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Don't Overcapitalize
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Keep Your Architect Honest Prepare your own cost plan
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Article on over-capitalising on renovations by Jonathan Drane Don't Overcapitalise It is one thing to have a 'dream renovation', but to allow it to result in a massive new home which is not going to realise its true capital value relative to other homes in the street, is not a great outcome! We have all seen what I mean by this; as an example is the 'mac-mansion' in the street where all the others are simple bungalows. I have nothing against 'mac-mansions' except that they should be built in context with their 'commercial surroundings' if they are to realise their true value. Overcapitalisation refers to the situation where an asset is 'capitalised' or 'developed' to a point where the 'assumed value' of the improved asset is greater than the actual realisable value of the improved asset. So how do you ensure that you don't go too far with your new dream renovation, and find your self with a major part of the new home in effect having 'no value'. Comparative Value To get a handle on this you need to understand firstly how houses are valued in the market place. There are two considerations in any valuation of a property; 'comparative value' and 'market realisation'. |
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I Thought It Would Only Cost...?! Blew your budget in the first few days!!? |
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Fail to Plan?. Plan to Fail Prepare your own family masterplan |
I Had A Dream..!!? Has your dream reno turned nightmare on you!!?
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| Don't Overcapitalise Use our 'Rich House, Poor House' Method. |
'Comparative Value' is based on comparing your house to other houses in the street or suburb, which are of a comparative nature and size. Past 'sales evidence' of similar houses is researched, and your house is 'extrapolated' or placed in a 'value range' related to the other properties. 'Market Realisation' looks at the current market, and what the house will actually sell for in the current climate. This may be more or less than the house's 'comparative value' So how do you assess your new home improvements in light of this? It is easy, use the 'rich house..poor house method' |
I Jumped In the Deep End And Found I Didn't Have any Floaties!
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Rich House Poor House In any street there will be a house that has been there 'forever', and has either not been looked after, or not developed or extended. It is usually a smaller house than those in the street because it comes from a different era, or perhaps was one of the original types of house in the street. We will call this 'the poor house' for the purpose of this method. In any street there will also be a house that is much larger than all the other houses in the street, and has been, over time extended or improved, or was simply built originally as a bigger home in a different time. We will call this 'the rich house' for the purpose of this method. In the 'rich house..poor house method' we ask you to go for a walk in your street, and find the rich house and the poor house. (If you find that yours is the poor house this is really good as will unfold below). If your house is the rich house, then this is good for you on current situation, but not so good if you want to do a major renovation and extension. This would requires some thought and planning. So why is this so? Lets say that your house is somewhere between the rich house and the poor house in terms of comparative value. Based on your own 'comparative value research' you find the poor house is $500,000, and the rich house is $1000,000. You also find that your house sits at about $750,000 based on comparative values. You also want to 'keep up with the rich house' and use the rich house as a model for your new renovation. This means that based on comparative values, whatever you do to your current house in the form of a renovation, you only have an 'added value window' of $250,000. If you spend any more than this, then you will not be realising any more value based on the current comparative value snapshot. In fact you should allow a margin and spend only $200,000 to give some contingency. A Budget Is Born People think that you create a budget by working out a design or a brief and put a cost against it. In fact the budget is determined by working out where your house sits between the rich house and the poor house. In our example above, the budget is $200,000 which (by the way) does not get you much for your money in certain building market places. If you also research 'typical average building cost rates per m2 for houses in your region' and find it is say $2000* per m2 then you can divide the $200,000 budget by the $2000 per M2, and this gives you a maximum space budget of 100m2 for your new extension. This can be a sobering exercise since 100m2 is the equivalent of four rooms with a dimension of 5m by 5m each! Four rooms for your new renovation area, when you were contemplating 'how many new rooms'... glad you did the math? Article by Jonathan Drane First published March 2009 on www.jondrane.net this article is copyright all rights reserved .
If you are already in a bind with this topic, then here are some ideas*: - Try to put a hold on the current process, ( be careful with existing contracts*) and take time out to review the situation -Do your own rich house poor house method. -Re-establish a budget based on the above method. -Issue a letter addressing your concerns with design and budget blowouts to your designer or architect*. - if construction has not been contracted, then ask for a design and cost review with alternatives and ideas to bring the project within budget. -Suggest that you are contemplating briefing a cost consultant, or quantity surveyor to audit the design for cost effectiveness. - Request that the administration function of the project be separated, and made independent through a third party building consultant, or quantity surveyor.
Learn More About This Topic This topic is covered under the following on our web site: -our e-guides called 'Getting Started' and 'The Concept Phase' see our Catalogue - Our 'Family Plan', 'Space Plan' and 'Cost Plan' tool see Tool Kit - our Starter's Webinar
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* The ideas we offer are for assistance, however enactment of them requires that you undertake your own review, seek separate advice or brief a lawyer if the situation is extreme. We take no responsibility for the effectiveness of the ideas, nor are they to be taken as direct advice, as we are not privy to the actual situation you are facing. Each situation requires its own special assessment by you and other required parties.
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Whose Project Is It Anyway? Has your architect got you by the..!!?
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