Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta
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Alright, you have now decided to purchase your dream home or a commercial property. But hang on, before you jump on the bandwagon and go for property hunting, keep in mind the valuations. By valuations we mean how much the property is worth at given point of time. So, you got to ask these simple questions…am I paying the right price for this property. Can I get anything lower than this? You need to understand the concept of market value before financing or investing in a property.
Market Value:
It is the most competitive price which a property should bring in an open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably and assuming the price is not affected by undue stimulus.
How do you value a property?
There are 3 principle approaches to valuation of property. All these approaches require you to gather market information before you apply these approaches to value a property. The data you need to gather is:
Approach 1 – Sales Comparison approach:
This approach is based on data provided from recent sales of property highly comparable to the property under consideration. If there are differences in size, scale, location, age, and quality of construction between the property being valued and recent sales of comparable properties, adjustments should be made to compensate for such differences. The more differences that must be adjusted for, the more dissimilar are the properties being compared, and less reliable the sales comparison approach. The fundamental principle for this approach is that an informed investor would never pay more for a property than what other investors have recently paid for comparable properties. Ideally the data should be collected of properties that are situated in the same locality (sub market).
For example, if you looking to buy an apartment in a builder project in Sector 85, Gurgaon. Collect the information about all other projects within the same locality and see at what price points apartments in those projects are being sold. Adjust for luxury specifications, approach towards apartment complex, and builder track record of successful and quality delivery. As an example, the price at which new apartments are being sold in Sector 85 is Rs. 5500 per Sq. Ft. A reputed developer has launched a new project at price point of Rs. 6200 per Sq. Ft. Why? Is this project offering luxury specifications? Is this project nearer to Highway or metro rail? Or what could be the reason for high prices? Ask these questions. Similarly, if something is being sold at below rate, try to understand why? Is there any litigation with the property? Are there any construction defects?
Approach 2 – Cost Approach:
For a new property, the cost approach ordinarily involves determining the construction cost of building, then adding the market value of the land. In other words, what will it cost you if you were to buy a piece of land and construct by yourself.
So, again, if you are looking to buy an apartment in Sector 85 in Gurgaon, check the prices of land or plots in the same locality. Let us assume, a 250 Sq Yd plot is sold at 60000 Rs. per Sq. Yd.
Below are the calculations you should do in order to arrive at the property value using cost approach.
Approach 3 – Income approach:
This approach is based on the principle that the value of a property is related to its ability to produce cash flows. This approach is highly recommended for commercial properties and least effective for residential properties. The income generated from commercial properties is capitalized to arrive at the correct valuation. We will cover this approach in details in next article.
So, now that you have some methods to calculate the worth of property you are considering to buy, we are hopeful that you will buy the right property at right price point.
Cheers :)
Follow @sach_gupta
Market Value:
It is the most competitive price which a property should bring in an open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably and assuming the price is not affected by undue stimulus.
How do you value a property?
There are 3 principle approaches to valuation of property. All these approaches require you to gather market information before you apply these approaches to value a property. The data you need to gather is:
- Identification of location or sector you are looking to buy the property
- Effective date of value estimate
- Gather market data on current rentals, capital values, and presence of social infrastructure
Approach 1 – Sales Comparison approach:
This approach is based on data provided from recent sales of property highly comparable to the property under consideration. If there are differences in size, scale, location, age, and quality of construction between the property being valued and recent sales of comparable properties, adjustments should be made to compensate for such differences. The more differences that must be adjusted for, the more dissimilar are the properties being compared, and less reliable the sales comparison approach. The fundamental principle for this approach is that an informed investor would never pay more for a property than what other investors have recently paid for comparable properties. Ideally the data should be collected of properties that are situated in the same locality (sub market).
For example, if you looking to buy an apartment in a builder project in Sector 85, Gurgaon. Collect the information about all other projects within the same locality and see at what price points apartments in those projects are being sold. Adjust for luxury specifications, approach towards apartment complex, and builder track record of successful and quality delivery. As an example, the price at which new apartments are being sold in Sector 85 is Rs. 5500 per Sq. Ft. A reputed developer has launched a new project at price point of Rs. 6200 per Sq. Ft. Why? Is this project offering luxury specifications? Is this project nearer to Highway or metro rail? Or what could be the reason for high prices? Ask these questions. Similarly, if something is being sold at below rate, try to understand why? Is there any litigation with the property? Are there any construction defects?
Approach 2 – Cost Approach:
For a new property, the cost approach ordinarily involves determining the construction cost of building, then adding the market value of the land. In other words, what will it cost you if you were to buy a piece of land and construct by yourself.
So, again, if you are looking to buy an apartment in Sector 85 in Gurgaon, check the prices of land or plots in the same locality. Let us assume, a 250 Sq Yd plot is sold at 60000 Rs. per Sq. Yd.
Below are the calculations you should do in order to arrive at the property value using cost approach.
Approach 3 – Income approach:
This approach is based on the principle that the value of a property is related to its ability to produce cash flows. This approach is highly recommended for commercial properties and least effective for residential properties. The income generated from commercial properties is capitalized to arrive at the correct valuation. We will cover this approach in details in next article.
So, now that you have some methods to calculate the worth of property you are considering to buy, we are hopeful that you will buy the right property at right price point.
Cheers :)
Have any Questions? Tweet to @sach_gupta
