Methods to Calculate Market Value of Property

People who are involved in the real estate sector or the ones that are looking forward to buying a property of their own can find it tedious without proper knowledge of the sector and the market value of the property.So what is this market value and how do you calculate the market value of a property? Keep reading to learn all that you must know before buying or selling a property.

 

What is Market Value and Market Price?

Based on the supply and demand, the real estate market determines the value of properties. This is known as the market value and it can keep fluctuating depending on factors like the features of the property as well the rates at which similar ones are being sold.

 

Market price, on the other hand, may or may not be the market value defined by the real estate market. This means that a seller does not have to strictly adhere to the market value while selling his land. It can be more or less depending on the demand for his land and the urgency of his/her requirement.

 

Being unaware of the market value can result in the exploitation of both the buyer as well as the seller. So if you are keen on knowing how to calculate the market value of a property, keep reading to find out.

 

How to Calculate the Market Value of Property?

There are different methods to calculate the market value of a property. The definition of market value can never be limited to a single method as there are a large number of factors that define the value of a property. So the calculation of market value may never be the same for the same property when different methods are used. Below are two of the commonly used methods.

 

Sales Comparison Approach

Also known as the fair market value, this method is often used to calculate the market value of ready-to-move-in apartments. This approach compares the market value of similar properties that were sold recently.

Find at least 3 properties that are similar and are located nearby so that you will get an average estimate of the price.

After that, you must calculate the price per square foot. This means that if, ‘X’ is the average estimated price of a flat that is ‘Y’ sq. ft in area, then

Rate= Estimated price/ sq. ft

The calculated value of X/Y will give you the value of the property. The price can go lesser or more than the estimated rate depending on the condition, design, accessibility etc.

 

Income Approach for Rental Buildings

If a building is capable of producing income, then the best way to calculate market value of a property is to use the rental method of valuation or the income-based approach that takes into consideration the income potential of the property. The market value of rental apartments or commercial buildings is often calculated using this method.

 

To use this method, you must first determine the Net Annual Income of the property. This involves considering the number of tenants and vacant spaces in the property. After careful evaluation, you must deduct the annual operating expenses like maintenance bills, etc to give you the Net Operating Income(NOI) of the property.

For example, if the property can generate Rs.’X annually and if the operating expenses account to Rs.’Y’ annually, then your Net Operating Income will be Rs. 'Z' after deduction.

 

Next, you will have to find out the cap rate. This is the return you are expecting from the property. If you are a buyer expecting a yield of 6%, then the cap rate will be:

 

Net Operating Income/yield, will be the value of the property.

 

Apart from that, you can also calculate the market value by using a property valuation calculator online. This will be easier when compared to the maths you have to do to calculate the market value of a property. Today, there are a lot of real estate companies that offer this service online. You will also find real estate professionals to assist with this. But always ensure that the sources are always trustworthy.