All you Need to Know About Property Depreciation
The remaining amount of usable years of the land or building must be compensated for before selling a property. This article provides more detail on Property depreciation.
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- The remaining amount of usable years of the land or building must be compensated for before selling a property. This article provides more detail on Property depreciation.
Over time, something of worth depreciates. For starters, if you are trying to sell old gold, there is a certain depreciation that the buyer factors in. Normally, this is a minimal number. The age of the house influences its deterioration, too, in real estate. You’ll understand how to measure the depreciation of property in this article.
What is Property depreciation?
Remember the following two significant points before we begin to discuss the subject.
- The property value continues to appreciate as the house depreciates over time.
- Place plays a large part in assessing the importance of appreciation or depreciation.
In assessing the deterioration of a house, the age of the property or the age of the building is a crucial consideration. Especially if you are a seller and are attempting to estimate the correct property price, you can need to weigh it in. As mentioned above, there is no deterioration of the valuation of the land on which the property is constructed. It’s just valued over time.
Why are resale apartment properties typically sold at a higher price, a query that sometimes arises? This is because you are still purchasing the Floor Space Index (FSI) of the land on which the house is constructed and the cost of land is appreciated when you purchase an apartment property. Except in the case of an individual home, land is valued at market values and it is the structure that decreases in value.
An old building is not as desirable as a modern one and, as a result, the value decreases. There are variations, though, too, which we will cover later in this post.
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How to Measure Land Depreciation
The serviceable age of an independent house is 60 years. Now assume that a few, Radhakrishnan and Mohini Iyer, decide after 20 years of construction to sell this land, what should be the sale price?
In such instances, by the following formula, depreciation is reached:
- Number of years after completion / Gross useful building age = 20/60 = 1/33
- The remaining useful age is this.
- A 1/3rd deduction from the building price should be considered by the Iyers.
- Thus, construction price = retail price x (1/3)
The Iyers would still need to refer to this construction price the price of the house, that is, the selling value of the land, in order to arrive at the overall price of the site.
Exceptions: Conditions affecting the depreciation estimate
In some cases, the formula stated above could not operate.
When there is insufficient land
Current land is in high demand in the absence of a land bank. On top of that, a seller may command a premium if the position is really common, and the principle of depreciation could be contradictory. In such situations, a prospective home buyer may be more interested in buying a house in a popular and desired locality.
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Factor of Obsolescence
Old ones typically go out of fashion as new items reach the industry. This is called the factor of obsolescence. Outdated utility or building construction defects, for instance. In such situations, the purchaser will have to lower the price because the calculation of the property’s deterioration alone does not compensate the prospective buyer for the decrease in the valuation of the building.
Land Depreciation: What Do Buyers Know?
If you are trying to sell your land, after measuring the depreciation, be sure to consider the price. In some situations, due to the demand, you can command a premium. This is not mistaken in any sense. However, if you see that the house has been on the market for a long time, it might be time to contact a valuer who can determine the correct price for the property, with absolutely no inquiries going your way.
Although many buyers would be willing to spare a few extra lakhs, if the property is overly priced, you may find it very hard to find a suitable buyer.
Note also that if the house is old and needs restoration, this will cost the buyer an extra 5 percent-8 percent of the cost of the land. These would necessarily be taken into account by a potential buyer who comes on a site visit, to decide whether to purchase the property or not.
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