Real estate is the favourite form of investment for us Indians. Rather than choosing other investment options like ETFs, mutual funds or stocks, real estate is a highly popular way of investing however, it is important to know how to find the fair market value of a property to avoid paying unnecessarily high prices to property dealers or brokers, which often tend to exploit the limited knowledge of the buyer or seller.
The Real Estate Regulatory Authority, or RERA, was established in 2016. The RERA Act of 2016 aims to boost investments in the real estate sector while safeguarding homebuyers. Thus, in this article, we’ll take a closer look at a method that will help determine the estimated market value of a property.
Understanding the fair market value is just the beginning. Equally crucial is safeguarding yourself against real estate fraud, a prevalent issue that can lead to significant financial losses. In our comprehensive guide, ‘How Can You Avoid Real Estate Fraud?‘, we delve into common scams and provide actionable strategies to protect your investment. From due diligence tips to recognizing red flags, empower yourself with the knowledge to navigate the real estate market safely.
Table of Contents
What are the main types of areas in real estate?
There are three prominent types of areas in a real estate property namely, the Carpet Area, Super Built-up area and Built-up area. These are described briefly as follows.
What is Super Built-up Area?
A super Built-up area covers the built-up area of the apartment and common share areas such as lift lobbies, staircase, common entrances, play areas, storage space, parking areas and others.
Alsom, for a group of flats, it is divided into proportions. For instance, if the common area of a group of two flats of 1000 SqFt and 2000 SqFt respectively is 1500 SqFt then, the Super built-up Areas of both flats will be 1500 SqFt and 3000 SqFt respectively as shown in the diagram below.
What is Built-up Area?
Built-up Area is the total area covered by the apartment. This includes the entire Carpet Area plus the external walls, balconies, personal terrace, and verandah. The Built-up area is always more than the Carpet Area. Usually, it is 10-15% more than the carpet area in most cases. The following diagram represents the built-up area in a property.
What is Carpet Area?
The net usable floor area of an apartment, excluding the area covered by the external walls, areas under services shafts, exclusive balcony or verandah area and exclusive open terrace area, but includes the area covered by the internal partition walls of the apartment. It can be understood by the following diagram for better understanding.
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What are some Prerequisites for Calculation?
To determine the actual cost, we will require some pre-requisite information about the particular area where the property is located. The following factors will help us in calculating the final result and our conclusion about whether the rate of the property is fair or overvalued or not.
Rate of Super Built-up Area
As we are now familiar with the complex terms involved in real estate, thus we know about what a super built-up area is. You can easily ask the rate of carpet area from a nearby property dealer or two in the particular area of the property.
As you know about the rate of carpet area per sq. ft, you can determine the rate of super built-up area by following this simple method given below.
Construction Quality
The kind of construction of the flat or its build quality determines its cost too. If the property whose cost you’re analysing, is well constructed with fall ceilings, has basic furniture like an almirah and cupboards, well made modular kitchen with Italian marble and proper wooden or marble flooring, it is considered as a well-built property with a premium interior.
Similarly, downsizing on the above parameters, if the property only has a few basic interiors like POP on ceilings and basic living amenities, it is considered above average. In the last case, if the property does not have any significant interior, it is considered as average or decent quality.
But you can question, how will this act as a parameter as we calculate the value of the property. So for benchmark purposes, consider the following values as per the construction quality of the flat as this will be used in our final calculation very soon.
Rate of Land
As you determine the above two parameters, the cost of land on which the flats are built plays a key role. As several floors are built over a particular piece of land, the ownership of the land is divided into the number of floors built and so is the cost of the piece of land. So for our example, we consider the cost of land to be Rs 10,000/SqFt which brings the Land Cost per Floor to be Rs 1,000/SqFt for one floor.
This information will be used with other factors to bring out the final cost or premium percentage by calculating it against the Rate of Super Built-up Area, which we asked from the property dealer at the start.
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Calculation of Fair Property Cost
As we have determined all the parameters above, we’ll take the help of an example of a piece of land which has 10 floors and the rate of super built-up area of the flat quoted by the property dealer or builder is Rs 5000/SqFt. Also in this example, we have assumed basic interiors only with the cost of land to be Rs 10,000 per SqFt which means, in a building with ten floors, the cost comes out to be Rs 1,000 for one floor.
Thus, with decent quality, we have already assumed the construction cost to be Rs 1,200 which brings out the total net cost to be Rs 1,000 (Land Cost per Floor) and Rs 1,200 (Construction Cost) giving Rs 2200 per SqFt. You can also use the following mathematical representation for a simplified approach.
Thus, the premium charged is the difference between the Net Cost after construction and the land cost per floor (Rs 2,200 per SqFt) from the rate quoted by the property dealer or builder (Rs 5000 per SqFt). Thus, the premium amounts to Rs 2,800 which is 127% of the net cost.
This gives you an idea of the premium charged on the property cost and you can calculate this for any flat using the method discussed above. The premium calculated above in rupees as well as in the form of a percentage, gives a fair idea of the property purchase/sale value.
Regulatory knowledge is key in real estate investments. The Real Estate (Regulation and Development) Act, 2016 (RERA), introduced to protect homebuyers and enhance transparency, is a game-changer. Our article, ‘RERA – The Real Estate Regulation Development Act, 2016‘, breaks down the act’s implications for buyers and developers alike. From project registration to dispute resolution, understanding RERA can significantly influence your property decisions.
Conclusion
Using this method, you can check the fair market value of a flat or a real estate property by calculating the premium above the net cost. The values assumed above can be changed as per preferences or different pincodes and areas which will affect the final result. Also, read about documents to be aware of in real estate transactions.
If you wish to know about the topic in the form of a video explanation, it is explained by Jagruk RJ on Labour Law Advisor’s YouTube channel. Check out the full video below:
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