Real Cost of Renovation | Avoiding a fixer-upper "lemon"

By Rich Harvey, CEO & Founder, propertybuyer.com.au

There are many interesting emotional journeys we see property buyers embark upon, and one of the most fascinating is perhaps the romanticisation of renovation. Many everyday Aussies seem convinced that renovating a home will be a grand adventure. They’re convinced that by putting in a little labour and altering a home to reflect their fabulous vision, they’ll generate a huge profit or create a dream abode that will fulfil their deepest real estate desires - often without fully understanding the true cost of renovation involved. 

But the truth is, renovating a property should be more about numbers than emotions.

To be a successful renovator, there are some key steps you need to take, and some major warnings you must heed.

Here are my tips for avoiding a renovation disaster.

Cosmetic vs Structural

Renovation works can generally be divided into two groups — cosmetic upgrades or structural alterations.

Cosmetic work is mostly about appearance, or easy alterations to fittings and fixtures. New paint, maybe some floor upgrades. They could even include some changes to kitchen and bathroom fitouts. Any demolition or removal is minimal, and you are definitely not changing any of the foundational features of the home. Cosmetic works traditionally deliver the best bang for your buck.

Structural alterations are far more comprehensive and tend to be more expensive and riskier than cosmetic work. They might include major extensions or additions to the home. They could be about altering internal walls to improve the layout of the property. It might also be raising an existing home to build in underneath. Structural change can be a worthwhile spend in some instances. They can even be highly profitable in certain circumstances. They must, however, be treated with more caution. The wrong sort of structural change can become an unrecoverable financial disaster.

Overcapitalisation awareness

Put simply, overcapitalisation occurs when the amount you spend on a change to your property exceeds the value it adds to that property.

Pools are a classic case of something that regularly results in overcapitalisation. It's not unusual to spend $50,000 to $100,000 on an in-ground pool. However, if you're in a suburb where buyers don't necessarily want a pool, the value they add can be minimal, despite the cost. I've even heard of one suburb in Queensland where the cost of ongoing maintenance and unstable reactive soils regularly cracking concrete gave inground pools a negative added value!

Don’t get me wrong – pools can add great amenity and be hugely appealing for home buyers in the right suburbs, leading to an increase in value. But for investors, they are perhaps not such a great investment of capital.

The only way to determine if some form of work is an overcapitalisation is to assess the property’s market value pre-upgrade and then assess a second time assuming the upgrade works are finished. If the difference between those two figures is less than the cost of the upgrade, then you are overcapitalising.

This is no easy task either. Finding comparable sales evidence that's recent and relevant for assessing both the pre- and post-renovated values is really challenging in most locations. It can take many years of experience to be able to accurately assess pre- and post-values in an area.

Of course, this isn't an exact science. Overcapitalisation is influenced by myriad factors. It can reflect the socio-economic demographic of buyers. It can be impacted by the cost of construction. It can be affected by the calibre of work to be completed, or the quality of fitout chosen.

This is why you really need a skilled property professional, like a very experienced buyers' agent, to help determine if your proposed changes are worth the dollars spent.

Know Your Numbers

Renovation is absolutely a numbers game. The cost of completing the work is obviously a key component.

Since the pandemic, the construction expenses have been growing at an alarming rate. First it was the cost of materials. In more recent times, labour charges have been on the rise. There’s a shortage of tradespeople at the moment, so factor in some delays in getting the quotes and right tradie for the job.

In fact, we've found in most of the markets we buy in that doing works to upgrade a home just isn’t worth the effort and the risk. In many instances you are far better off buying an already completed renovation.

There are other numbers to allow for too in your calculations. The cost of buying in and then selling out of a flipper project for example. Then there are professional fees like draftsmen, architects, town planners and certifiers, engineers and so on.

Also — don't forget about potential council charges. The local authority may even impose design guidelines or upgrades to civil works areas like footpaths, kerb crossovers or utility and drainage works for more comprehensive renovations that require their approval.

Assess your scope of works and plan on a spreadsheet. Add a column for “cost escalation” ie, those little cost over-runs and surprises that keep popping up during a reno – and keep good cost control.

When upgrades are OK

One final thought is that sometimes it's OK to upgrade a property even if it is an overcapitalisation. It's most justified when you're buying a home that needs a little work, and you plan to hold onto it for the long term. If you can secure the right sort of home in the location you

want, then outlaying a few thousand dollars to create an extra room or bathroom to meet the needs of your family may be worthwhile, but determining that level of acceptable upgrade isn't easy without professional guidance.

Renovation is a popular pastime for Australian property owners, but there are many financial pitfalls just waiting to catch would-be renovators. For this reason, seeking homes that need some touch-ups without the help of an experienced, local buying professional from a trusted buyers agency Australia is fraught with risk. If you're keen to explore the feasibility of real estate changes, then reach out. We have experts ready to ensure that when a hammer is swung, it's not your financial security that’s about to be smashed.

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