From Money Magazine
The greatest risk for renovators these days is spending too much on the wrong things. Owners can pour big money into expensive fixtures, the highest-quality floor tiles or a swimming pool and add nothing to the value of the home.
Robert Caulfield, managing director of Archicentre (the Institute of Architects' building advisory service), says it’s not uncommon for renovators to lose $100,000 over-capitalising on renovations. "They spend $250,000 but the value of the property goes up only $150,000," he says.
Caulfield says there's a basic choice for home owners dissatisfied with their current home: relocate or renovate.
People need to consider how much they're entrenched in their current suburb (kids’ schools, community groups, etc) and
contemplate the cost of moving. Caulfield says the average cost of selling and relocating is $50,000.
Those who decide to refurbish need to assess whether the home is suitable for renovation. Not every home is a candidate.
Caulfield says weatherboard homes are generally not as suitable for first-floor extensions as brick homes. With a weatherboard home, it's better to extend at ground floor level.
How much is too much? Property owners need to assess the current value of the home and its potential value after a makeover. They should consult valuers to assess their home as a finished product.
Brisbane buyers agent Scott McGeever says owners can do this themselves but it requires some homework. First, add what was paid for the home to the cost of the planned renovation – then compare the sale prices of similar finished products
in the area. Anyone planning to create a four-bedroom, two-bathroom home should examine existing homes of that type on similar-sized blocks.
Archicentre says it's dangerous to start a project without a firm budget, which can result in an unfinished project or unexpected borrowing which cuts the investment potential dramatically.
Caulfield says renovators who don't seek competitive tenders from builders can end up paying 50% to 100% more than they need to.
Home owners then need to get a proper contract in place, one that deals effectively with changes that arise during construction. "Variations are inevitable," says Caulfield. "They may strike rock during excavations or find termites or faulty wiring or plumbing that's not up to scratch. You need to have someone realistically calculate a fair price for those variations."
Wait a while
Caulfield says the experience confirms Archicentre's view that property owners need to retain a property after renovating. "We recommend that people don’t bank on selling a renovated property for five years," he says. "The concept of buying, renovating and putting it back on the market immediately is generally a good way to lose money. You don't need much of a change in the market to come unstuck."
Caulfield says renovators' biggest mistake is viewing the project as a package into which they put all their favourite things: gold taps, expensive floor tiles or a particular bathroom basin they love.
If home owners hope to add value as well as improve their lifestyle, they need to consider other people’s tastes as well as their own – and understand which features add value and which do not.
"What you might find funky, others may find deplorable," says Caulfield. "Be cautious of renovating to your selective lifestyle and taste. Produce a design that is compatible for all tastes."
It's important to get the external look right, with the extensions matching the existing structure and roof shape, and to achieve an internal layout that makes sense, with rooms of the right size.
Buyers agent Nicole Graham of Sydney Property Finders says the key to avoiding over-capitalising is to focus on what appeals to the wider market.
Pools are a big trap. Perhaps the most common disappointment for renovators is spending big on a swimming pool and finding it hasn't added great value. McGeever says pools are lifestyle improvements, not value improvements, and the market is split 50-50 on whether they're desirable or not. Many people dislike the cost and hassle of maintaining pools.
There are ways to easily add value. McGeever says investors should look for houses that can be re-configured internally rather than extended. He says one possibility is converting the lock-up garage into a master bedroom with en suite and then add a carport extension.
Another possibility is buying a good-sized home and making cosmetic improvements such as painting and new floor coverings. "I would suggest you don't touch the big-cost items like kitchens and bathrooms," he says. Graham says renovators can make the mistake of leaving nothing for future owners to do. "Most new home owners want to put their own stamp on a property," she says. "If you renovate it to within an inch of its life, it may put off some buyers."
Rules of thumb for renovating
How not to over-spend
Buyers agent Nicole Graham of Sydney Property Finders says useful rules of thumb to prevent over-spending on renovations include:
- New kitchen: Spend between 4% and 6% of the property value.
- New bathroom: Spend between 2% and 3% of the property value.
- Landscaping: Spend 1% to 2% of the property value.
Robert Caulfield of Archicentre
suggests these pointers:
- If you're rebuilding a home from scratch, don't spend more on the structure than the value of the land.
- If you're doing a significant renovation of an existing house, don't spend more than half the value of the property – i.e. if you buy an old house on land for $500,000, don’t spend more than $250,000 on renovation.
* Terry Ryder is author of several books including Real Estate Without Agents
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