Overcapitalisation – Why Cost Does Not Equal Value

Something that was drummed into me when I was doing my property degree is: “Overcapitalisation – where cost does not equal value” with home improvements.

A simple rule, but not an easy one to follow, let alone understand. It resonates not only with real estate but with everything from a bottle of wine to cars to clothes. Everyone has a different definition of “value” and what they are willing to pay for it.

Understandably, home owners often have a naturally biased view of what their home might be worth if offered for sale. When these opinions are expressed, “upgrades” are almost always referenced: “I upgraded the carpet, the kitchen appliances, put in a pool” and so on. But how much of that “upgraded” item is recovered in the sale price? Paying an extra $40,000 for a new shed or $50,000 for a high end kitchen does not automatically increase the value of a home by $90,000. That $100,000 self cleaning, saltwater pool does not add $100,000 to the price of a home any more than the $3,000 cubby house and sandpit does. But do things like that enhance appeal? Most definitely. When you’re selling in competition with other properties on the market, these capital expenditures can make all the difference but don’t expect a dollar for dollar return because it rarely happens.

Is there a difference between brick and weatherboard? Between laminate floors and hardwood? Between granite and Caesarstone? Of course, but functionally they are the same; while vastly different in quality they do the same job. Does a $5,000 chandelier cast different light than a $200 one? Before embarking on a renovation, it’s critical to understand what is typical in an area and to ascertain if spending an extra $10,000 on granite benchtops is really prudent, and this is where an experienced agent, preferably someone who has bought and sold a few times can really assist.

Unfortunately, we sometimes get called in after the work has been completed or partially paid for and the home owner hasn’t kept in mind some of the factors which have greater impact on the overall value of the property. For instance, evaluating their neighbour’s housing style, demographics of the neighbourhood, streetscape, design trends of neighbouring properties, and recent sale prices of homes in the area.

Value – like beauty – is in the eye of the beholder. Remember that the market (buyers) dictate “value”; they dictate what’s “hot”. While a homeowner may hold every improvement in high regard and make use of the upgrades every day, the “market” (buyer) and the agent or valuer will be looking at sales data to justify everything. Complicated? It can be – but the basic key is to know the micro market you live in before embarking on major renovations or upgrades.

Robert Broadhurst

If you are unsure about changes that you think need to be made to your property, get in touch and we will provide the best industry advice.

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