For the majority of us, our home is our most valuable asset and although many Australians choose to stay and renovate their home rather than sell, it is still important that you consider whether your renovation is adding value or whether in the long run it will lose you money. As a home owner when it comes time to sell your focus will be on ensuring you make the most amount of money from the sale, but if you have spent too much on the renovation you may have overcapitalised. But what does this mean and how do you ensure you don’t do it?
Over capitalization – what is it?
The term over capitalisation means to improve a property beyond its resale value, in other words it means that you spend too much money on the renovations of your property and are not able to recoup this money if you decide to sell it. An example would be if a home owner spent $200,000 on home renovations and then decided to sell the property, they may find that the renovations only added $100,000 to the value of your property meaning you have effectively lost $100,000 as a result of doing the renovation. You have over capitalised on your property by $100,000.
To ensure you don’t spend thousands on your property and then lose money when you go to sell it, make sure you consider these points.
Understand the value of your property
The first step is to get your home valued by a qualified real estate agent. Understanding how much your property is worth in the current market, how much it has increased in value since you bought it and how much other properties are selling for in your immediate area is very important. Plus, talk to your agent about the value of similar renovated and un-renovated properties in your area. Keep in mind that each neighbourhood has a median sale price and an upper sale threshold and this can vary significantly even within one suburb as a result of the housing style, street scape and demographics of each area.
Once you know how much your home is worth you can determine how much you want to spend on it. As a general rule if you are looking at selling your home in the near future or you are renovating an investment allow 10% of your property value for your renovation budget. For example, if your home is valued at $700,000 a good budget to work with is $70,000. However, if you are planning on staying in your home for the long term, you can risk spending more.
Keep in mind when working out your budget that you don’t spend way over the upper sale threshold as the chances of you making your money back in the short term are near impossible.
Plan for the future
If you are renovating your home to live in, often a priority is to make it comfortable and to suit your current or future needs, but make sure you also consider if your renovations will appeal to a wide range of buyers if you were to sell it? There are certain rooms that will bring value to your home. The kitchen, bathroom, family room and outdoor living areas are consistent favourites with buyers. In more recent times, renovations that make homes greener by increasing efficiency and reducing energy bills are becoming increasingly popular.
On the flip side, adding features such as a pool may actually reduce the price of your property in long run as many future buyers are not keen on the extra work and expense that come with pools.
In essence, while it is important to have a comfortable and well-made home for you and your family, think about whether the renovation makes financial sense and whether it will appeal to a wide range of people…aka future buyers.
Create a budget and stick to it
Ensuring you have a clear and documented budget is important and making sure you stick within the budget will ensure you don’t over spend. You don’t want to get to the point where you can’t afford to finish the renovation and have to sell the property half completed.
Poor Design and layout
Poor layout and design can impact the resale value of your home. It is recommended that you consult experts such as an architect or drafts person to help draw up your plans and to ensure the layout is functional. In many cases people renovate a home that would be better off demolished or add on an extension that doesn’t work with the original home. If the layout and design is poor the chances of you losing money on these renovations is fairly high.
Choose the right builder & don’t DIY
Ensuring you engage the services of an experienced and qualified builder is critical. Make sure you spend time researching the builder, talking to past clients, checking they have the right experience and qualifications.
Unless you are a trained builder it is not recommended that you take on the job of renovating your own home. If the quality of work is poor, it will devalue your home. There is no such thing as a cheap renovation, ultimately it will impact the resale value of your home and you may need to spend more money later to fix the original.