Selling a house is a tricky process. Especially if you choose to do it without an agent or realtor. However, we can make it a little bit easier for you. Today we discuss the market value and the fair value of your property.
Although they sound like the same thing, the market value and fair value in real estate are two different price estimates of your property and can have a significant gap between them as well. They are used for different purposes like taxation, registration, and the sale of your property.
While we will list down the exact differences between the two, we believe understanding both of them on their own is also necessary for you to truly grasp what these price estimates of your property mean.
Meaning of Market Value in Real Estate
Let’s start with the market value of your property or plot of land first. When selling or buying an asset in any market, what you invested in your asset is never the exact amount you sell it for. You could either incur a loss or make a profit on the sale of your asset. This loss or profit is caused by the market value of your asset.
In simple terms, the price a buyer is willing to pay for your property, considering the market conditions, is the market value of your property. This doesn’t take into consideration any renovations you might have done to your property or the price you paid when you bought it.
Also Read: Types of Commercial Lease
What affects Market Value in Real Estate?
The following factors can directly affect the market value of the property:
1. Location Of The Property
The location of your property is crucial when assessing the market value. If enough buyers aren’t looking for a property in the location you’re situated, the market value of your property will fall and vice versa.
2. Market Conditions
Let’s say the conditions of the real estate market in your city are more supply and less demand, also known as the buyers’ market. In such a case, buyers hold the power to decide the price at which they wish to buy a certain property. This gives you, the seller, much less wiggle room in negotiating a price. Thus, making the market value of your property lower than you would like.
3. Property-Specific Factors
Property-specific factors are factors like the layout of your floor plan, the number of rooms, the square footage, or the quality of materials used. Things like a modular kitchen, or a modular wardrobe can also help increase the market value of your property.
4. Other Factors
Any other factor that affects the desirability of your property can and will affect the market value of your property. Connectivity to major routes in your city, availability of uninterrupted essential services, or the curb appeal of your property, are just some of the examples of factors that might directly affect the market value.
Meaning of Fair Value in Real Estate
The fair value of a property is the price estimate that doesn’t take into account any market conditions. Whether the real estate climate of your city is a buyers’ market or a sellers’ market, the fair value of your property will stay the same with negligible fluctuations. Only long-term market conditions can truly affect the fair value of the property.
Fair value is a very important piece of information when calculating the taxes owed on a property. For any properties bought before April 1, 2001, i.e. ownership was acquired before this date, the capital gains on the sale of a property are calculated using the fair value instead of the cost of acquisition.
Also Read: Sale Deed Agreement
What affects Fair Value in Real Estate?
The following factors can directly affect the fair value of the property:
1. Location Of The Property
The location of the property can significantly impact the fair value of the said property. Similar properties located in two very different locations like the prime location of Vasant Kunj in Delhi and the remote location of Narela will fetch two completely different price valuations.
In addition to that, properties located in areas with good connectivity to essentials like schools, hospitals, offices, and markets also have higher fair value.
2. Size Of The Property
Needless to say, the size of the property can increase or decrease the fair value of the property. Whether it is a plot, flat, or villa, a larger property will have a higher fair value as compared to a smaller one.
3. Long-Term Market Conditions
Long-term market conditions don’t only refer to the supply and demand of property in your area. It also refers to the economic state of the real estate market. This means any factors that could affect an individual’s property ownership decisions like mortgages, availability of mortgages, disposable income, etc. can all affect the fair value of a property.
Difference between the Market Value and Fair Value in Real Estate
To conclude our deep dive into the market value and fair value in real estate, let’s take a look at the differences in the two:
Reason for Fluctuation
Market value is highly dependent
on the market conditions to
determine the price of a property.
Fair value takes into consideration the long-
term valuation of a property. This does not get
affected by any immediate market factors.
Market value is necessary for the
sale and purchase of a property.
Fair value is necessary for taxation purposes
on capital gains and stamp duty.
Market value, since it is highly
volatile does not indicate the
actual value of the asset.
The fair value gives an accurate estimate of
the value of a property.
Market value is generated by an
agreement between the buyer and
the seller of the property.
Fair value is generated by using a circle rate
the method by concerned authorities.
While there are many differences between the market value and fair value of a property, they still present a really good picture of the value of your property has. While one shows possible long-term capital gains, the other shows short-term capital gains.
Make sure you find out the exact market value and fair value of your property as you step into the sale process. Knowing important financial information about your property can really help you have the upper hand when selling it.
Also Read: Stamp Duty on Property Purchase