Real estate prices and values are prone to change every now and then. A house is seen as a secure long-term immovable asset and an estimate of its property value is required to purchase the asset. The location of the house, the prevailing real estate prices in the market, the proximity of the property to all the required facilities, the condition of the property, its features, etc. are some of the factors that determine the property value of the dwelling.
Even though a real estate property may prove to be a great investment option, in the long run, its immediate cost may cause immense financial strain to you. Ascertaining the property value and planning your financial options and alternatives to purchase a house is an absolute requirement to stem unrequired financial outflows and save money. This article seeks to explain some important facts about the property value of a house and some ways to assess its value.
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What will be the valuation of my house in 5 years?
Property values and real estate prices tend to fluctuate every now and then, but you need to be concerned with long term appreciation or depreciation in the value of this class of asset. Any differences between the present market value of your house and the property value at which you purchased are due to various factors. Factors like the demand-supply situation, investment inflow-outflow in the realty estate sector, policies made under the Real Estate (Regulation and Development) Act, 2016, etc. can greatly influence real estate prices.
- If you want to ascertain the price of your house 5 years later, the best way of ascertaining the price would be a direct comparison of your house with a house in a similar condition and with similar features and in the same or similar locality.
- If such a house were to be sold, you would get a decent estimate of the price your house would fetch on the market.
- Otherwise, you can find comparable homes and research and study their market prices over the last five years.
- Prices can appreciate or depreciate on an annual or the best way would be to find the average prices of the property every year, calculate the rate of increase or decrease between the previous and subsequent year, and then averaging the results of the five years.
Should you overpay for the house you love?
Purchasing your own house is no small dream and purchasing your dream house is a cherished life goal. You will find yourself working tirelessly towards that goal as you envision the life you will spend in that house. However, the question is that is overpaying worth it?
- Chasing your dream of buying a house is great but a house does not usually come cheap. It involves some serious financial planning and organizing resources.
- Other than a house, you may have other short-term dreams, responsibilities, and obligations. You need to consider apportioning adequate resources towards meeting these above-mentioned requirements as you make the necessary preparations for the purchase of a house.
- A house can keep cash blocked on a long-term basis. Short term pressing needs and financial requirements usually need cash to be met. The satisfaction of having fulfilled your dream by paying that little extra should not come at the cost of your immediate pressing needs which may fall into disarray if not met.
- Make suitable arrangements like availing of a home loan on favorable terms, planning your monthly EMIs, considering a joint-ownership in case the house is beyond your means, etc. before taking the leap.
- Collect information on the legal requirements and processes and update yourself on the necessary provisions of the Income Tax Act, 1961, the Real Estate (Regulation and Development) Act, 2016, The Registration Act, 1908, and if required, the Transfer of Property Act, 1882 if you plan on buying a house via joint ownership.
- A house is a coveted asset that could possibly outlast your ownership. It can be transferred to your legal heirs for their enjoyment of the property after you are gone. However, you need to be prepared for contingencies and exigencies in life. Purchasing a house, after all, is not only about the residence, but also an investment. It should not become a lifelong liability.
What appreciates the valuation of a house?
The appreciation of property value can take place due to the following factors:
- The market forces of supply and demand in your local area for real estate can fuel real estate prices in your area to go up. If the demand for real estate housing was to go up, the prices would react proportionally and rise along with it as people are willing to pay more for a house.
- Inflation is another primary mover of real estate prices as the money supply in the financial systems foes rises and falls. If people have more money in their hands, they are more likely to have the means to purchase a house. Likewise, if the money supply is severely restricted, people will save more instead of investing or spending on the purchase of things.
- Cost of borrowing otherwise known as the rate of interest payable on home loans is a driving factor behind the value of houses. If the interest rates in the market are high, people will shun home loans and defer their plans to purchase a house until the time the interest rates fall. The higher the interest rate, the higher will be the monthly EMI outflows due to the rising cost of borrowing on loans.
- The increase in facilities like the erection of offices, schools, malls, hospitals and other market drivers that lead to a higher standard of living in your area will definitely boost the value of a house in your area as people want to purchase a house in an area that provides them access to facilities that can improve their lifestyle.
- Population growth causes higher demand for housing to meet the growing number of people and this, in turn, contributes to the rise in prices and property value.
How do you know if you have paid too much for a house?
A question that often arises in the mind of a homebuyer is that ‘Have I paid too much for the house?’.
- It is a fair question considering that you can only estimate the value of a property and can never accurately ascertain the real value of the property.
- It is in these cases there are a few signs that may indicate you have overpaid for your house:
- The money you paid for the new house is far greater than the sale value of a similar house that was sold in your new neighborhood.
- You got a home appraisal done and the appraised value was over 10 % lesser than what you paid for the house.
- In case you bought your dream house at an auction, you got sucked into a price war that got you to bid and buy the house at a far greater than value than its auctioned price.
- Despite having a set budget for the house, you ended up purchasing a house that was well beyond your budget.
- If you are resorting to a home loan to finance your decision of purchasing a house, it is best you get a home appraisal done prior to starting the purchase negotiations. Often, banks and leaders insist on a home appraisal to determine the quantum of loan money to be sanctioned to finance the purchase. Banks do not lend money over the appraised value of the house and that is an indicator you need to consider and compare with the price in your head that you are willing to spend for purchasing a house.
- If you have a good credit history and good relations with your bank, you could try to apply for a pre-approved loan to get an estimate of how much the bank is willing to lend and whether it is in the range of what you had in mind.
What are the different valuation methods?
Some of the valuation methods are:
- Comparable Sales Valuation Approach
- Income Capitalization Valuation Method
- Cost Valuation Approach
The valuation of the property can be carried out with the help of professions. The banks usually appoint valuers to ensure that the valuation of the property before granting loans. If the buyer or the seller of the property is not satisfied with the valuation, then they may challenge the valuation or opt for re-evaluation.
A house is a long term asset purchased for self-use or for earning income by renting it out. Its property value does not depend solely on the condition or features of the house, but more on the locality, facilities present for the betterment of standard of living in the neighborhood, prevailing real estate prices and the demand-supply situation in the market, cost of borrowing, etc. You need to examine these factors, assess which factor takes priority when you exercise your choice of buying a house and allocate or organize funds to fulfill the purchase.
Purchasing your dream house is definitely the achievement of a life goal, but it is even better if you buy it without sacrificing your immediate and present financial priorities. A home appraisal is not mandatory but may prove a great first step towards the estimation and ascertainment of the property value of the house before advancing further for the purchase. It could save you the regret reserved or hindsight.