All about Fair Market Value (FMV) in Real Estate
Here’s all you want to know about Fair Market Value (FMV) in Real Estate:
Fair Market Value (FMV) is one of the favourite topics in real estate. And why wouldn’t it be? It provides a lot of insights. Notably, from the standpoint of valuation of property. The owner gets to know the real worth of his property. He may avoid being fooled around. The question of FMV surfaces at various instances. It can be Sale and Purchase, Refinancing, Legal purposes, Loan purpose, Stamp duty collection, Portfolio Management, Family Law/Matrimonial or Market Valuation.
When you want to buy a property, you need to know its FMV. It facilitates in establishing the right purchase price. It saves you from being overcharged. You get the real value for money. Consider another situation when you want to get a loan on the property. If the property isn’t correctly valued, you might not get a loan from the banks.
Even from the taxation perspective, FMV helps you to be compliant.
You might wonder how?
At the time of sale of property, you make capital gains. It’s the difference between the Sale Price and Fair Market Value. The transaction attracts tax incidence in the form of Capital Gains Tax. If there’s any discrepancy in the estimation of Fair Market Value, be prepared to receive a call from the income tax department.
So, as the name goes…..
Fair Market Value needs to be really fair!
You may be well aware of the Budget 2017 which came out with flying colours. The announcements on real estate make me underscore the issue of Fair Market Value. The base year for calculation of Fair Market Value has been shifted from 1981 to 1 April 2001. The changes would be effective from the following financial year 2017-18. However, it’s going to transform the manner in which Fair Market Value impacted your tax liability. On the properties purchased before 2001, the owners are going to have significant savings on tax incidence.
Also read: Should you invest in a second home or not
Read on to get enlightened.
Factors affecting Fair Market Value of property
There are many factors which affect the Fair Market Value of your property. With gradual changes in these factors, the value of the real estate tends to escalate or depreciate.
So, as a prudent real estate enthusiast, you got to know the variables before settling the property deal.
The place where the property is situated can have a bearing on its valuation. If the property is situated in a prime location, it would definitely command a premium valuation. Prime locations refer to the heart of the city or the commercial areas having upscale buildings and residential areas having sprawling apartments. A few examples can be Connaught Place in New Delhi, MG Road in Bengaluru, Nariman Point in Mumbai and likewise.
From the buying side, you would have to shell a lot more to grab an apartment in these localities. On the contrary, being a seller would bestow upon you considerable bargaining power.
On the contrary, properties located in remote locations or on the outskirts come at a lower cost. The reason could be poor connectivity with the city centre, lack of amenities, etc. But you may never know when some unexpected event leads to a price hike. Take the case of Jaipur city, located 258 km from Delhi. The announcement of proposed IT Park and construction of Jaipur-Ajmer Expressway are driving up the property rates.
The dimensions of the property also play a significant role in its FMV. Whether it’s a plot, fully constructed house, independent villa or a flat; each one commands a different value. Independent villas would be expensive as compared to a flat. A bigger plot of land would fetch higher value compared to smaller one.
One more point needs to be emphasised here i.e. the builder. Well-known builders likely secure exorbitant rates due to the quality and reputation.
3. Demand & Supply
The economics of demand and supply rule the property valuation. Demand for residential property is increasing on account of various reasons. Easy access to home loans, increase in disposable income, the massive influx of population from rural to urban areas, future expectations of prices are driving demand for real estate. The rise in the price of substitutes i.e. house rent is encouraging individuals to own a home. Hence, both favorable & unfavorable economic conditions trigger changes in the FMV of the property.
How to estimate Fair Market Value (FMV) of real estate
Fair Market Value of property can be determined by a variety of methods. You must ensure that the value arrived at be as accurate as possible.
1. Guidance Value
These are also referred to as Circle Rates. It means the minimum rate of property that is prescribed for a particular area. The circle rates are fixed by the state government or the local development authority. It becomes a reference point for estimation of stamp duty and registration charges.
The authorities keep revising the rates periodically to match the changed circumstances. Still, there’s a massive gap in the circle rates and the market rate of real estate. Ideally, it should give you an insight into the relative worth of property in different localities. But relying solely on circle rates may put you in a difficult situation. So, it’s better to use the guidance value in conjunction with other methods to arrive at true FMV.
2. Neighborhood Rates
This method calls for conducting a market analysis in your locality. Look around and ask your neighbours the prices at which they have bought or sold the property. Another source of information can be the real estate agent. You may consult him to find out the FMV of properties which have similar dimensions as yours.
It happens to be a very crude method of estimation. It may or may not give your correct results. Additionally, you may find the agent quoting prices depending on your circumstances. It means when you want to buy a house; he may quote a higher price. On the contrary, when you approach him as a seller, he may quote a lower price.
If these ways seem a bit impractical, there’s another authentic way out. Visit the real estate’s websites like 99acres, magic bricks or makaan.com. You get to know the property prices and make a comparison to get the best deals.
3. Housing Index
A housing price measures the changes that have taken place in the prices of residential property over time. The popular property indices in India are Residex (maintained by National Housing Bank) & HPI & RPPI (managed by RBI). HPI stands for Housing Price Index & RPPI stands for Residential Property Price Index.
These indices give an idea about the prevailing pricing trends in various cities. The indices are updated quarterly based on the revenue department’s transaction data. The information provided by these is undoubtedly reliable. The only catch is the historicity and limited coverage.
You may get the figures for prominent Indian cities which may or may not include yours. Secondly, it might be difficult to get the most recent data to facilitate decision-making.
4. Registered Property Valuer
When it’s about real estate valuation, you need a Registered Property Valuer. He is a government-approved professional who renders a range of services. In return for a nominal fee, they estimate the real worth of the property. They usually consider factors like dimensions of the property, freehold/leasehold, restrictive covenants (if any), whether insured or not. Based on a standard procedure, the valuer would give you a valuation report. It’s necessary to retain the valuation report at least for 8 successive assessment years after valuation.
Estimating the true Fair Market Value is vital from all the legal angles. Before entering into any real estate matter, make sure that your property is fairly valued.