The danger of over-capitalising

 In Newsletter

I recently watched a re-run of one of my all time favourite shows on PayTV- Grand Designs.  For those not familiar with the programme, architect Peter Maddison visits Australian home builders who are constructing custom-made and often unusual homes. Their journey is documented and televised from blueprint and planning stage through to final completion, and it makes for compelling viewing.

There have been trials and triumphs on the show, amazing transformations and highs, as well as heartbreaking lows for those brave enough to not only take on these residences, but also subject their journeys to the scrutiny of the viewing public. One such home owner was the entrepreneurial Drew Muirhead, who built a mammoth undertaking in the small suburb of Sydney’s Cottage Point, a suburb on the northern banks of Ku-ring-gai Chase National Park.  Home to just 52 residences, he was drawn to this quiet piece of paradise and undertook the task of designing and building a beautiful sandstone and timber waterfront multi-storey house, complete with disco room, private pontoon, jetty and wet-edge pool.  It turned out to be a showstopper of a residence, thoughtfully built into the hill and with amazing bush and water views from almost every room.

At the commencement of the project, Drew told Peter costs were likely to be around the $3m mark, however as the build progressed it became evident that funds became a problem, and it was obvious that Drew was struggling to maintain his initial positivity regarding the build.  Sadly, upon completion he ended up having to place this amazing dream home on the rental and eventual selling market, obtaining just $3.35m in 2013.  With all options gone awry, the debt obviously became too much for Drew.  With initial expectations of more than $6m (the price of the other most recent waterfront sale in Cottage Point) it must have been a blow to him, that despite all his hard work (not to mention stress) he lost a significant amount of money on this project.  Not only the initial cost of the land, but the project and holding costs would have contributed to a hefty loss.

The definition of over-capitalising is to “place a nominal value on the capital of a company or asset higher than actual cost or fair market value”   In Drew’s case, it was obvious that this is what transpired.  Not taking the resale or likely “real” market value into account is the downfall of many an emotive home owner. There is a reason why property experts advocate buying the “worst house in the best street” and why location is increasingly important.  In order to make profits on property, purchasers need to be savvy in investing time into due diligence, before moving forward with any projects.  Being king of the castle is only going to pay off if you have another king willing to pay for the castle, and kings aren’t exactly dense on the ground in areas where demand is likely to be low. Cottage Point, as beautiful as it is, is also somewhat isolated and therefore not in demand as it’s closer Sydney waterfront suburb neighbours.

If planning a large-scale renovation or rebuild, take into consideration ALL COSTS and factor these into the worst-case scenario before you go ahead.  What if you do have to sell?  Who will buy it and at what price?  If unsure, obtain a few local independent agent opinions even before you start.  You may just save yourself a lot of heartache, or decide to scale down the project in favour of something more “saleable”- something I’m sure Drew may have considered afterwards, when all the dust had settled.

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