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Are you concerned your renovation is bigger than Ben Hur? What is overcapitalisation?

Renovation and Overcapitalisation

When we plan for renovations on our home we are generally doing so because we want it to look nicer, or we may want more space or say more bedrooms. These are common reasons.  But at the end of the day, we don’t want to go backwards.  We want the money that we spend on renovating our home to work for us. To help improve the value of the property so that if we decide to sell it – we recover the amount that the renovation cost.

Overcapitalisation is the situation where you spend too much money on the property and are not be able to recoup these monies if you decide to sell it.  Using the example of Mr & Mrs Average, assuming they purchased their home for $300,000 and shortly thereafter spent $160,000 on home renovations – if they decided to sell the property but found that the value of the property had only increased by $100,000 then they have effectively lost $60,000 through the renovations.

In effect, they have over-capitalised the property by $60,000.

So when considering how much to spend on renovating have you confirmed that you won’t be overcapitalising? That is – have you fully assessed what other renovated homes in your area are selling for and do you expect your home (once renovated) to sell for similar amounts?

If your home is worth $300,000 today and after a $160,000 renovation it will be comparable with homes in the area selling for $400,000 then you may want to reconsider the extent of your renovation. It is looking like a poor investment.

A really useful tool in determining what is the value of homes in your area is the Flyover Property REPORT provided FREE on the State Custodians website.

 

You should also speak with your local real estate agent for advice about what your home (once renovated) can expect to sell for.