Overcapitalization And How To Avoid It

What is overcapitalization? Whether you are building a new home or renovating, it’s advisable to keep it within the constraints of the price range of homes within your community. You can put a million dollars’ worth of improvements into a 500m2 block in a good suburb, but it will not come close to giving you a million dollars in resale value. This is overcapitalization. Even though there may be ‘real value’ in the property, its priced outside of what the local market can bear.

How Do You Avoid it?

The best way to avoid overcapitalization is to obtain a better understanding of price bands that exist within your target area. A value referred by your lender can help you with this. If you are doing it on your own, you would need to identify what price bands are in place by looking for the obvious. For example, a 3-bedroom, 2-bathroom, double garage home on a 600m2 block, which is set on an airport path needs to be compared to an area with the same character and unique points. Using this approach will allow you to identify all the features and characteristics that your home will have after it’s complete.

After that, looking at recent sales of homes with those characteristics in the area where your home is and staying within the specified area will allow you to create a median price. For each sale of a home that is anywhere close to having the same features and characteristics of yours, write down the price and whether the home is more or less valuable than yours will be. This should give you at least a rough ballpark idea of what your home will be worth in today’s market.

What Next?

Now that you understand what overcapitalization is and how to ensure you don’t run into it with your new home, here are a few things to consider.

  1. If it is your first home; the average Australian will have 5-6 homes during their lifetime
  2. Are you willing to maximize your borrowing capacity based on this information?
  3. Do you want to risk having your valuation come back short due to lenders believing its overcapitalized?
  4. Do you want this home to be an investment property in the future, moving onto a bigger project in the future?

This is the most common occurrence we at First Home Buyers have with clients. Fortunately for our clients, we ensure 100% transparency in explaining this and they understand that the home in Rostrevor or Athelstone will come. But for now, it’s a start jumping out of the rental roundabout and into your first home.

For further information, feel free to contact one of our friendly consultants to find out more on how to minimize over capitalization on your first home. 

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