Should You Renovate Your Home Before Selling It?

By Craig Lowe

 

Doing up houses is engrained in New Zealand’s culture. The general wisdom says that buying a house that needs work, then fixing it up, is one of the best ways of building equity. Additionally, people seem to have a ‘territorial’ instinct; they want to add their own stamp to a house once they move in to ‘make it their own.’ The popularity of home renovation TV shows like ‘The Block’ is testament to what appears to be a national obsession.

The consequence is that ‘potential’ becomes such a huge selling point to home buyers that, somewhat ironically, an unfinished property will often sell for more than the finished product once you factor the cost of the renovations into the equation. It still amazes me how many people clamber over each other to purchase a ‘do-er upper’ or a ‘blank canvas.’

Although there are buyers in the market looking for finished homes, I would argue that they are the minority, particularly in the more affordable price ranges. Also, buyers who want finished homes are often very picky as they know exactly what they want. Most of us are biased to think our taste will be popular. The reality is not always the case. I have seen many renovated properties ‘fall between the cracks’ because, for one reason or another, the style just hasn’t been what buyers wanted.

Professional property developers know that to make money they have to achieve economies of scale. High rise apartment buildings and multi-site subdivisions can be very profitable because the cost of building the individual units come down due to the benefits of building so many at one time. When you renovate or build a single property you pay significantly more at the margin. Compounding this, inflation has taken renovation costs through the roof in recent years.

What if you do the work yourself? DIY weekends are good, but to know whether it was all worthwhile, you must factor the cost of your time into the equation. Economically speaking, the best return you can get on your DIY is the hourly rate you would pay a tradesperson to do the same work. At worst, you will incur an opportunity cost if your time is worth more than that. In other words, the economics of the project remain the same and, in effect, you have employed yourself at the tradesperson’s hourly rate.

Finally, if you have owned the property for any significant length of time, the true return on your capital improvements is going to be impossible to quantify. To measure it you need to know exactly what the property is worth immediately before the improvements, not what you paid for it many years ago. Unfortunately it doesn’t matter how many appraisals or valuations you get, a properties true market value is so uncertain that, unless you recently purchased the property, there will be no way to know for sure if you have made money from your improvements. Consider this: If you did not already own your home, would you buy it at today’s value, renovate it, and then sell it immediately in an attempt to profit? Financially, this scenario is identical.

I’m not saying it’s impossible to make a profit from renovations - some people definitely do - the point I am making is that it is harder and more risky than many people realise.

So what work should you do before selling? The answer depends on who you are, what skills you have, what condition your house is in, and who the likely buyer for it is. In general, the least risky option is to get a home as tidy as possible with the least amount of expense. Doing gardens, painting inside and out, replacing rotten weatherboards, water blasting paths, de-cluttering – all of these simple, easy and inexpensive things are likely to increase the appeal considerably with almost no risk of overcapitalising. If your kitchen, bathrooms and general interior decoration is out of date, you can use it to your advantage in the marketing and advertise the ‘potential.’ You might be surprised at the result you can achieve without taking any risk at all.

Renovating a home for your long term enjoyment is a different equation altogether. Work out what you like and what you can comfortably afford; do it and enjoy it – but don’t get so emotionally attached that if you decide to sell in the future you feel you must recoup every cent as it doesn’t always work out that way.

I am always happy to advise people what work needs doing before sale. I can refer reputable and cost effective tradesperson who can get the inexpensive but value enhancing jobs done quickly. If you would like a free no obligation appraisal of the value of your home, call me anytime on 021-764-647.

 

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