparison approach, cost approach & component approach. Read the complete blog to know every detail.
Knowing how to find the property value of a home prepares you to buy, sell, refinance or even negotiate lower property taxes. There are a variety of ways in India to know the market value of a property. Let’s take a look at the three most used methods to reach the conclusion of determining the market rate for the property.
1. Sales Comparison Approach
The sales comparison approach is one of the most commonly used methods to assess property value. In this approach, the value is assessed based on the price that similar properties have in the same sub-market / neighbourhood. Hence, the term sales comparison approach.
List the features and benefits of your property. For example, total area, location, the age of the property, the number of bedrooms (If residential), parking space, electricity supply, security, overall condition, etc.
Consider the sales price of at least three comparable properties. Ideally, these properties should have almost 70% of the features that you have listed and note down other different characteristics. Location is the key deciding factor in altering the property prices. Make sure the properties are in the same neighbourhood and have not been sold more than six-month ago. The property research can also be done using online property portals for your research.
To attain a benchmark price for the property run a quick calculation. Take out an average of the selected three properties (you can also find out the price per Sq Ft, and then multiply it with the total area of your property to arrive at a benchmark price).
Adjust the price, keeping in mind the condition of the property.
2. Cost Approach
The cost approach starts by calculating how much the property would cost to rebuild where you are unable to find a comparable property. The cost approach is based on the assumption that a reasonable buyer would not pay more for an existing improved property.
Under this method, you need to assess how much the property would cost to rebuild with comparable features, amenities with modern technology and construction materials.
Calculate the depreciation of the property, which represents the wear and tear or reduction in the value of the property over time.
Arrive at a fair market price after factoring the depreciation.
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3. Component Approach
Under the component approach method, the land value and the value of the building (construction cost) can be assessed separately and added to get a fair estimate of the property price.
a. For assessing building cost:
The value of the building is determined by working out the re-production cost and assessing the present value by factoring depreciation.
Total cost = Value of building + value of Plot
Total cost = Total area x 10% of reproduction cost + value of plot
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B. For assessing land price:
Land value can be calculated from the instances of sale of built-up properties in the locality. The frontage on the main road, zone use, floor area and plot coverage are considered. In cities where urban land tax is collected, the price fixed by development authorities or housing boards while offering the sites for sale is taken into account.
And this is it. Choose any method, or choose an average of all three. No matter what, you will get a good estimate of your property value.