How to value a house?
Seniors, I have written below based on my understanding of how construction cost and plot cost could be added to value a house, your usual guidance and correction will be helpful.
Valuing a House by Cost plus Method
http://realestateislamabad.blogspot.com/
One of the methods that has been discussed earlier for valuing houses is Value to Price Ratio (VRR); this may be reviewed again in earlier posts; now let us explore other methods for valuing houses. Two more methods for valuing property could be (a) cost plus basis (b) discounted cash flow method. Discounted cash flow would be more appropriate for commercial properties where the property is expected to stay on rental and that rental will be subject to various market conditions, will only be discussing cost plus method in below lines.
Cost plus method of valuing property will be more useful in emerging societies, sectors or communities. In such areas rental market is premature and is in developing stage; rental values are suppressed in earlier stages of development but increase happens quite fast as more and more people build and occupy houses and amenities are added to the societies. This means that using solely the rental amount to determine the value of a house would not reflect correct value of a house in such society.
Solution to this problem could be cost plus method. Cost of a house may be bifurcated into cost of land and cost of construction. Cost of the land is easy to determine and could be checked at any point of time by visiting few estate agents. Cost of the construction is relatively trickier but to make it simple construction may be categorized as average, above average and below average. Talking of Islamabad average construction cost is around 1,600, above average could be anything above 1,600 but for sale purchase purposes 1,900 should be more acceptable number and below average will be 1,300. Above average could go as high as a constructor may wish, luxurious finish could push the cost well above 2,000, however such houses are relatively low in demand especially in 10 marla and below plot sizes. Top notch finish can push the cost upwards to almost any limit but on the other hand it would be very difficult to go below 1,300 even for below average finish.
A very important point is that cost of construction is the amount a person spends to construct a house for personal use not for sale. When the same person decides to sell then a premium will be charged for all the effort and time spent to have the construction done. This premium will be a minimum of 20% above cost. Below table has the calculation of sale price after adding premium for the three construction types. Actual premium also depends on multiple factors but below table is a simplified version.
Construction Type Cost of construction Premium or Margin (20%) Sale Price
Above Average 1,900 380 2,280
Average 1,600 320 1,920
Below Average 1,300 260 1,560
Above numbers are Pakistani Rupees per square foot
D-17 could be used to assess how relevant this method would in real life scenario. D-17 is a small but emerging sector in Islamabad. Almost one quarter of the sector has been constructed, significant number of houses are under construction and is the most populated sector in Zone-II. The sector has mainly three plot sizes i.e. 30x70, 40x80 and 50x90, extension and villas also have some more sizes. Taking example of 30x70 plot, average covered area will be 3,400 square feet. Plot cost is around 4 to 4.5 million depending on location and condition. Condition of plot entails good level surface requiring no or minimum filling and good soil condition. Below table will give an estimate of price of a house and this is very close to what is actually happening in the market.
Construction Type Value of land Covered Area Rate of sale/ square foot value of construction Value of a house
Above Average 4,500,000 3,400 2,280 7,752,000 12,252,000
Average 4,200,000 3,400 1,920 6,528,000 10,728,000
Below Average 4,000,000 3,400 1,560 5,304,000 9,304,000
Above numbers are Pakistani Rupee
For newly constructed houses below average construction is relatively uncommon in and around Islamabad and generally there will only two types of houses for practical purposes of sale and purchase i.e. Average and above average; prices are also quoted accordingly.
Syyed. Not very convincing write-up in comparison with your previous ones.
Many loopholes.
These methods and jargon is prevelant in international market too?
Sayyed Bro,
Good effort you made a very big detail to make house value.
In my opinion its very simple 2 points.
(1) The cost of land in current time for that particular house.
(2) The cost of Construction in current time.
Dear B.R Malik sb, apologies for the having having tables in very bad shape, don't know how to correct format.
Regarding your comment would appreciate if you could kindly guide in a bit more detail on the weak areas in the write up.
To your second comment I'm not sure if the jargon is used internationally or not. My basic training is in finance and accounting and mostly I apply the techniques that I have learnt for investment appraisal and stock valuation.
Dear Tanoli sb, very true the two points you mentioned are the key. I have written in detail for a beginner like myself, besides I do find a lot of time to waste and this is how kill the time ... ;-)
Brother syyed , very nice attempt ,any how can we simplify it in the words of Brother Ahmad Tanoli
cost of land @current market rates ,,
but cost of house according to your formula of above average,average ,and below average for new homes ,,,plus how to reduce construction price for the age of the house,
for example 10 years old average house @?
Dk raised an important question. With finance background, you can answer it.
I think your cost of construction is not accurate. In Islamabad, with CDA bye laws, there is no way one can make house in such cost. I just completed my home. Two of my friends also completed homes with me. One of the builder also completed a home where I was living on rent. All had different finished. None of it match your figures.
Than, an important thing. House finish should be in harmony with it location. If there is an extra ordinary location, but average finish, house value will be down. Likewise, with an average location, super finishes would not increase value of house. No one would be ready to pay premium.
Fine balance should be maintained between location and finish. If the combination is perfect and in consonance with each other, than house will have true value.
There is another important factor I.e map. House should not have major mistake. Like I know a builder who made 9 bedroom house with 1 kitchen in E-11. It took 2.5 years to sell that house on throw away price.
Design sense also matter. Simple designs does not add up to cost a lot but value is increased. Old designs devalue the new house.
If house is not made according to taste of the precise target market, the house is devalued automatically. Every size house has different target market. Every location has different.
So it's combination of all these factors in my limited view.
I also have finance background to some extent. That's why I had an objection on the method. Vaisay, frankly, I think financial accounting holds little ground in Pakistani desi business environment. It's like " bhains k Aagay been bajana" . I learnt this during 17 years of business experience.
Nothing works like this in market.
Sorry no offense. Just serious objection on cost of construction.
Dear Malik sb, I absolutely take your point on cost of construction, the numbers might not be accruate as these are mainly based on interviews not based on actual construction done by myself. Infect I'm at the very start of construction of a house, would know this better once done.
Would appreciate if you could share your numbers on cost of construction.
But the rest of your post is subjective discussion and is quite correct. Top notch finish in 25x40 will not fetch the same price as it would in 50x90. However, this is a separate discussion and I have not touched this in my writeup, what you have written is very relevant and i fund this useful.
And I'm not offended at all, it's discussion; arguments and counterarguments make discussion rich, useful and enjoyable. Please feel free to comment.
Dear DK sb, condition is the key for an old house and even for a new one for that matter.
Theoretically below should be the formula:
Valu = cost of land + cost of construction + 20% of cost of construction (premium) - 1% reduction in premeium for each year after construction - cost of repairs required
A very good condition house with 10 years after construction will have only 10% premium to cost of construction compared to 20% premium for newly build. Additionally cost of required repairs will also be subtracted.
We could have used a depreciation concept but I'm sticking to the same formula used earlier to keep the things simple.
DK sb, final thing that must be remembered and very aptly added by Malik sb, market in Pakistan or anywhere in the world does not value property or any other assets using these formulas. Value is determined by demand and supply and is determined wmere buyers and sellers agree.
These valuation models and methods are just to have a comparison of what is being done is as per expectation. Theory has no influence on behavior of buyers and sellers, it's infect decoding of what they have done already. So it's buyers and sellers who agree on price not the theory.
Thanks a lot Brother Syyed,
you have shared wonderful information with us .,
Here in zameen forum , there are many builders and construction line ppl and also designers ,but unfortunately i have noticed them using this forum only for their own advertisements, if they wish they can contribute a lot positive and informative stuff to this forum, ,,but unfortunately they don't share any thing positive , they only advertise themselves ,
I pray for the successful completion of your home , and brother after you are done with that please share your experience here thanks,
Relationship between Rental Value and Sale Value of a house in Islamabad
http://realestateislamabad.blogspot.com/
There are various ways value of a house may be determined, one simple method is cost plus i.e. Market value of a plot on date of sale and construction cost with addition of a reasonable margin on date of sale. This method is more useful for new construction but would get trickier for a house that is not brand new. An easier method will be multiplies of rental value which has been described below.
The relationship, if any, between value of a house and the rental it fetches is an interesting one. It’s not rocket science to guess that value of a house is directly proportional to rental value however question remains if there is any way we could guess the value of a house based on the rental. The answer is yes and will be discussed in below line.
Value of a property could be measured as the numbers of years it takes to make value at the rate of current rental; this could also be called multiples of yearly rental and may be referred as Value to Rental Ratio (VRR). For Example current value of a house is 10 million and monthly rental is 50,000 then the rental will take 200 months or 19 years and 8 months (roughly 20 years) to generate 10 million. We could say that the value is 19 multiples of rental.
Having discussed multiples in above lines let’s see what factors determine the number of multiples a property is expected to have. The answer to this question depends on location, condition and demand for property at any point of time. Good location, nice condition and high demand would been top dollar whereas the value will start to decrease as the location and condition is bad and demand is low.
Ideal location, good condition and high demand could fetch as much lower range will be 25. Average location, condition and demand could be anywhere from 20 to 24 and then the value keeps going down. However very seldom the value will be lower than multiples of 15. Below is the summary in tabular form.
Location Condition Demand Value in multiples of Yearly Rental (VRR)
Excellent Y Y Y 25 to 30
Average Y Y Y 20 to 24
Low Y Y Y 15 to 19
In an example where monthly rental is 10,000, theoretical maximum value will be 3.6 million (10,0001230=3,600,000), minimum value will be 1.8 million (10,000x12x15 = 1,800,000) and likely value will be 2.4 million (10,000x12x20 = 2,400,000).
Let’s try to test above formula in real life scenario, G-13 has average monthly rental of 50k per month for a 30x60 house. The sector is newly constructed, has good location and tends to be high in demand; the value is expected to be towards the higher end of the spectrum. Multiple of 30 puts the value at 19.8million and at multiple of 25 value comes down to 16.5 million, these theoretical values are pretty close to the real values in the market.
I-10 is a relatively old sector and location (proximity to pirawadhi) among other things pushes the sector towards the lower end of value. Average rent of 25X40 or 25x50 house is 40 thousand. Value of houses is expected to be around 10 million which is equal to 20 years rental. However some of the houses have high rental due to better condition and others have lower rental due to poor location and old construction etc.; the result is that price of houses is some cases is as low as 8.5 to 9 million and in other cases it goes as high as 13 to 14 million.
Real value is determined by market as per market mechanism, above is just to add to understanding how rental and sale value interact with each other. This will be of no use without understanding of market.
Aoa,
You have to take the market value of the land which will always be calculated as per market.
The construction cost is a bit complicated.few things to be sure of
Is the current construction cost of an average priced contractor.and what kind of construction if it is a class or b class...........e.g
If the house is of A class construction which costs around lets say 2200 per sqft. And the construction is only a year old than cost of land and construction cost is to be calculated.which should give you the actual cost of a house.
If the house is over 5 years old than current cost of land and 25 to 30% of the construction cost should be deducted.....and if its more than 15 or 20 years old than more or less the cost of land is paid.....
Thanks Syyed. Cost of construction is neglected part in this forum. Whenever anything related to construction comes on the forum, builders jump in and spoil most of the discussion. Beginners who need help get even more confused and leave the forum.
Good attempt by you.
By the way, my finished cost was 2400 even though structure was complete before 2013 budget. My friend's average or somewhat below average finish cost was 1850. Builder's finished cost was 2000. People making home around me had Rs 2500 finish who recently completed.
Umar Gul cricketer also finished home when I completed my grey structure. His finished cost was Rs 2200/-
We all discussed and shared our costs with each other to help.
BR malik visit my threads you will get almost 50 % idea with regards to cost of construction…
Malik sb, what is the are you are talking about, it must a very posh area, Umur Gul must be living in very high end Area.
For plot size of 10 Marla and below 2,000 will be very high if a person intends to construct for selling. Based on little exercise of surveying in middle class sector and societies of Islamabad people are paying around 2000 to 2200 for a constructed house plus the cost of land.
I'm planning to construct 10 Marla and have budget of 1,600 in mind for average finish but if it goes beyond that I will be stuck.
To understand it in a bit more detail what do you suggest will be cost of grey structure for average construction, my expectation is around 750 to 800 per square foot. Planning a covered area of 3,400 square foot and expecting a cost of 2.5 million to 2.8 million, how do you see this?
Once you reply I will also share the breakdown.
@ HT sb, agree to your comment in general but the numbers are quite aggressive. 15 to 20 years do bring a lot of wear and tear but Prices don't go down to plot cost after this time unless a house is very poorly maintained.
In my formula im subtracting cost of repair at the end and this will go very high to make a house in running conditon in case it's not maintained properly. Every house needs significant spent after 5 years and major overhaul every 10 years.
Taking example of islamabd sectors I-8 to I-10, average age is around 15 years. I-9 and i-10 average is 20 plus and I-8 is in the range of 10 to 12 years. Price is still well over plot cost in I-9 and I-10; I-8 is really is ascendancy and is very very high as you must be aware yourself.
@ Syyed. I am takkingt about E-11.
Somehow, my impression is that people guiding us before construction give wronh estimates. All labour contractors give wrong estimates. Carpenters give wrong estimates. On probing this impression myself and a friend of mine, we came to conclusion that workers want the owner to jump in a project or work. Rest, they know that owner will arrange money somehow or taking loans. If they give correct estimates, owner will be shy of jumping in and hence no work of workers. They are street smart and we are not. They constantly give you adrenaline injection that your cost are very good. Mr. X and Y and Z spent so much but still work quality was low. Purpose is that owner is happy and never object to your work.
One og my friend did construction recently in G-15 . Size 30x60. His cost of grey structure was 950.
When I look back, I think architects gave better estimates but we rejected it at that time because one wants to be optimist at start on construction.
Almost 4 of us were making house at same road. We discussed and helped each other. Every one of us were stuck due to wrong estimates. It was beyond anyone of us estimates.
Builders save a lot of money in structure. But after seeing home building by a builder close to my home where I was living on rent, I will never ever take builder's house. Its like outsourcing milk supply network to cats as they know a lot about milk.
B.R. Malik Sahib, please keep writing, your opinions are reality based and will definitely benefit lots of us. In return, we can give you Dua’ and insha’Allah you will be rewarded in this world and the world hereafter for your good deeds. I read every word of you keenly, and actually copy it to a word file named “MUST READ MULTIPLE TIMES BEFORE AND DURING CONSTRUCTION OF MY OWN HOUSE”. Please keep writing.
Thanks a lot for the encouragement 