Renovation can be a bad plan

Private Property South Africa
Cathy Nolan

By renovating your property you can design the perfect home for yourself. It can be an exciting process, as well as a rewarding one – especially from the point of view of an investor (which you are, as a home owner). Renovation increases the market value of your home. It’s simple; by putting money into the property, you can increase its worth and make your money back – and then some.

But this doesn’t mean you can just go on a renovating rampage. (Well, technically you can, but don’t expect that just because you’ve poured money into your property you will make it back when you sell. If you’re not careful, you can suffer a substantial financial loss.)

Ag, shame

Let’s illustrate with an example: Fred Khumalo lives in a nice neighbourhood and his property is a relatively good catch when compared to the rest of the area. He decides that he’s going to sell his property, but first he would like to renovate it, make it the best house on the block, and then sell it for much more. Believing that the renovation will be a good investment of his time and money, Fred’s property gets the whole works: landscaping, a new roof, kitchen remodelling, high-end upgrades, a swimming pool … The house looks great afterwards and it would be a fantastic home for anyone to call their own.

The property then goes on the market. But no one bites for the price he’s asking.

For Fred to make back the money he put into redoing his home, and still make a profit, he has to price the property far above the average market value of the neighbourhood.

Here’s how it works

Say the home would originally have been valued at R2-million, and he puts an additional million into the renovation (it might have even been more!). He’d have to price the property at R3-million just to break even. To make only a R500 000 profit for his efforts and investment, he would have to sell the home for R3.5-million. But, given the averages in the neighbourhood, he’s probably not going to get any takers for that price.

Even though the property could technically be valued at up to R4-million, the property market isn’t going to support it. Based on a variety of factors (like the particular city, the neighbourhood, roads and amenities) most home buyers are only willing to spend so much for a house in a particular neighbourhood. The buyers who can afford that price aren’t going to be taking out home loans to pay R4-million in a neighbourhood where R2-million is the norm. They’ll want to spend it where R4-million is the norm.

So Fred has to lower the price. He’ll be lucky if he even makes back what he put into the property.

What this means for you

By all means, go forth and renovate your home. But bear in mind Fred’s sad predicament. The renovations you make need to be tempered with how much you could reasonably ask for when selling. Just because you put money into a property doesn’t always means you’re going to make it back. This word of caution is particularly relevant for would-be “house flippers”.

You need to think about the market and your potential buyers. It’s going to take market research, a budget, and a carefully-calculated renovation plan. What work does your home really need? What renovations will add to the resale value and what won’t? Are there more affordable changes that still yield big effects, like a new coat of paint? Had Fred been more savvy with his renovations, he could have put less money in, priced the home accordingly, and then been able to get his asking price that covered his renovation expenses with a little extra profit.

If you really want to make a particular change for your own enjoyment, like getting in contractors to tear down walls for a more open layout, or even build your very own “fire pool”, then by all means go for it. Just don’t make the mistake of assuming that you’ll make back whatever you put into the renovation, when you sell it.

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