Resale flat is a popular term you will come across if you are looking to invest in real estate. As the name suggests, resale flats are previously owned properties, and many property buyers consider investing in them, especially in saturated markets with fewer new developments. Moreover, these are attractive options owing to their affordability. Before investing in a resale flat or any property, it is essential to conduct a property valuation to estimate the right property price. This ensures buyers do not end up overpaying or underpaying during property purchase.
Whether you are a homeowner planning to sell your property or a homebuyer looking to purchase a resale flat, estimating the resale value of a property will be a crucial step in your journey. In this guide, we will explain how to estimate the resale value of a flat.
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What is a resale property?
A resale property refers to property that had been previously owned and occupied and is now available for sale in the market and available for purchase in the market.
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What is the resale value of a property?
The resale value or market value of a resale property refers to the price at which it would be sold to the buyer based on current market trends.
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Resale property vs new property
| Parameter | Resale property | New property |
| Price | Resale flats are older properties and likely to have lower prices compared to new properties in the same location | These are newly constructed flats and come with modern, which gives them a higher price tag |
| Investment potential | Resale properties offer higher returns if they are in a well-established neighbourhood. Price appreciation may be slower and depends on several factors, including infrastructure | With the development of the locality, price appreciation of properties takes place gradually. |
| Location | Resale properties are mostly located in established neighbourhoods with well-developed infrastructure | New properties are part of new housing projects that typically come up in emerging neighbourhoods or suburbs |
| Investment potential | Resale properties offer higher returns if they are in a well-established neighbourhood. Price appreciation may be slower and depends on several factors, including infrastructure | With the development of the locality, price appreciation takes place gradually. |
| Features and amenities | These include amenities initially provided at the time of development and may lack modern amenities or features | Newly constructed properties are equipped with latest amenities such as gymnasium, swimming pools, etc. |
| Maintenance | Resale properties required higher maintenance – repairs or renovation, as they are older construction | New properties are built as per latest construction standards and required minimal maintenance in the initial years |
| Legal | Investing in resale properties requires due diligence, as there could be legal disputes or unresolved issues. | Investment in newer projects may come with risks, such as delayed possession. Buyers may have to verify the builder’s credentials, check for project clearances, etc. |
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Factors that determine the value of a resale property
Location
Assess the locality regarding the availability of social infrastructure such as schools, colleges, healthcare centres, malls, etc. Consider the new developments like upcoming metro, flyovers, etc. Properties in well-established and prime neighbourhoods have higher resale value than those in less-developed areas. Moreover, accessibility to public transportation and arterial roads and proximity to commercial and business hubs give an advantage and influence property values in a locality.
Amenities
Properties located in gated communities with several amenities tend to have higher resale value. Gated communities attract modern homebuyers owing to the lifestyle amenities, privacy and security they provide. On the other hand, standard buildings with resale flats without any facilities may have a lower sale value. For example, a building without any lift will sell for a lower value compared to a gated society with flats equipped with lifts.
External elements
External elements include the outer condition of the property, such as architectural style, aesthetic appeal, and wall and roof conditions. It also covers lifts, water supply, pavement, sewage system, etc. Poor condition of the exteriors and lack of these facilities can lower the resale value.
Internal elements
This includes aspects such as quality of construction and area (number of rooms). The property’s size, especially the number of bedrooms, is a major factor influencing resale value. The larger the house, the higher the value it is expected to have. Moreover, whether the house is fully furnished or unfurnished determines its resale value. The availability of appliances such as chimney, geysers, etc. can increase the property’s resale value.
Property’s age
Older properties tend to have lower resale value than newly developed properties in an area. However, this depends on other factors such as amenities, neighbourhood, etc.
Supply and demand
The demand and supply of properties in that particular neighbourhood influence the value of a property. Moreover, there are specific periods, such as the festive season, tax season, upcoming infrastructure developments, etc., that drive demand for properties in an area. Thus, prices are expected to be high. On the other hand, if there is not much demand from buyers, resale values are likely to be lower.
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How to calculate the value of a resale property?
There are various methods to calculate the value of a property, as discussed below:
#1. Sales comparison approach
This method involves analysing recently sold properties in locations. The evaluated properties should be similar in size, condition, features, etc. Comparing these values can help determine the resale value of a particular property. To calculate the market value, find out the property’s location, type (residential or commercial), age, and area. Then, multiply the average per square foot price of comparable properties with the property’s total square footage.
Market value is calculated based on the formula:
Market value = Average per sqft price of comparable properties X square foot of target property
For example,
There is a flat with an area of 800 sqft. The average rate of property is Rs 4,500 per sqft.
Market value = 4,500 X 800 = 36,00,000 or Rs 36 lakh
One should note that some adjustments must be made, considering the property size, amenities, location, etc., as these may vary. That is, if the said property’s area is higher than the comparable property, one must adjust the value of the comparable property to account for the additional square footage.
#2. Cost approach
This approach involves considering the cost of replacing or reproducing the property with a new one of similar size and quality. It is mostly applicable for evaluating values for newer properties or properties with unique features that are difficult to compare to other properties. To calculate property value based the cost approach:
- Find the market value of land in the locality. This can be done by comparing the given property to similar land plots that were sold recently
- Estimate the construction cost by considering the cost of materials and labour, features of the property, area, etc.
- Deduct depreciation from the total cost to estimate the market value of the property. Depreciation refers to the loss of value owing to wear and tear.
#3. Income approach
The income approach is applied to rental properties or commercial properties. The property’s value is determined by:
- Assessing the potential rental income of the property in an area
- Deducting maintenance, taxes, vacancies, etc. expenses and computing the net operating income (NOI). The NOI is computed by subtracting the operating expenses like property taxes, insurance, maintenance, utilities, etc., from the property’s income.
- Determine the capitalisation rate or cap rate. It refers to the percentage that reflects the relationship between the property’s NOI and the market value. (Capitalisation Rate = NOI / Property’s current market value). A higher cap rate denotes a higher risk and a lower value, while a lower cap rate indicates a lower risk and a higher value. The cap rate for residential properties in India ranges from 2% to 4%.
- Based on these factors and using the formula, the property’s value is estimated. That is,
Property’s current market value = NOI / Capitalisation rate
For example, if a property has a cap rate of 4% and an NOI of Rs 4,25,000, the estimated market value is: 4,25,000/ 0.04 = Rs 10,625,000
#4. Government’s property valuation methods
State governments in India determine the minimum property price in an area, known as circle rates or ready reckoner rates. These values are decided after property valuation based on factors such as property size, location, type, usage, etc. Property tax calculation and stamp duty assessment are based on these values. To know the minimum property value in a locality, one can visit the official portal of the relevant authority, such as the Inspector General of Registration and check the latest values. One should note that the government periodically revises these values.
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Why should you calculate the value of a resale property?
Evaluation of the resale value of a property can be beneficial in many ways:
- Estimation of accurate value: Following a property valuation method can help estimate the accurate resale value of a property in a locality. This will give a clear picture to the buyers planning to buy a house or selling wanting to sell their house in the present market conditions.
- Helps in effective negotiation: The data available through property valuation enables property buyers and sellers to negotiate the price, ensuring easier and more transparent property transactions. If a seller quotes a higher price, it may turn off prospective homebuyers. On the other hand, undervaluing the property can lead to financial loss for the seller.
- Property tax assessment: Prospective homeowners can estimate the property taxes, they must pay if they purchase the property. Proper assessment saves them from overpaying taxes.
- Stamp duty and registration charges calculation: Similarly, stamp duty and registration charges are paid on the market value of a property. By estimating the resale value of a flat, a buyer can find out how much they must pay for stamp duty. This will help them plan their finances better.
- Informed investment decisions: The data available after estimating the resale value of a property allows the property owners and buyers to gauge the property’s investment potential. It also helps estimate the return on investment (ROI) and rental yield.
- Planning for home loans: Banks and financial institutions consider the property’s market value when assessing the property price and determine the terms and conditions for the home loan. Property valuation helps potential buyers to secure the loans based on their needs.
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Difference between resale value or fair value and market value?
The resale value of a property is the estimated value at which the property will be sold, given the present market trends and factors such as property’s location, age, size, amenities, etc. This value is indicative and is used in the calculation of the market value. On the other hand, market value refers to the reasonable price set by sellers or the actual transaction amount agreed by the buyers and sellers. It is important to understand that while the fair value indicates the asset’s price, the market value is the actual amount for which it will be sold.
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Evaluation of a property is necessary for buyers and sellers as it will help them make an informed decision regarding the property transaction they plan to undertake. One can get professional property valuation services from reliable service providers or take the help of a free property valuation calculator to get a fair idea of how much a property is worth.
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FAQs
What determines a property’s resale value?
The property’s location, age, features, neighbourhood, etc., are considered when determining a property’s resale value.
Do banks conduct the valuation of the property?
Yes, lenders conduct property valuation with the help of an appraiser before sanctioning home loans. Most appraisers adopt the sales comparison approach to determine the market value.
How to calculate the market value of a property?
According to the sale comparison method, market value is calculated based on the formula - market value = average price per square foot of comparable properties x square foot of target property.
What is the fair market value?
Fair market value refers to the price at which the property will be sold in the market, as agreed by both the seller and the buyer.
Is it worth buying a resale property?
Purchasing a resale property is an ideal choice if one is looking for a ready-to-move-in home. However, the price of a resale property will depend on factors such as amenities, property’s age, location, etc.
| Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at jhumur.ghosh1@housing.com |
