The Indian Accounting Standard (AS) 113[1] defines the fair market value (FMV) as the price that is received on selling an asset or paid to transfer a liability in an orderly transaction between the participants on the date of assessment. The amount that a given property or asset would fetch in the marketplace is subject to various conditions listed below.
1. Prospective buyers and sellers are aware of the asset, and they are behaving in their own most genuine interests and are under no undue pressure to trade.
2. A reasonable time is given for the transaction to be completed.
Provided these conditions, the Fair Market Value (FMV) of an asset should represent an accurate valuation or assessment of its worth. Municipal property taxes are generally assessed depending on the FMV of the owner's property. The longer the property’s ownership period, the more significant the difference between the purchase price and the property's FMV will be. Professionals use standards, guidelines, and local and national regulations to determine a property’s FMV.
Factors affecting the Fair Market Value of a property
Location
The location of the property is a major determinant of its value. If the property is situated in a prime area, it obtains the first estimate. Excellent location refers to the heart of the city or an area with upscale buildings and residential areas, including sprawling apartments, for example, MG Road in Bangalore and CP in Delhi. On the contrary, properties located in remote areas or outskirts are estimated at a lower value.
The site
The dimensions of the property play a significant role in its value evaluation, be it a plot, flat or independent villa. A bigger parcel of land will retain more substantial value compared to a smaller one.
Demand and supply
The demand-supply dynamics of the property, too, impact its FMV. Higher demand unmet by insufficient supply is bound to surge the FMV, whereas oversupply hinders capital appreciation. Various other factors, such as easy access to home loans, an increase in disposable income and the rural to urban migration drive demand for real estate. Hence, economic conditions trigger changes in the FMV of the property.
The FMV is an important estimate that the parties must indulge in before carrying out property transactions. Therefore, always analyse your property’s worth basis the factors mentioned above, or hire professional real estate evaluators to make the job easy.
