Taking the risk out of renovation-and-resale

Renovating a run-down home can be very rewarding financially as well as personally – providing you can minimise the risks associated with “fixer-upper” projects.

“The most serious of these,” says Jan Davel, MD of the RealNet estate agency group, “is the danger of over-capitalising, or spending more money on a renovation than can be recouped on resale of the property at a later date.”

And to avoid it, he says, the potential buyer should first ascertain whether the area will support the higher value of a renovated property, before deciding to purchase a “fixer-upper” home.

“This will depend largely on location and the character of the area. For example, a modest home converted into a mansion will be difficult to resell at a profit if the suburb as a whole generally attracts only those buyers on a limited budget. Those who might be able to afford the mansion would almost certainly be looking at homes in a more upmarket area.”

But this does not mean at all that there are no bargains to be found or gains to be made, Davel notes. “What potential renovate-and-resell buyers should be looking for are homes that have not yet been worked on but are situated in areas that are already being uplifted, with many younger buyers coming in, many renovation projects already under way and, ideally, good schools and public transport in place, and new shops or offices being built to speed up the renewal process.

“In addition, they should then seek the help of a knowledgeable estate agent to find out about pricing in the area – especially the average price of recently sold pre-owned properties that have been renovated, so that they can compare this with the asking price of the property they are thinking of buying. The difference in value will be the maximum they can spend on a renovation, although it would be much more prudent to allow a margin of about 20%.”

This would mean, for example, that if the average price of similar properties that have been renovated is R1m, and the price of the property you want to buy is R700 000, you should be very cautious about spending more than R100 000 on renovations if you want to resell it at a profit. And even if you are going to live there yourself, you should only consider spending more at a later date when values in the area have increased.

“And this brings us,” says Davel, “to the second biggest risk with renovate-and-resell projects, which is underestimating the cost of the work to be done and then having to exceed the margin you have set yourself in order to get the property into liveable or saleable condition.”

Here again, he says, it is very important to get expert help. “Unless you are in the construction business yourself, you should hire a professional home inspector to help you determine whether the house is structurally sound, and whether it needs expensive roof, plumbing or electrical repairs.    

“Then once these important evaluations have been made, it should be a relatively simple matter for a registered builder or a quantity surveyor to calculate the cost of the materials and work that would be needed to complete your renovation – and for you to use this information in making your purchasing decision.”

And finally, cautions Davel, you need to account for one more factor – the additional purchase cost implications in the form of the attorney transfer fees, deeds office fees, taxes in the form of duty or VAT and bond registration costs, which you should obtain from an experienced estate agent or a practising attorney prior to signing an offer to purchase

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