Whenever we plan to buy a property, The biggest dilemma for a buyer is what is the Fair Value of Property? It is because of fear of paying more than the market price. There is no straight forward answer to resolve this dilemma. In fact, sometimes people postpone purchase decisions in anticipation of price correction. In other words, they wait for the fair value of property. I am tracking real estate sector of key markets from last 6 years but i have never seen instances of sharp price correction.
In last few years, prices have softened and corrected by 10%-15%. I do agree that there can be distress sale which can happen both during good and bad times. The price of property under distress sale is generally 15-20% cheap compared to market rate. These properties are also referred as discounted property. In other words, we can say that buyer discovers Fair Value of Property under distress sale.You also need to find out the reason behind discounted property, it can be a trap. In some instances, good negotiation skills can fetch you a better price. To negotiate a property deal is an art as i shared in my post, Negotiate Property Deals.
To search for discounted property or discover fair value of property requires a lot of patience & time. Risk involved is high. Risk in the sense that if i am looking for discounted property and current rate of property is 10 Lac. If i keep searching indefinitely then i should keep in mind that property rates may increase. Say after 5 months, i found distress sale at 20% discount but by now price of same property is 13 Lac so effectively i am at a loss. Based on my experience i can say that any time is the best time for property purchase at market rate if you are buying for own use. Market rate may or may not be a fair value of property. If you are buying for investment purpose then you can wait for Fair Value of Property. For investment, I always suggest 2BHK unit as i explained in my post 2BHK – Best Real Estate Investment.
Now million dollar question is what is the Fair Value of Property? While calculating Fair Value of Property you should listen to your mind, not heart. The Fair Value of Property should be decided broadly on 2 factors (a) Accessibility i.e. Location and (b) Site i.e. Society, Flat, Amenities etc. The seller can command premium for prime location. The best way to find prime location is to look out either for Heart of City say MG Road in Bangalore, Nariman Point in Mumbai or Connaught Place in Delhi. Alternatively, check the CBD (Central Business District) say BKC in Mumbai, ORR or ITPL in Bangalore or Gurgaon in NCR. The property far from prime location of the city is cheaper (Of course there will be exceptions also). The second criterion is site i.e. Flat, Society, Builder etc. In Mumbai, Hiranandani commands a premium so as Mantri and Shobha in Bangalore. I would not like to name but there is a project in Bangalore that is practically in Jungle. It is almost 30 km from MG Road but this well-known builder is asking for rates that are never heard off. In short, Builders also command a premium. There is always an exception to Fair Value of Property.
As per basic principles of Economics, Demand and Supply should play a crucial role in deciding Fair Value of Property. Sometimes sentiments & Purchasing power play an important role which overpowers all the principles of economics. This is what is happening in Delhi and Mumbai. The prices in pockets like Dwarka & Gurgaon are never heard of. It’s because Govt/builders have acquired land from farmers at too high rates. It has increased the purchasing power of many people which in turn have boosted the sentiments thus property prices have skyrocketed. You cannot talk/think about the fair value of property in such pockets.
Secondly, this scenario induces insecurity among others. The fear of missing the bus or we may not get a property in future so everyone join the rush to buy property which further increase the price. All these situations defy basics of Fair Value of Property. I can give it in writing that prices in these areas will fall like a pack of cards shortly. The reason being, there are no growth drivers in most of these areas. If the increase in property price is not linked to any growth driver then the price is artificially inflated by hoarders/investors. If property prices are increasing in Whitefield and Electronic City of Bangalore then reason is a lot of SEZ’s have come up in these areas. These areas are contributing one of the highest addition to office space in the country.
My personal advice to readers is to make a well-informed choice as it is your hard earned money. If you are not finding the right property then better to stay on rent. The sentiments should not overpower your conscious and thinking process. For a common man, it is not possible to consider, evaluate and analyze all the important factors. After a lot of studies, i have concluded that Rent is the best criterion to fix Fair Value of Property. Rent covers all factors like Demand, Supply, Accessibility, Site, Sentiments, Growth Drivers etc. that should be considered while purchasing a property. To find Fair Value of Property, All you need to do is just check the Rent that you can potentially earn by putting similar flat in same society on rent. It will give you a fair idea of property valuation and you will be in a better position to take an informed decision.
How to calculate Fair Value of Property?
After finding out the rent just calculate Price of a Property by simply applying following 2 methods and you will get a Fair Value of Property.
Method A: This is a well known international method to arrive at the fair value of property and is adopted by well known real estate firms. It states that Fair Value of Property should not be more than 25 times the Annual rent you can earn as of date. For example, if a property has potential to earn Rs 20,000 rent per month i.e. Annual Rent of Rs 2.40 Lac. In this case, 25 times of annual rent is 60 lac therefore fair value of property is 60 Lac
Method B: This is well known Indian method to calculate Fair Value of Property in the current scenario. It states that price you are paying for a property should not be less than 3% of Annual Rent you can potentially earn from the property. Let’s take the example mentioned example above, Annual rent is 2.4 lac and on a higher side if yield is 3% then Fair Value of Property should be 80 Lac.
Now from these two methods, we get 2 different values i.e. 60 lac and 80 lac so we can consider this as a range to buy the property. If you get it at lowest point i.e. 60 lac then you strike the Gold and if you get it at 80 lac then also it’s a fair deal.
In a nutshell, there is no hard and fast rule to fix fair value of property but we can set some rules and guidelines to make well-informed decision to avoid regrets in future.
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