A Fixer-upper Without Breaking The Bank
So you’ve found a property that is undervalued yet screams with potential and which would provide a great opportunity if you could just renovate the kitchen or bathroom. But before you get down to the business of renovating and begin browsing through color charts, there are certain things you should know. These are mistakes that you should avoid at all costs if you are buying to renovate while protecting your finances, profit margin and your sanity above all. Below is a look at 10 mistakes that you should avoid when buying to renovate. The actual work to renovate your kitchen or bathroom could actually be the easiest part. Here are the mistakes to avoid:
A frequent mistake that many investors make is fail to accurately cost out the renovation upfront. Even before you make an offer, you should know the detailed costs to renovate. Instead of simply relying on a ballpark figure, for instance saying “I’d like to spend 100,000 to remodel my kitchen or bathroom” you should break the amount right down to the number of power points you wish to add, doors you want to replace, and more. For most homeowners the drawing up of house plans is all that matters at the planning stages. The excitement and anxiety of visualizing an improved home becomes overwhelming during the house plan designing stage. During this stage, project cost considerations becomes the last thing on many homeowner’s lists of crucial items to guard against.
The more detailed your information is concerning what you wish to do with your project, the more accurate the cost projections will be. Use a checklist when inspecting the property to ensure that you capture the tiniest of details of what will need to be removed, added, repaired or changed.
This level of information concerning the property will make it much simpler to obtain and compare quotes from tradesmen, as well as get discounts on materials by providing them with a complete list of what is required. It is advisable to source as many quotes as possible before buying the home, such that you are able to discover any unknown costs in the financial feasibility.
Failure to do a detailed financial feasibility beforehand is the downfall of most home buyers. They instead make wild assumptions and guesstimates that they will be spending x amount, only to discover at the end of the project that they have used up almost twice as much as the original estimate. The most beautifully remodeled kitchen that you’ve just seen has cost lots of money! This failure to crunch numbers is what makes many renovators miss out on making a profit or even a loss upon completion of their renovation projects.
Failure to Do a Profitability Analysis
Upon working out the costs of your renovation, you will next need to calculate the amount of profit you will make in the financial feasibility. Many investors struggle when analyzing a deal and calculating profitability before they purchase a property, such that they either miss out on the opportunity or end up walking away with little or no returns.
As you analyze to see whether the project will be profitable, you will need to factor in all project costs which may include loans, holding, purchasing, selling, adding value, as well as factor in the resale that you can achieve after completing to remodel your kitchen. A profitability analysis is key to understanding the amount of profit there is in your potential deal. Not only does this help in comparing different deals, but it also makes it simpler to analyze the different variations within that deal.
Making a Rash Offer
If you identify a property on the market that is prime for renovation, be sure to take into account the renovation costs while negotiating the price. The purchase price should reflect the profitability analysis that you performed, and be backed up by the costing of the renovation and financial feasibility information.
Do not shy away from including a printout or screenshot of the research that you have conducted to demonstrate to the agent how you arrived at the figure you are offering. The more information you provide them on the basis of your offer, the easier it will be for them as they will be able to present to the vendor the supporting information that will increase the chances of your offer being accepted.
Failure to Plan
Failure to have a clear plan of the type of renovation that will be required could result in cost overruns, with the outcome failing to meet your original objective. This can be easily solved by ensuring that you have an appropriate and proper plan that includes either a written scope of works (a specification) or, for the more complex works, a set of building plans that provides a visual representation of the required works.
If you intend to outsource the renovation to professionals, this may entail paying a draughtsman or architect to draw some house plans. If you plan on coordinating the renovation by yourself, while using different tradesmen for various aspects of the project, then it will help to show them photos and magazine clippings of the look that you wish to achieve. Your architect may also be in a position to provide you with rendered 3D models that he produces together with the set of house plans for your renovations.
Confusing Fiction with Reality
Forget those “Reality” TV shows that show an entire kitchen or bathroom being renovated and transformed magically within one day. To renovate a kitchen or bathroom in real life looks nothing like the sort on entertainment TV. In fact, you cannot magically renovate and transform any kitchen within one day. Chances are to renovate a kitchen or bathroom will take a minimum of 4 days and not everything will magically go according to plan as they do on TV.
It is important to beware of the realities of how long your project will take the amount of effort required, and the costs to complete the project. These are factors that never come up on renovation TV shows. Instead of watching TV, visit an actual site to see what its actually like to renovate a kitchen or bathroom.
Renovate what exactly?
The main reason why many renovators end up overcapitalizing is not just because they end up spending too much money on the improvements, its more about the types of renovations that they decide to do. Rather than using your heart decide, renovation decisions should be based on what will achieve the best returns.
It’s imperative that you be very selective with regards to the renovations you will perform, and then only perform those ones using materials that will add the highest value. The type of renovations you decide to do will largely depend on the type of property, its location and your target market for resale. It is your responsibility to identify the best and most appropriate use of your site that will produce a profitable outcome.
No Time Management/ Organisational Skills
Do not approach your bathroom or kitchen renovation project in a manner that is ad hoc and almost chaotic, completely lacking in organizational or time management skills. The lack of professional skills and structured discipline onsite, an inability to work to a system or manage the project in an efficient and effective way will cause blowouts in cost and time.
A common problem that arises during renovations is that the renovator takes into account the mortgage holding costs only for the renovation time, without taking into account the other time elements of the deal. The costs of your mortgage are a significant expense for your project. It is therefore important to factor these correctly into the financial feasibility to avoid a cost blowout and a profit reduction.
Renovate to Your Taste – Not that of Your Target Market
If you are unaware of the demographics of the suburbs in which you are renovating, who the tenants or buyers are, as well as what they desire in a property, you could end up creating something that nobody wants. It is important for renovators to always understand who the target buyer of the renovated property is before even buying the property themselves. Don’t make the mistake of renovating the property based on your personal preferences, as opposed to that of the demographic you want to purchase the renovated property.
Unaware of When the Resale will Take Place
Timing can greatly impact the amount of money for which you will sell the renovated property. Take into account the time of year in which you take your renovated property to the market for sale. Certain seasons can translate into a massive price difference that reduces your profitability. Many renovators sell their completed renovation projects immediately upon completion in the hope that a buyer will come along. They fail to take into account the time of year, as well as the considerations for demand and supply during that particular season. Be sure to research on stock levels and subsequent price levels for every season.
Paying Too Much for Labour & Materials
When renovators are lacking in time, chances are they will not negotiate on the trade labor and goods, and therefore end up paying too much for their materials and goods, which in turn diminishes the project’s financial viability. Take the time to learn how to project manage your site just like the pros do.
Many renovators blindly walk into projects unaware of what it is going to entail, how much it will cost, how long it may take, how to add value and obtain the highest returns, the order in which things need to be achieved, and how profitable the venture will be, even in the worst-case scenario. Do not allow mistakes in identifying and accurately calculating the profitability of deals to increase your risks and cost you the chance to recoup on lucrative profits from renovating your home.