Beware of Overcapitalizing – Build for the Area and Market

Blog capitalization

Overcapitalisation is one of the most common real estate mistakes. This can be avoided by being aware of a suburb’s median price and not going too far above this price for a similar style of property in that area. If a property is improved beyond the median price, it generally leads to smaller profits when sold or being on the market unsold for a long period of time – not good if you have to sell.

It is important to realise that most suburbs have a median sale price and an upper sale threshold specific to that suburb. Even different streets in your suburb have different price thresholds. That is because the houses and the general streetscape have considerable influence on the value of homes in each street. Before building or renovating it is important to consider the housing styles, demographics of your suburb, and sale prices achieved of other homes in the area that have recently sold.

Overcapitalisation occurs in many ways: adding fixtures and fittings that are not aligned with surrounding houses. It is important that your house does not look ‘out of place’, e.g. a mansion with a pool, tennis court and manicured lawns and gardens would not be suited to a lower socio-economic suburb and this would impact on the price you would get if you sold the house.

Prior to building your new home in your chosen suburb, it would be worthwhile to attend a couple of ‘open houses’ to see the style of the suburb, the additions to the houses, updates, quality of fittings, quality of craftsmanship and amount of space. Taking these details into account and looking at the value of the property, including the eventual sale price, will help you determine what kind of house sells quickly and for the best price. Also, it helps to discern the community market and build to suit that market. Is the suburb design modern homes or post war weatherboard houses? Are the homeowners, families, young couples or mature couples?

Once you have this knowledge, you can choose a home design to suit the demographics and community you will live in. This will assist in resale when you decide to move on.

4 Tips to Help You Avoid Overcapitalisation

1. Find out the pricing disparity in your chosen suburb.
If you build a new home and the house and land ends up costing $550,000 while the pricing of homes in the suburb is $450,000 to $500,000 you will lose on the resale.

2. Visit open houses in your area.
Viewing houses in the suburb helps you to assess the market, what features are desired in the homes. You can then design a home to suit this market.

3. Talk to a real estate agent to find out what features attract more buyers or renters.
By talking to local real estate agents you can find out exactly what buyers and renters want in their homes. An example of this is: a second bathroom will more likely be a better selling point than a butler’s pantry in a family-friendly neighbourhood. You may not be planning on selling your home soon but it’s always a consideration for the future.

4. Budget wisely for your renovation/ build

Research the costs of doing your renovation or build, make a budget based on this research and stick to it as closely as possible. Make sure you factor in any surprise costs that may occur.

If the homeowner is living in this home for the next 20 years, it is fine to improve a property to a value beyond a median price, for lifestyle reasons and the owners’ enjoyment and not to potentially make money from it when it is sold. The homeowners will get the full value of the improvement while living in their ‘dream’ home.

If you would like to discuss this further please give me a call

Ian Davis
OJ Pippin Homes Consultant
0433 110 098

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