How to calculate the market value of a property?

Piramal Realty, in this blog, tries to help its readers understand ‘what is the market value of property’ and ‘how to find market value of property’ efficiently. Let us begin with a thorough understanding of the concept of ‘market value’ and then proceed with the question “how to check market value of property”.

Market value of property:

Market value of a property is the estimated price at which the property would get sold in the open and competitive real estate market. This price is determined by factors such as demand and supply ratio, economic trends, physical condition of the property, environmental conditions in the vicinity, interest rates, taxes and other government regulations, etc. under normal conditions (not during a period of any political or statewide/nationwide turmoil such as medical emergency, war, or similar situations). It is believed that both, the buyer and the seller of a property, have adequate knowledge regarding the conditions of the property and the market, and that they both make negotiations and decisions in their own best interests. It is assumed that there is no undue pressure on either party to enter a contract or transaction, and that the way to exit the contract at any time before fulfilment is open to both of them.

Now that we know what the market value of property is, we shall check what factors affect the market value of property. Before that, however, we shall see what factors influence the entire real estate property market as a whole. Real estate properties include residential properties such as houses, apartments, vacation homes, etc., commercial properties like offices and retail spaces, industrial properties such as warehouses and factories, and land.

Factors that influence the property Market as a whole:

• Supply and demand:
  The availability of real estate properties against the demand for them affect pricing significantly. There is an inverse relation between the supply of properties and the prices of properties.
• Economic conditions:
  Economic conditions such as interest rates, inflation, rate of employment, national economic growth, etc. are responsible for influencing the realty market in a country. Higher interest rates reduce the overall purchasing capacity of individuals, affecting the property market adversely, whereas when interest rates fall, borrowing capacity of people increases, and demand for properties is stimulated.
• Demographics:
  Growth in population and changes in migration patterns are the key demographic factors contributing to fluctuations in demand for real estate properties.
• Government policies:
  Policies pertaining to sales and purchase of real estate in a region, zoning laws, taxes, local owner-tenant laws, etc. affect the real estate market of the region.
• Infrastructure Development:
  Developments such as improved connectivity, convenient transport, utilities, proximity to amenities such as educational institutions, health facilities, recreation centres, etc. have a positive impact on the property market. If we take example of the Mumbai city, major projects like the Mumbai Trans Harbour Link, Coastal Road Project, and new metro corridors are enhancing connectivity, bringing the suburban areas such as Thane, Navi Mumbai, and Panvel closer, favouring the real estate market in Mumbai.
• Global Factors:
  The real estate market is often affected by international issues such as global recession, foreign investment rate, geo-political events in other nations, etc.

Read more about Top 5 Factors That Influence Property Values In Today’s Market

Latest trends in the real estate housing market

• Significant rise in demand for Luxury and Premium Housing:
  Driven by rising disposable incomes and preference for high-end amenities and finishes, the affluent community is opting for features such as opulent living spaces, exclusive clubhouses, personalized services, etc.
• Focus on Sustainable and Eco-Friendly Living:
  Today, homebuyers are becoming increasingly aware about sustainability and eco-friendly practices. They eye developments that incorporate green building features and the efficient and renewable sources of energy.
• Rise of Co-living and Shared Spaces:
  The exploding demand for housing in urban areas and the relative shortage of spaces has given rise to the trend of co-living and shared spaces. Mostly, young professionals prefer this kind of living arrangement which they find affordable and yet, offering shared amenities such as workspaces, gyms, and social areas.
• Technological advancements with the use of PropTech:
  Affluent class, these days, prefers advanced features in homes, such as smart thermostats, voice-activated assistants for gadgets, and automated lighting systems for their ‘smart homes’.
• Emphasis on Wellness and Health:
  Property developers are aware that homebuyers these days want wellness features such as yoga studios, meditation rooms, green spaces incorporated in the plans.

How is the market value of property determined?

• Location of a property:
  Any buyer or investor would ensure that a property is well connected to neighbouring commercial hubs by ways of excellent transportation. Constant developments in infrastructure contribute to rising prices of properties. Similarly, proximity to amenities such as schools, hospitals, child daycare facilities, recreation parks, open spaces, etc. plays a vital role in enhancing market value of a property.
• Physical condition of a property:
  The age and maintenance of a property, number of renovations, any structural changes, etc. have a severe impact on desirability of a property. Other factors are the size (area) of a house, plan, and any unique features that a property exhibits.
• Market Conditions:
  Supply and demand for properties in a particular geographical area, prices of similar properties in the locality, zoning laws, taxation and other government policies, etc. are responsible for market values of properties.

Why is calculation of market value of property important?

Knowing the correct market value of properties is important to participants in the real estate market in the following ways:

• To buyers:
  For making well informed decisions regarding purchase price of a property and terms of negotiation, based on its physical condition, location, connectivity, amenities, infrastructure, etc.
• For sellers:
  For setting a competitive price based on market research regarding prices of similar properties in the location
• For Lenders:
  For risk assessment and for loan amount determination
• For Investors:
  For determining potential ROI (return on investment) from a certain property
• For taxation bodies:
  Property taxes may be calculated and fixed, based on the assessed price of a property which is linked to the market price.

How to calculate the market value of a property?

Calculating the market value of property involves a systematic approach, however, there is no single fixed method for calculation of market value of property; there are a number of methods that can be used individually or in combination for assessing the market value of a property.

Those methods are as under.

1. Sales Comparison Approach (Market Data Approach):
   This is the most common method, especially for residential properties. It involves comparing the subject property to similar properties that have recently sold in the same area.
   
   • Find Comparable Sales: Identify properties that are similar in size, age, condition, location, and features to the subject property.
   • Adjust for Differences: Make adjustments to the sales prices of the comparable properties to account for any differences between them and the subject property. For example, if a comparable property has a larger plot, you would subtract an amount to reflect the difference in plot size.
   • Estimate Market Value: Once the adjusted sales prices of the comparable properties are determined, an average or weighted average can be used to estimate the market value of the subject property.
2. Cost Approach:
   This method is often used for newer properties or unique properties where comparable sales are difficult to find. It involves estimating the cost to replace the property and then subtracting any depreciation.
   
   • Estimate Replacement Cost: Determine the cost to replace the property with a similar one using current construction costs.
   • Estimate Depreciation: Subtract an amount to reflect any physical deterioration, functional obsolescence, or economic obsolescence.
   • Add Land Value: Add the estimated value of the land to the depreciated replacement cost to arrive at the market value.
3. Income Approach (Capitalization Approach):
   This method is used for income-producing properties, such as rental properties or commercial buildings. It involves estimating the potential income of the property and then applying a capitalization rate to determine its value.
   Steps:
   • Estimate Potential Income: Determine the potential gross income of the property, which is the total amount of rent that could be collected if the property were fully occupied.
   • Estimate Net Operating Income (NOI): Subtract operating expenses, such as property taxes, insurance, and maintenance costs from the potential gross income to arrive at the NOI.
   • Determine Capitalization Rate: The capitalization rate is the rate of return that an investor would expect to earn on their investment in the property. It is influenced by factors such as risk, interest rates, and market conditions.
   • Calculate Market Value: Divide the NOI by the capitalization rate to estimate the market value of the property.

Professional (licensed) appraisers assess a property’s market value on the basis of detailed inspection, local market analysis, and the (above) established valuation methods.

There are online valuation tools such as property listing platforms that use algorithms based on latest sales in a location, characteristics of a property, and the ongoing market trends to provide price estimates for the property.

Now that you are well versed with the concept of ‘market value of a property’, why not take the next step of participating in the real estate property market by purchasing a property or investing in a property with thorough analysis of the market and knowing the market value of your desired property?

Frequently Asked Questions

Disclaimer- The views expressed above are for informational purposes only based on industry reports and related news stories. Piramal Realty does not guarantee the accuracy, completeness, or reliability of the information and shall not be held responsible for any action taken based on the published information.