Who will take the profits when selling?
For many of us, our home will be the largest wealth creating asset of our lifetime. It offers potential to grow in value through ways like capital gains or considered strategies like renovating. The selling of that asset is a primary event for tapping into that value and realising some decent profits. But who will be the extractor of those profits - is it the vendor before the sale or the purchaser, afterwards?
Blogger: Laorence Nohra, Tradebusters
A user of our service (let’s call her 'Jane') had purchased a 'renovators delight' property six months ago and then proceeded to carry out a mid-scale renovation. Jane was delighted to share that the property was recently professionally revalued showing a profit of $70,000 (and that’s after purchase price and renovation costs). Not bad considering the renovation works were completed in less than three months.
Of course our team was thrilled for Jane’s success, but it did have us thinking. If Jane just made a “paper” profit of $70,000 by renovating after purchase then had the vendor (let’s call him 'Bill') just missed out on banking $70,000 but not renovating before sale?
Now, about Bill. How long would it take Bill (based on his current salary) to actually save $70,000? Was it 1 year, 7 years, decades, never in a lifetime? Now assuming Bill was just average Bill and not the CEO of some large company, I think we can safely assume that it would probably take Bill some years to save $70,000.
Our thoughts continued. Was Bill even aware that he had just potentially lost out on the opportunity to make the largest cash savings of his life?
Maybe like many other home-owners, Bill simply put the house on the market in its current run-down state and without even assessing its potential to extract additional profits.
Certainly, not every property will return a profit on renovation and sale due to various factors like market conditions, location or overall costs, and so careful due diligence is essential in order to evaluate if it will be a rewarding move.
This includes consideration of the following:
• Over- capitalisation. This is the biggest risk with any renovation and sale. It is important to know how far you should take the renovation project to boast the value of the property. It could be a few cosmetic changes like a fresh coat of paint or new flooring, or it could be a complete transformation involving additional rooms or another level, if it could mean superior profits.
• The likely selling price of the renovated property. Then minus the purchase price, all the costs associated with buying, selling and holding the property, as well as the expected renovation budget. If there is a healthy profit left over, then renovating before sale could be well worth it. A good local real estate agent can help guide you in this area.
• Renovation complexity. Do you have the time, patience and experience to take it on? This may depend on the reasons for sale and urgency to get the property to market. A cosmetic renovation is fairly manageable and can be completed within weeks, whilst a structural renovation, could take months (if not longer). Further the larger the renovation, the greater the risk of time and budget blow-outs. Working with the right experienced tradespeople is even more crucial to minimise such risks.
So when it comes time to sell your home, ask yourself - are you going to hand it over to the purchaser and without even analysing how much you are giving away? It may $5,000, $40,000 or $100,000 plus. Don’t be a Bill! It could bank you a new car or even that second house deposit.
About Laorence Nohra
From the jet setting corporate world of accounting and finance, Laorence Nohra is the CEO of Tradebusters, one of Australia’s first personalised tradesmen service providers.
Based on the principal that the best way to find good tradespeople is through a quality ‘referral’, Tradebusters aims to help homeowners take away the time, guesswork and risk of sourcing good tradespeople.
As an outsourcing and operational efficiency expert, who has held a number of international posts with global corporations establishing shared service centres across the world, Laorence now works actively with homeowners, real estate agencies and trade businesses across Australia to unlock and realise the benefits of effective outsourcing.
Tradebusters has been featured in The Sydney Morning Herald, The Daily Telegraph as well as various online, local and industry related publications.
“Tradebusters is Tradeblogging” is aimed at sharing with you real life experiences so that any home improvement or renovation job, whether it is big or small is stress-free, positive and rewarding. That’s all part of Tradebusters difference!
