Valuation of Old Properties 101 - Indian Real Estate Forum

SS1983 · 05-07-12

For people who are looking at buying an existing flat, you should be very careful and understand what value you are paying for.

I see lots of ads from big existing apartments which are over 10 years old...
2 bhk for 82 lacs, 3 bhk for 1.4 crores etc.

If you buy flats at these places for the above prices, you are getting ripped off big time.

Here is the reason:

Every flat has 3 price components: Land Value + construction value + facilities/ brand value

Land Value: Current Market Value of Land * Undivided Land share

Most of the people dont know what their UDS is. In large older constructions, it is anywhere between (20-50%). If your UDS is low, it means your land holding is low.

Construction Value: It is the (cost of construction)*(Super Built up area). For 10 year old flats, construction costs are as low as 800 per sqft as compared to new flats where constuction cost is closer to 1400 per sqft.

To determine the cost of construction one can use the inflation index WPI/CPI over the current 1400 per sqft value or consider a long term inflation rate of 5%.

A concrete building is usually expected to have a useful life of 40 years. Therefore if you are buying a 10 year old flat, you should only consider 75% of the construction value (assuming straight line depreciation)

Facilities Value: It is simply the value assigned to amenities like swimming pool, play groun, gym, builder reputation etc. One can add upto 20% of the (land value + building value)

Say, you are looking at purchasing a 10 year old 1200 sqft flat in a prime area where land market rates are 10,000 per sqft. The flat has an uds of 300 sq ft. And it is inside a posh community. Here is the valuation:

Land Value = 10,000 * 300 = INR 30 lacs
Construction value = 75%*1200*800 = INR 7.2 lacs

Value of property = INR 37.2 lacs
Premium for brand = 20%* 37.2 = INR 7.5 lacs

Total value = INR 45 lacs.

You can add another 10 lacs for car parking, club house, bwssb, electricity connections etc.

Value before registration = INR 55 lacs

Now, if the same posh apartment is being quoted at 82 lacs, guess what? You are paying over your head.

Buy wisely, dont go by absurd broker and developer talks!

kumars17 · 05-07-12

Quote:

Originally Posted by SS1983

For people who are looking at buying an existing flat, you should be very careful and understand what value you are paying for.

I see lots of ads from big existing apartments which are over 10 years old...
2 bhk for 82 lacs, 3 bhk for 1.4 crores etc.

If you buy flats at these places for the above prices, you are getting ripped off big time.

Here is the reason:

Every flat has 3 price components: Land Value + construction value + facilities/ brand value

Land Value: Current Market Value of Land * Undivided Land share

Most of the people dont know what their UDS is. In large older constructions, it is anywhere between (20-50%). If your UDS is low, it means your land holding is low.

Construction Value: It is the (cost of construction)*(Super Built up area). For 10 year old flats, construction costs are as low as 800 per sqft as compared to new flats where constuction cost is closer to 1400 per sqft.

To determine the cost of construction one can use the inflation index WPI/CPI over the current 1400 per sqft value or consider a long term inflation rate of 5%.

A concrete building is usually expected to have a useful life of 40 years. Therefore if you are buying a 10 year old flat, you should only consider 75% of the construction value (assuming straight line depreciation)

Facilities Value: It is simply the value assigned to amenities like swimming pool, play groun, gym, builder reputation etc. One can add upto 20% of the (land value + building value)

Say, you are looking at purchasing a 10 year old 1200 sqft flat in a prime area where land market rates are 10,000 per sqft. The flat has an uds of 300 sq ft. And it is inside a posh community. Here is the valuation:

Land Value = 10,000 * 300 = INR 30 lacs
Construction value = 75%*1200*800 = INR 7.2 lacs

Value of property = INR 37.2 lacs
Premium for brand = 20%* 37.2 = INR 7.5 lacs

Total value = INR 45 lacs.

You can add another 10 lacs for car parking, club house, bwssb, electricity connections etc.

Value before registration = INR 55 lacs

Now, if the same posh apartment is being quoted at 82 lacs, guess what? You are paying over your head.

Buy wisely, dont go by absurd broker and developer talks!

Did you forgot VAT,Service Tax etc which the original owner would have paid? Add some 20% extra for that too as anyway even if you buy a new one, you need to pay for them.

If you know of any good 1200 sqft apartment from a reputed tier 1 builder, for 45 lacs in CBD(as you have quoted 10k per sqft for land which is near CBD only), Please email it to me. I will definitely buy it next day. Seems like a dream to me. If I go by your logic 3BHK in prestige acropolis shouldnt cost more than 60 Lacs

honest · 05-07-12

Thanks.. Useful post.

Quote:

Originally Posted by SS1983

For people who are looking at buying an existing flat, you should be very careful and understand what value you are paying for.

I see lots of ads from big existing apartments which are over 10 years old...
2 bhk for 82 lacs, 3 bhk for 1.4 crores etc.

If you buy flats at these places for the above prices, you are getting ripped off big time.

Here is the reason:

Every flat has 3 price components: Land Value + construction value + facilities/ brand value

Land Value: Current Market Value of Land * Undivided Land share

Most of the people dont know what their UDS is. In large older constructions, it is anywhere between (20-50%). If your UDS is low, it means your land holding is low.

Construction Value: It is the (cost of construction)*(Super Built up area). For 10 year old flats, construction costs are as low as 800 per sqft as compared to new flats where constuction cost is closer to 1400 per sqft.

To determine the cost of construction one can use the inflation index WPI/CPI over the current 1400 per sqft value or consider a long term inflation rate of 5%.

A concrete building is usually expected to have a useful life of 40 years. Therefore if you are buying a 10 year old flat, you should only consider 75% of the construction value (assuming straight line depreciation)

Facilities Value: It is simply the value assigned to amenities like swimming pool, play groun, gym, builder reputation etc. One can add upto 20% of the (land value + building value)

Say, you are looking at purchasing a 10 year old 1200 sqft flat in a prime area where land market rates are 10,000 per sqft. The flat has an uds of 300 sq ft. And it is inside a posh community. Here is the valuation:

Land Value = 10,000 * 300 = INR 30 lacs
Construction value = 75%*1200*800 = INR 7.2 lacs

Value of property = INR 37.2 lacs
Premium for brand = 20%* 37.2 = INR 7.5 lacs

Total value = INR 45 lacs.

You can add another 10 lacs for car parking, club house, bwssb, electricity connections etc.

Value before registration = INR 55 lacs

Now, if the same posh apartment is being quoted at 82 lacs, guess what? You are paying over your head.

Buy wisely, dont go by absurd broker and developer talks!

SS1983 · 05-07-12

Quote:

Originally Posted by kumars17

Did you forgot VAT,Service Tax etc which the original owner would have paid? Add some 20% extra for that too as anyway even if you buy a new one, you need to pay for them.

If you know of any good 1200 sqft apartment from a reputed tier 1 builder, for 45 lacs in CBD(as you have quoted 10k per sqft for land which is near CBD only), Please email it to me. I will definitely buy it next day. Seems like a dream to me. If I go by your logic 3BHK in prestige acropolis shouldnt cost more than 60 Lacs

Service tax was introduced only in 2005 i.e. 7 years ago and that too builders made enough loopholes to avoid paying that until 2010. So, for 10 year old flats there essentially was no service tax.

The registration and vat would be on the value as of the time of construction and I think flats costed no more than 2k per sqft in early 2000s. So net effect is 10% registration and vat on around 24 lacs. Which is 2.4 lacs.

The thing is:

The land owner is greedy
The builder is always greedy
The buyer/investor is greedy
The government on top of it all is greedy
The agent/broker is greedy

When the system itself is greedy it leads to big spikes and price bubbles.

Ashirwaad · 07-07-12

Quote:

Originally Posted by SS1983

For people who are looking at buying an existing flat, you should be very careful and understand what value you are paying for.

I see lots of ads from big existing apartments which are over 10 years old...
2 bhk for 82 lacs, 3 bhk for 1.4 crores etc.

If you buy flats at these places for the above prices, you are getting ripped off big time.

Here is the reason:

Every flat has 3 price components: Land Value + construction value + facilities/ brand value

Land Value: Current Market Value of Land * Undivided Land share

Most of the people dont know what their UDS is. In large older constructions, it is anywhere between (20-50%). If your UDS is low, it means your land holding is low.

Construction Value: It is the (cost of construction)*(Super Built up area). For 10 year old flats, construction costs are as low as 800 per sqft as compared to new flats where constuction cost is closer to 1400 per sqft.

To determine the cost of construction one can use the inflation index WPI/CPI over the current 1400 per sqft value or consider a long term inflation rate of 5%.

A concrete building is usually expected to have a useful life of 40 years. Therefore if you are buying a 10 year old flat, you should only consider 75% of the construction value (assuming straight line depreciation)

Facilities Value: It is simply the value assigned to amenities like swimming pool, play groun, gym, builder reputation etc. One can add upto 20% of the (land value + building value)

Say, you are looking at purchasing a 10 year old 1200 sqft flat in a prime area where land market rates are 10,000 per sqft. The flat has an uds of 300 sq ft. And it is inside a posh community. Here is the valuation:

Land Value = 10,000 * 300 = INR 30 lacs
Construction value = 75%*1200*800 = INR 7.2 lacs

Value of property = INR 37.2 lacs
Premium for brand = 20%* 37.2 = INR 7.5 lacs

Total value = INR 45 lacs.

You can add another 10 lacs for car parking, club house, bwssb, electricity connections etc.

Value before registration = INR 55 lacs

Now, if the same posh apartment is being quoted at 82 lacs, guess what? You are paying over your head.

Buy wisely, dont go by absurd broker and developer talks!

None of this will work in India,, you have totally missed out on the intangibles..the sentiments that drives all real estate more than the pen and paper calculations..

Simple consideration - what if u absolutely love the place but the next door apt. was just sold at 60L??

this is the difference between guidance value and market value...

SS1983 · 07-07-12

Quote:

Originally Posted by Ashirwaad

None of this will work in India,, you have totally missed out on the intangibles..the sentiments that drives all real estate more than the pen and paper calculations..

Simple consideration - what if u absolutely love the place but the next door apt. was just sold at 60L??

this is the difference between guidance value and market value...

This is a calculation for rational home buyers. Buy what is worth the money.

vish00 · 07-07-12

Quote:

Originally Posted by kumars17

Did you forgot VAT,Service Tax etc which the original owner would have paid?

How does that matter to the buyer?

You don't calculate the the current value of a resource based on the money that has been sunk into it in the past... but rather based on how much it would cost to recreate that today. Having valued it that way, then you take away depreciation for the fact that it is 10 years old.

I put the question back to you: If you were buying a new flat, would you incur the service tax, vat etc as of the earlier years or as of today? Let say a parcel of land comes to sale. Consider two plots in it. One plot has changed hands thrice. The very next plot to it has changed hands only once. Do you think someone buying the first plot would be willing to pay more than the price quoted for the second plot because the first plot incurred registration charges thrice?

Gaurav2k101 · 08-07-12

Quote:

Originally Posted by SS1983

This is a calculation for rational home buyers. Buy what is worth the money.

But were are the rational sellers.

How can we find a home based on my rationality?

As someone mentioned could u get us the deal of Prestige Acropolis in 60 lacs. I'll pay 40 lacs more ... can u get us in 1 crore?

Problem is we wont get the price we want. It is only driven by what is the market value.

For rational buyers the petrol price may be Rs 40 but we have to shell out Rs75. So there are something called as external factors apart from just calculating the land cost and cosntruction cost.

So dont get fooled by this calculation and apply ur mind.

SS1983 · 08-07-12

Quote:

Originally Posted by Gaurav2k101

So dont get fooled by this calculation and apply ur mind.

If you apply your mind, you will calculate the way I did

and not go by broker rates as market value.

05-07-12	#1
SS1983 Member Join Date: Feb 2012 Posts: 144 Likes Received: 38 Likes Given: 3 My Mood:	Valuation of Old Properties 101 For people who are looking at buying an existing flat, you should be very careful and understand what value you are paying for. I see lots of ads from big existing apartments which are over 10 years old... 2 bhk for 82 lacs, 3 bhk for 1.4 crores etc. If you buy flats at these places for the above prices, you are getting ripped off big time. Here is the reason: Every flat has 3 price components: Land Value + construction value + facilities/ brand value Land Value: Current Market Value of Land * Undivided Land share Most of the people dont know what their UDS is. In large older constructions, it is anywhere between (20-50%). If your UDS is low, it means your land holding is low. Construction Value: It is the (cost of construction)(Super Built up area). For 10 year old flats, construction costs are as low as 800 per sqft as compared to new flats where constuction cost is closer to 1400 per sqft. To determine the cost of construction one can use the inflation index WPI/CPI over the current 1400 per sqft value or consider a long term inflation rate of 5%. A concrete building is usually expected to have a useful life of 40 years. Therefore if you are buying a 10 year old flat, you should only consider 75% of the construction value (assuming straight line depreciation) Facilities Value: It is simply the value assigned to amenities like swimming pool, play groun, gym, builder reputation etc. One can add upto 20% of the (land value + building value) Say, you are looking at purchasing a 10 year old 1200 sqft flat in a prime area where land market rates are 10,000 per sqft. The flat has an uds of 300 sq ft. And it is inside a posh community. Here is the valuation: Land Value = 10,000 300 = INR 30 lacs Construction value = 75%1200800 = INR 7.2 lacs Value of property = INR 37.2 lacs Premium for brand = 20%* 37.2 = INR 7.5 lacs Total value = INR 45 lacs. You can add another 10 lacs for car parking, club house, bwssb, electricity connections etc. Value before registration = INR 55 lacs Now, if the same posh apartment is being quoted at 82 lacs, guess what? You are paying over your head. Buy wisely, dont go by absurd broker and developer talks! bhavesha and honest like this.

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