Overcapitalisation, Some Common Mistakes
Simply put, over capitalisation is when the cost of a home improvement is more than the value it adds to your property.
While some renovations can increase the value of your home, there is an upper limit on what properties are worth at any given time.
1 – Getting Emotionally Involved
Many homeowners undertake a home renovation for emotional reasons. Very often they fall ‘in love’ with the property. This emotional issue applies to both home owners and investors.
2 – Not Doing Your Homework on Comparable Market Pricing
Unfortunately, it is important to recognise that most suburbs have a median sale price and an upper sale threshold specific to your suburb. Even different streets in your suburb have different price thresholds; that’s because your neighbour’s houses and the general streetscape have considerable influence on the value of homes in your street. Before renovating it is important to consider the housing styles, demographics of your suburb, and sale prices achieved of other homes in the area that have recently sold.
3 – Under-Estimating all of the Costs Involved in Building
This is one of the biggest mistakes that homeowners make when renovating their homes. Homeowners typically under-estimate the costs involved in building. Such as; demolition costs, professional fees, contingencies for variations, foundation changes due to soil conditions, fit-out and landscaping, kitchens and bathrooms, escalation of building costs and delay and acceleration costs to finish the project on time.
4 – Poor Selection of a Builder
Property owners who decide to employ a builder to undertake home extensions also encounter problems because they have not undertaken sufficient research on the experience of the builder, and their past record in undertaking renovations. Especially their “variation claims” history, often Builders locks unsuspecting homeowners into building contracts which cost homeowners thousands in variation costs. Another common mistake is to let the Builder provide the design, and therefore restrict the homeowner from getting competitive quotations upon the Builders design.
5 – Doing it DIY to Save Money
Some people also make the mistake of trying to undertake home renovations themselves. This can prove costly in time and is financially unwise because a poor standard of work will only devalue the property. Character homes in particular require a higher standard of renovation work and you may need to carefully select tradesmen with past experience in this area to ensure that the work is properly completed. Always seek competent, professional advice and trades people before undertaking a major renovation.
6 – Failing to Stick to a Budget
A common problem is that home renovators do not operate within a strict budget and are unable to complete planned renovations because of a lack of money. This mistake results in homeowners financially overextending themselves through a lack of financial planning. The “Catch 22” is that renovators often can’t then sell their ‘half completed’ renovation and end up in severe financial hardship.
7 – Poor Functional Design Layout and Design
A very common problem is that home renovators end up spending too much on a poor functional layout because of the limitations of the existing building. In many cases the homeowner would have been better off, to have demolished the existing house and start all over again. Another common problem is where the style of the renovation is inconsistent with the rest of the house; you’ll often see houses for sale with a modern extension that clash with the rest of the house which is still stuck in the 1970’s. These properties are “lemons” on the market and typically homeowners lose money on these renovations.
8 – Spending Money on the Wrong Things
If you are living in a $100,000 house you will not get a good return on an investment in a $35,000 bathroom. Swimming pools are a good example of additions to a property that often doesn’t add value. Many buyers do not want the work, expense, and potential for accidents that come with a pool. The general rule is that you should not spend more than 25 per cent of the value of your home on home improvement renovations.
9 – Underestimating the Disruption to Your Lifestyle
Undergoing a major renovation and living through it, is often overlooked by most homeowners. The disruption to your lifestyle, the mess, the noise and restrictions is something that should not be discounted. If you are having major renovation (especially if you are a family with young children) consider moving out and renting elsewhere during the construction phase.
Before you make the decision to renovate or buy a new house, carefully ask yourself the following questions.
1. Decide what it is you are looking for in a final result and ask yourself if it will be cheaper to buy a different home or to renovate your old one.
2. What is the average selling price of homes in your area?
3. Will renovations alter the appearance of your home so that it appears out of place in the neighbourhood? Check the styles of other homes in the area. Keep in mind it might be a better idea to match or keep in step with the styles of other homes in the area. A poor design could devalue your home by thousands of dollars.
4. How much will renovations cost compared to what you paid for your home. What is the expected increase in value because of the renovations?
The decision to buy a new home or to renovate is not one to be taken lightly. It is recommended that you think through every aspect of the project prior to getting started. Seek the advice of a local professional architect/building designer as well as a real estate professional if necessary to determine how the proposed renovations will affect the value of your home.
In general terms, you’ll probably avoid overcapitalising if you keep the cost of your renovations to less than 10% of the value of your home. The less you need to invest in your home to give it that wow factor, the more you can expect to get back when it’s time to sell. And always keep a close eye on the sale price of similar properties in your area.
Source: Gary Pemmelaar
