Over capitalisation – 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 homeowner 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 means 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, streetscape 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 the 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 to the budget will ensure you don’t overspend.  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 draftsperson 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 are 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.

6 questions to ask yourself before you renovate

1. What are your current and future needs? Will you need space for the kids, will they be moving out anytime soon? Now map out the must have’s vs the nice to have. For example, a 3^rd bedroom for your teenage boy may be a must-have whilst the skylight in the hall may not be.
2. How much will the renovations costs, do you have the available funds, how much is the expected value to be added to the property, will the renovations actually cause your home to lose value?
3. What is the condition of my current home - Will I be renovating more than 50% of my home?In many states and territories, if you renovate over 50% the rest of the home then will need to comply with current building regulations, such as new wiring, plumbing, and energy rating and this can add a significant cost to your renovation.
4.  What do you want to achieve from your renovation and would it be cheaper to buy a different home rather than renovate?
5.  Will my renovation be in keeping with the style of homes in my area or will it stand out like a sore thumb?Often many people like an area for its style of properties and a poor design that doesn’t compliment the surrounding homes can devalue yours.
6.  Am I renovating to sell or to live in as this will dictate budgets, the scope of work, design and the finishes you choose?

Want to check and make sure you haven't overcapitalised ?

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