Overcapatalisation

By September 28, 2018News

Earlier this year we had a client who was concerned about overcapitalising on their residential property. They wanted to add to the structure and add new structures, but were wary of the project costs not fully converting to market value.

Explaining how best to avoid overcapitalising did not seem easy at our first meeting, however became obvious during a property inspection. The question property owners need to ask themselves is “what do buyers expect from this type of property, at this location”.

If your residential home does not have any car accommodation, then building car accommodation will not be an overcapitalisation. However if the new garage or carport is larger or more extravagant than is required by average buyers in your area, then you run the risk of overcapitalising.

You may have a large property in a rural location. A shed will most definitely be expected by those looking to buy in that area. The amount of sheds added before you overcapitalise may depend on the enterprise taking place at the property (and the likelihood of that enterprise continuing if the property was sold). In contrast, buyers looking for an inner-city unit will be expecting different specifications and definitely not a shed.

So asking yourself what buyers might expect from a property such as yours can be of real help to avoid overcapitalising.

Another important point we did make with our client was to try and avoid altering your current structure. We have all heard this saying, “If it isn’t broken, don’t fix it”. This is so true if you don’t want to overcapitalise. It is far safer to renovate or refurbish homes that feature out of date fixtures and are generally poor condition.

We all customise our homes to suit how we would like to live. Once owners start adding features that nobody else has, the risk of overcapitalising becomes high.

On another occasion, our office was asked to give advice on the value of a large, two storey home which had eight bedrooms. The vast majority of the surrounding development is of one level, three bedroom homes.

The owners are expecting almost double the average sale price normally achieved in this area. Sadly, this won’t happen. Reality is now playing out for these owners. Obviously, they will sell for more than the street average, but they will not recover the costs incurred at this property.

Well, I hope you gained some useful information from reading this. If you need a property valued for any reason, don’t hesitate to contact one of our offices. We will be glad to help.

Written by Bruce Coats – Certified Practising Valuer and Associate of API.