Monday, 15 June 2015

Tips to calculate depreciation of your house

Ranjani Karthikeyan from Bengaluru asks, “My property is 20-years old and I wish to sell it because I am moving abroad. My problem is that I am unable to calculate the selling price. Since the value of property depreciates with every passing year, what factors should I keep in mind?”

Why is depreciation calculated?

It is for the simple reason that a building like everything else has an age too. Exceptions apart, a very old construction will not be able to gather as much buyer interest or money. Magicbricks reached out to Ajay Sharma, DGM, Valuations and Consulting, HDFC Realty who gives the following insights-

- In case of an independent house, the value of the house is sum of the value of the land and construction cost of the building.

While the value of the land needs to be benchmarked to the market price, the value of the building depends upon its age.

-In case of an independent house, the total useful age is estimated to be about 60 years. Suppose you are selling it after 20 years of construction, selling price of the building minus depreciation is arrived at by this simple formula- Number of years after construction/ Total (useful) age of the building. In Karthikeyan’s case it is 20/60 = 1/3. Therefore, the remainder of the useful age is the price you can ask for the building component.

- To this building price, add the price of land arrived at through market benchmarking to get the total price for the house.

Exceptions to the rule

Consider an area where land bank is scarce and is extremely difficult to find a new plot for construction. This happens mostly in established areas which has a premium attached to it. In such a case where prospective buyers’ are willing to pay for the location value, the calculation stands nullified.

Value attached to a building depends on many things- construction type, technology, services etc. In this regard, one has to consider the obsolescence factor. Functional obsolescence means your property is either too showy or grand for the locality or below the standard when compared to other properties in the same area. A simple example could be the use of open wiring. This is an old feature and may call for a cut in the selling value of the house

A third case would be when a buyer is focused on purchasing the property because of an emotional connect with it. For example, your parents may have lived in Bungalow ABC which had to be sold for some reason. Today, when you have the budget to buy it back, you may even be willing to buy it at a higher price. This constitutes an exception too and cannot be taken as the market benchmark

What should you be careful about?

A seller should price his property rationally.  In many cases, sellers put up an inflated price either because he/she thinks that it is the genuine amount or because they foresee the buyer urging on a bargain. However, you must understand that overpricing may be a deterrent.

The seller knows the average value of property and would be willing to spend -/+ 5 per cent of the market price. Suppose, the price of your property is Rs 100 and a buyer would have to incur an expenditure of Rs 12 to repair/renovate the house, ideally the seller should be selling the house for Rs 88. If you still feel you should ask for Rs 100, that is, the total cost of the property you should be willing to undertake all the repair work before passing it on to the buyer.

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