Factors that influence fair market value of property | What is the fair market value?

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Fair market value is the amount that a seller is ready to pay for an object at a given time based on its worth. The Indian Accounting Standard (AS) 113[1] defines fair market value as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Fair market value refers to:

• The sale of an asset
• The transfer of liabilities
• This is not a forced or distressed sale.
• It is clearly market-based, not entity-based.
• It is reached at when the sale or transfer occurs.

Factors that Influence the Fair Market Value of Property

The fair value of a property can either increase or decrease depending on the following criteria.

Locality

The location is an important aspect in determining a property's value. Property values in cities such as Mumbai, Delhi, Bangalore, and Chennai range significantly between rich and developing neighborhoods. For example, a home in Malabar Hills, Bandra, or Juhu may cost multiple crores, whereas a similar property in a developing region may be less expensive, priced at Rs 50 lakh.

The precise position within a locality

Even within a desirable neighborhood, the particular placement of a house is important. Future development and appreciation rates might be influenced by factors such as corner plot location or proximity to the major road.

Amenities

The amenities and features connected with a property considerably increase its value. Features like a private swimming pool, elevators, and neighboring business establishments are perceived more positively post-pandemic, which might lead to increased value.

Improved infrastructure leads to higher property values. Land prices in Ayodhya, for example, have risen significantly after the inauguration of a big temple, as have those near the Jewar Airport in Greater Noida.

Demand and Supply

The balance of demand and supply is an important metric for property appreciation. A house with exceptional qualities may not appreciate significantly if there is low demand or an oversupply of comparable residences.

Interest Rates

Borrowers' interest rates have a direct impact on property price rise. High interest rates might depress buyer enthusiasm and limit a property's potential for value appreciation.

Time

Real estate investments typically provide long-term profits. A property's value is more likely to improve over time than it is to fluctuate in the short term.

Property buyers and investors must consider these elements in order to make informed judgments and appreciate the real estate market's potential for appreciation.

Fair market value versus market value of a property

While the phrases fair market value and market value are sometimes used interchangeably, they have different meanings despite their similarities.

Definition

Fair Market Value 

FMV is the price at which a property would be exchanged between a willing buyer and a willing seller, both of whom have reasonable knowledge of the relevant facts and are not obligated to buy or sell.

Market  Value 

Market value is the current value of a property on the open market, taking into account supply, demand, and economic conditions. It is the price that a buyer is willing to pay and a seller is willing to accept in a typical and competitive real estate market.

Considerations

Fair Market Value 

FMV examines the hypothetical scenario of a fair and open market transaction in which both parties act in their best interests.

Market Value 

Market value is primarily concerned with the actual, current status of the real estate market, taking into consideration recent transactions, comparable properties, and local economic conditions.

Use and Implications

Fair market value  

FMV is frequently utilized in legal and fiscal applications, such as estimating property taxes, calculating capital gains taxes, or assessing the worth of assets in estate planning.

Market  Value 

Market value is frequently utilized in real estate transactions to calculate a property's asking price or offer amount. Real estate professionals generally utilize recent comparable transactions to determine market value.

Methods to Determine Fair Market Value

• The selling price of a recent property might assist assess its fair market worth.

• You can calculate the fair market value by comparing it to a similar property.

• Comparing the property prices of similar configurations in that area and neighborhood can assist evaluate the fair market value.

• Hiring professional assistance may help you achieve the proper market value.

How can I determine the fair market value of a property?

Ready reckoner or circular rates.

The income tax laws provide no guidelines for determining a property's fair market value. However, there are specific methods for estimating the property's fair market value that are normally acceptable to the Income-Tax Department.

To prevent under-reporting of the consideration in sale agreements (which is done to avoid paying sufficient stamp duty), governments have created a system of predefined values, based on the area and form of building.

The circle rate is the minimum price at which a property in a given area cannot be purchased or sold. It is important to remember here that circle rates differ by location. They are periodically amended by local governments to keep the value similar to the current market value of property in a given location. Even if the seller intends to charge a lower amount than the per sq ft circle rate, you must pay stamp duty based on the current circle rate. If the property is sold at a higher price than the circular rate, stamp duty will be imposed based on the transaction cost in this situation.

So, if the property was acquired before April 1, 2019, you can calculate the fair market value using the stamp duty quick reckoner from 2001. If you obtained the property as a gift or inheritance, or if you built it after April 1, 2001, you can use the ready reckoner value to determine the property's fair market value.

However, determining the fair market value of a property is not as simple as it appears, because the real estate market is quite diverse, with property prices varying greatly even within the same area. It becomes more challenging when you attempt to discover the fair market value of properties as ancient as 2001.