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Thoughts on adding value

We all like to find ways to add value - whether selling and striving for the best price or buying and hoping to unlock value soon after settlement. So how do you tackle it? You don’t have to look far on Google to find an expert saying things like ‘always focus on street appeal, kitchens, bathrooms’ - I even saw one claiming that planting trees achieved a 17:1 return on investment! What absolute garbage.

The truth is there’s no silver bullet for all situations. Each property is unique as are the people involved and their skills and budget. That said it’s worth considering the following:

1. Cost does not equal value. If you buy a section and erect a house, buyers do not care how much you spent to do it. Sometimes the value is more than the cost (which is why developers become active during boom markets to make profits). Whereas in a falling market, often the value drops while cost remains flat. When added value drops below replacement cost, people stop building until the market rebalances. This is partly why the construction sector is subject to booms and busts.

2. Location - the one thing you cannot change. Of course, when you buy you can absolutely choose the location – but whether the location value goes up or down after you buy is entirely outside of your control. You’ve no doubt heard the old adage about the 3 keys to real estate: location, location, location.

3. Presentation – this is certainly where the easy gains are made, often not costing a lot and more about a willingness to do the work. Clearly, mowing lawns, weeding, water blasting, window cleaning, vacuuming, decluttering are all self-explanatory. The value effect of doing this far outweighs the cost, as buying houses for most people is largely an emotional decision (perhaps not for rental investors) and first impressions really do count.

4. Kitchens & bathrooms – this one is often mentioned, and to be fair there is some truth to it – but beware. For example, when someone says ‘you could spend $30k on a new kitchen and add $45k of value’ I offer a caveat. Any value premium mostly applies when the existing kitchen is near the end of its life – physically and/or aesthetically. What I often find is that the owner simply doesn’t ‘like’ the old kitchen. But its perhaps only 5 years old and works fine. So in the above example, by removing the old kitchen, they are destroying say $25k of value - and then ‘creating’ $45k of value at a cost of $30k. Clearly they are going backwards overall here. The trick with any upgrade is to identify the weak points of the home in the eyes of your target buyer – then rank those points in order of priority on a cost/benefit basis. Is a new kitchen really top of the priority list? Or is it that the deck is too small? Or perhaps the trees are blocking the view? Its not always about kitchens and bathrooms – and even if it were, sometimes a freshen up is all that’s needed rather than outright replacement.

5. Renovations and extensions – there’s considerable scope here and I can’t possibly cover all scenarios. First off, there is a significant difference in terms of cost and hassle between redecorating, renovating, reconfiguring, and extending. This is perhaps a typical order of increasing cost and complexity - with extensions one of the most difficult. I often find those looking to extend their house have an emotional tie to the property and/or locality. They perhaps need more bedrooms for a growing family, or simply want more living space as finances allow. In my personal experience observing many such extensions, the cost often outweighs the added value. It is hard enough for a builder to erect a brand new dwelling, but with an extension they also have to remove a wall and roof section, decommission services to that elevation, marry up floor and roof lines which may no longer be strictly level, and ensure a seamless transition of floor, framing, joinery, cladding, and roofing to make it look consistent. I often caution people to think twice before attempting extensions, and perhaps consider selling and buying a larger home instead. Of course I’m generallising but please be prepared for considerable cost and obtain good advice first.

6. Gardens – I have a soft spot for plants. The reality is that while you can build a house, pour a concrete driveway, install a pool - all by simply writing a few cheques; you cannot buy mature trees. With a bare section and a brand-new home, when it comes to trees you’re forced to be patient. Now of course you can pay more for slightly bigger plants at the garden centre, but you’re not going to get established privacy and shelter instantly. While the majority of buyers do appreciate some level of greenery, overly fussy or manicured gardens generally appeal to a more limited number of buyers. Many working age home owners nowadays have neither the time or desire to spend hours gardening. Again, every property is unique, but well considered gardens are certainly very good at enhancing that first impression when a buyer arrives, and softening the transition between land and building. Occasionally trees do need to be trimmed, and views and sunlight are certainly valuable – but its worth also weighing up the effect on wind protection and privacy. On sloping sites, some form of planting can also be a great way to mitigate the need to mow steep lawns which can deter some buyers.

7. Subdivision – this is perhaps the place you can make the biggest gains (or losses). The ability to subdivide has created fortunes for many property owners in New Zealand over recent years. The value of subdivision potential is complex, and largely a function of council planning rules, section numbers achievable, the value and saleability of those sections, the value and position of any existing buildings, the difficulty in providing access and services to the new sites, geotechnical suitability, project costs, council fees and levies, credit availability and interest rates, project timeframe, and the level of competition from other developers. Quite a list! But as a homeowner you don’t necessarily have to complete the project yourself to see some benefit. There is often value in simply having the right zoning, and greater value still in obtaining a resource consent to subdivide which reduces risk for a developer / purchaser. It’s of course best to check with a planning professional or surveyor in the first instance as every situation is unique and developers aren’t always actively buying. On the flip side, and this is important, many fortunes have been lost in undertaking subdivision projects. The rewards can be significant, but so are the risks, with cost, compliance and timeframe blowouts often catching out the unprepared.

I’ll expand on each of these in later articles but wanted to offer some discussion points to get started. Every property and situation truly is different, so please treat this as general commentary only and not personal advice about whether you should or should not undertake any specific course of action.

Till next time,

Scott Morison, Registered Valuer