A reader who owns a three-bedroom house in a small town wants to know whether she can sell it below market value, given that it is in a state of disrepair.
She wishes to sell the property for about R250 000, without having to spend any money on repairs prior to the sale.
She estimates that the market value of the house, which she purchased in 2001 for R150 000, is between R600 000 and R1 000 000 as it is situated close to schools and in an area where properties are in demand.
See the reader’s question here.
The house, however, has a leaking roof with several rotten supporting beams and will require substantial maintenance and structural work to bring it up to spec.
It is important to understand how the market value is determined.
Although one might be able to get a fair idea of market value based on sales of the area, it is important to compare the property in question to those currently listed for sale and those which have recently been sold to ensure one is comparing apples with apples.
The market value of property is determined by several factors – not just the selling price of surrounding properties.
The condition naturally plays a role as one has to keep in mind what the buyer will have to spend to upgrade the property to the same condition as other houses recently sold in the area.
A neighbouring house in good condition, which sells for R600 000, is arguably more attractive than the reader’s house offered at a lower price but in need of a R300 000 financial outlay to get it to a similar state.
Other factors that may influence market value can be of an intrinsic nature and related to the property itself. For example, the layout, standard of finishes, fixtures and fittings and the views one may have from the living areas and bedrooms.
The reader should bear in mind the possible tax consequences of her proposed course of action and, if the selling price relative to the market value is queried, she may have to justify that such lower price is indeed market related.
Valuations from one or more estate agents or professional assessors could be obtained prior to placing it on the market.
If the actual selling price is lower than the valuation price, it may still be justifiable in certain circumstances.
These could, for example, include length of time on the market, feedback from potential buyers and the trend of rejected offers received.
An important aspect to bear in mind is that if Sars determines that the property was sold below market value, donations tax may be payable on the difference between the selling price and its deemed market value.
Ultimately, Sars will most likely require transfer duty to be paid on the deemed market value and not the selling price.
The reader should begin by securing preliminary assessments as to the market value of the property.
This should be based on an actual inspection opposed to a so-called ‘desktop analysis’, a value determined by a quick consideration of the basic amenities and the size of the erf in comparison with other recently sold properties in the area.
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