Thursday, February 10, 2005

The Dangers of Overcapitalising

Renovate Wisely - Don't Overcapitalise

Are you risking diminishing the value of your through home improvements and renovations. Some homeowners might be shocked by this statement. How could renovations devalue my home? I thought home improvements always increase the value of a property. While owning a home is a good investment and renovations generally are a good thing this is not always the case.

According to, Archicentre, the Royal Australian Institute of Home Advisory Service, many homeowners are paying thousands of dollars only to devalue their homes. One of the ways they do this is by overcapitalizing which means to improve a property beyond its resale value. Unfortunately, there are many other factors involved which impact the value of your home in addition to your home itself. The neighbor’s houses and the general streetscape have considerable influence on the value of homes in the area. Before renovating it is important to consider the housing styles, demographics of your neighborhood, and sale prices of other homes in the area that have recently sold.

For example, if you are living in $100,000 house you will not get a good return on an investment in a $35,000 bathroom. The general rule is that you should not spend more than 25 per cent of the value of your home on home improvement renovations. Swimming pools are a good example of additions to a property that often add no value. Many buyers do not want the work, expense, and potential for accidents that come with a pool.

Before you make the decision to renovate or buy a new house consider the following questions carefully.

1. Decide what it is you are looking for in a final result and ask yourself if it will be cheaper to buy a different home or to renovate your old one.

2. What is the average selling price of homes in your area?

3. Will renovations alter the appearance of your home so that it appears our of place in the neighborhood. Check the styles of other homes in the area. Keep in mind it might be a better idea to match or keep in step with the styles of other homes in the area. A poor design could devalue your home by thousands of dollars.

4. How much will renovations cost compared to what you paid for your home. What is the expected increase in value as a result of the renovations? Will the renovations actually cause your home to lose value?

The decision to buy a new home or to renovate is not one to be taken lightly. It is recommended that you think through every aspect of the project prior to getting started. Seek the advice of a local professional architect as well as a real estate professional if necessary to determine how the proposed renovations will affect the value of your home.

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