Renovating to sell? Plan first to avoid overcapitalising.
Overcapitalisation is not a word any renovator wants to hear, particularly an investor looking for a quick return.
And while overcapitalisation – when someone spends more on improving a property than the market will return on it when it comes time to sell – is less of an issue for people renovating a home they intend living in for the long term, it’s still something everyone should bear in mind when looking to improve a property.
The good news is that time will heal most wounds when it comes to overcapitalisation, as Tony Kelly, managing director of property valuers Herron Todd White in Melbourne, puts it: ”There’s no wrong value; it’s just a matter of how long you want to wait to get your price.”
But for those who don’t want to have to wait to sell – whether as an investor or owner-occupier – there’s a few things to be aware of to help minimise your chances of doing so.
One of the first is to carry out what Monique Wakelin, of Wakelin Property Advisory, calls the ”purpose test”: are you renovating the property to enhance your own lifestyle as you live there for years to come, to enhance the rental returns it attracts or to make a quick capital gain through reselling?
”If it’s either the second or the third alternative, then basically you have to sit down and do a feasibility study,” Ms Wakelin says.
This involves calculating the full cost of the renovation – getting advice from a professional valuer can be a good idea – then considering whether that value stacks up in terms of what properties are selling for in that location (Ms Wakelin advocates investors should be looking for a clear 20 per cent profit).
Buying well at the outset is, therefore, key. Valuer Colin Robertson, of Value Melbourne Property Valuations, says spending too much on a property in the first place – particularly for investors – can create an opportunity for overcapitalisation to creep in. ”You’ve got to discipline yourself to buy at the right level. That may mean you miss out on lots of different properties but … be patient.”
Location counts – it’s important to bear in mind that what might be overcapitalisation in one suburb may not be in the next. Mr Robertson says, if looking to renovate and sell, avoid an older suburb that is located next to a new one.
”Those old estates get absolutely pummelled for about a 10-year period, maybe more, until the new estate starts to get a bit older, get a bit tired, and then values in those older estates will start to creep up again.”
Paul O’Regan, state manager for real estate firm LJ Hooker in Victoria and Tasmania, notes that people who buy homes at the lower end of values for a suburb will have more scope for capitalisation without overdoing it.
”Remember the adage, buy the worst house in the best street, applies for good reason,” he says. ”It allows the buyer the best chance of capitalising.”
It’s also important to be sure of what you’re buying – one way to overcapitalise is to have to spend large sums on structural improvements by replacing rotting stumps, a leaking roof or bad wiring – costs that buyers will be loath to pay for.
Other ways of overcapitalising include spending too much on kitchen or bathroom renovations (although well-costed renovations in these areas can add value to a property), overspending on fittings or fixtures or extras like home theatre rooms, constantly doing smaller renovations or making improvements to a property over an extended period, poorly planned or carried out extensions such as adding a ”pop top” second floor, or even putting in a swimming pool purely to try to raise the value of the property.
”Pools will never deliver a dollar for dollar value back to the property,” Mr Kelly says.
Being aware of the state of the real estate market is also important; a softening market is less able to absorb lavish expenditure.
David Hallett, of building advisory service Archicentre, says it was ”pretty near impossible” to overcapitalise when house prices were soaring. ”More recently, though, house prices haven’t been going up at the same sort of rate … which means you probably need to be a little more mindful of overcapitalising than perhaps you needed to be five or six years ago.”
The key, he says, is to approach any renovation as a developer would.
”When you are renovating a house you’re a property developer; and if you’re a property developer, you don’t do anything without doing a feasibility study first. You work out how much it’s going to cost you, you work out how much you’re going to get back and you decide if it’s worth doing at all.”
HOW TO AVOID SPENDING TOO MUCH
??????????????????????? Buy a house with a value at the lower end of what can be seen elsewhere in the suburb, allowing greater scope for capitalisation.
??????????????????????? Make sure you have a pre-purchase inspection carried out so you’re aware of any potential costs with regards to unseen structural improvements.
??????????????????????? Fully cost out any renovation plans – seeking professional advice from a valuer can be a good idea.
??????????????????????? Beware of adding overly expensive fittings, fixtures and finishes.
??????????????????????? Beware of continually renovating the same property.
??????????????????????? Be clear on the purpose of the property – a swimming pool may be desirable for your lifestyle but may not add value when it comes time to sell.