Is there still room to renovate and resell?
Category RealADVICE
When interest rate were low and property prices were rising rapidly, it became very popular, especially among younger buyers, to seek out older homes in sought-after areas that could be renovated and quickly resold for a good profit.
But with the prime interest rate and mortgage rate expected to be stuck at over 11% for most of the next year and property values currently only rising slowly, people buying fixer-uppers need to be very careful of over-capitalising now, and may have to hold those properties for much longer than they originally planned, says Gerhard Kotzé, CEO of the RealNet property group.
"And the same holds true for homeowners who are thinking of making any substantial improvements to their existing homes."
He explains that to over-capitalise means spending more money on a renovation than could be recouped on immediate resale of the property and that the danger of doing so does depend to a large extent on the property's location.
"However, it is not enough now to seek out older homes in areas with a history of persistent demand and increasing property values. Prospective buyers need to work with informed and experienced estate agents to research the current market trends and forecasts for the area.
"The rise in remote work over the past years has caused major shifts in the popularity of many areas, and renovation buyers need to consider what types of properties are in demand and what features are most wanted now so they can make informed decisions about the improvements that will appeal to their potential buyers. For example, if the property is in a family-friendly suburb, the focus might be on creating additional bedrooms or upgrading the bathrooms and kitchen."
In addition, Kotzé says, renovation buyers must check comparative sales records. "Recent sales of similar properties in the area will give them a good idea of the resale value ceiling of a renovated or modernised home and help them work out whether there would be any profit in a sale after their planned upgrades."
Before even thinking about such a purchase, though, renovation buyers need to do some financial homework and determine a realistic budget for both the purchase of a property and whatever renovations may be required - including a generous margin for unexpected costs that often arise during the renovation process.
"They should also mitigate their risk by having any property they plan to renovate professionally checked to ensure that is structurally sound and will not require major work to critical elements like the roof, plumbing or electrical system."
The next step, he says, is to assess the extent of alterations or improvements that may be needed and the potential return on investment for each of these. "It is important to focus on renovations that will add value to the property without overspending - and on properties that can be upgraded relatively easily and quickly.
"Property holding costs such as municipal rates, insurance and security can mount up fast, so renovation buyers also need to consider how much time it is likely to take to complete their planned changes and put the property back on the market - and to ensure that those changes will all comply with local building and zoning requirements. Any delays or fines could severely erode their profit."
"And finally, we always suggest to renovation buyers that they have a plan in place in case the property does not sell as quickly as anticipated - such as renting the property out or leaving themselves room to lower the asking price and attract more potential buyers."
Author: RealNet
