Over-capitalizing with Renovations
Posted on: 20.06.2016
What does ‘Over-capitalizing with renovations’ mean?
Here at Uprosper, we sometimes bump into Gold Coast home owner’s that have spent far too much on the renovations of a property given it’s location or suburb. Essentially, Over-capitalizing with renovations is when your total spend on a property is more than the most expensive property that has sold in that suburb.
For Example:
In suburb ‘X’, properties sell for a median house price of $400,000. The cheaper homes are around $370,000 and the most expensive is $430,000. John and Sally have purchased their home in suburb ‘X’ for $430,000 and have spent $100,000 on renovations. With the total spend on the property being $530,000, they are now $100,000 above the highest sale price ($430,000) in suburb ‘X’. John and Sally have now Over-capitalized on their property in suburb ‘X’.
Although in most cases over-capitalizing with renovations is not good practice, It’s not always bad to over-capitalize. If home owners are planning to have a certain style of property in an under-developed suburb and stay for a long-term period of say over 10 years. In this case, the natural progression of infrastructure and population would eventually raise surrounding house prices to the same value of the initially over-capitalized property.
What are the likely consequences of over-capitalizing?
Put simply, if in the short-term after over-capitalizing with renovations you decide to sell, you may limit yourself to cash buyer’s only.
This is because generally, the majority of buyer’s need finance from a bank or lender to purchase. Therefore, when the lender performs a valuation, it will often fall short of the new buyer’s purchase price as the majority of comparable properties in the suburb are lower and effect the valuation negatively. Often, the valuation will come in lower than the agreed purchase price (contract price) and the buyer’s finance will not be approved by the lender.
What can i do to make sure i don’t over-capitalize?
Research the Suburb your property is in.
The best sites to help you look at different properties in your suburb and what they are selling for:
These sites will really help give you a good insight into how much you should try keep your renovation budget to.
Try to look at three of the cheapest and three of the most expensive properties in the suburb –
- What quality of construction and layout do you get for that price? Tiled floor, Timber or Carpet? Laminate kitchen Bench-top or Stone? Ducted-aircon?Security Screens? Auto lock-up Garage door?
- What is the exterior finish? Is it brick? Rendered? Cladding?
Doing your research into the cost of these different finishes and materials will also help you figure out what will and won’t optimize the effectiveness of your renovation.
We hope this helps and all the best with your renovations. If you’re looking at renovating in the near future, it may be worth while refinancing your home loan to optimize savings or access equity. If you’d like to ask us a few questions you can request we contact you for a friendly chat.
Best of luck,
The Uprosper Team
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