Don't overspend on home improvements
Category RealADVICE
Homeowners who would like to upgrade to a bigger home or a more affluent area usually have two main worries, the first being the possibility that they might not be approved for a loan to buy their new home, and the second being the total "hidden" cost of selling and buying again, including transfer duty, legal fees, bond cancellation and registration costs and an estate agent's commission.
"And while the first can quite easily be resolved by consulting a reputable bond originator about their loan prospects and obtaining pre-qualification, the second can often prove to be a serious sticking point," says Gerhard Kotzé, MD of the RealNet national estate agency group.
"Owners can be reluctant to spend some or all of the profit they might make from selling their existing home to cover these costs, and this will often prompt a decision to stay put and make additions and alterations rather than move to an upgrade property."
There can be a positive side to this, he says, as it means that existing housing stock is being improved and modernised, and it can lead to the rejuvenation of whole areas. "However, in the current market especially, they need to be extremely careful not to overcapitalise their properties."
This occurs when owners redevelop their homes to the point where the cost of the renovations added to the original purchase price exceed the current market value of the property.
"There is obviously less danger of this happening in cases where the value of the property has already appreciated considerably over a number of years of ownership," notes Kotzé, "or when the owner originally purchased a home relatively cheaply in a more expensive suburb.
"But price growth is definitely slowing down at the moment in the face of rising interest rates that are affecting buyer affordability, so owners need to take great care when planning additions and alterations to a home in a modest suburb that these won't boost the nominal value above the current price ceiling for that area.
"This would seriously limit the property's resale potential, and could put the owners in a really difficult position financially if they were for some reason obliged to sell suddenly."
He says that homeowners need to weigh the original cost of the house plus the cost of any planned improvements against the current sale prices of properties in their area before starting any work.
"The latter can be ascertained very quickly by asking a professional local estate agent for a comparative market analysis (CMA) of the property as it stands. They will then be able to work out how much they could spend without over-capitalising the property or alternatively, whether it would actually be better to just to bear the transaction costs associated with upgrading.
"And the deciding factor will be whether or not they can add the extra space or the lifestyle features they are dreaming of within the renovation budget dictated by their area. If they can't, they will be better off upgrading to another home where these are 'readymade' - and also avoiding the mess and stress of the construction that would be required to alter their existing home."
Author: RealNet
