Many home owners who extend or renovate their homes make money when they sell, while others wonder why they have trouble getting their money back. What are the main things to consider before embarking on a renovation or extension?

Firstly, ask yourself whether improvements will make your house significantly better than the others in your street. The best-house-in-the-street phenomenon is often an unhappy one as the values of the other houses in the street affect the upgraded one - after all, this is not a street where purchasers will be looking to spend the higher prices the vendor is after. Those who renovate above and beyond the level of surrounding homes are less likely to get good capital appreciation when they sell.

Furthermore, do the changes you are making really improve the home? Many home owners simply increase the cost of their home without necessarily adding to its value, because some alterations don’t improve the standard of the property enough to compensate for their cost. Others leave a mishmash of disparate styles, or serve only to emphasise the datedness of the original house, or are too personal in their application to have wide appeal and so end up worth less than they cost.

It is not even uncommon for home owners to sacrifice one feature to gain another, thereby adding cost but not value. Frequently reported examples of this sort of expenditure include turning a bedroom into a dining room or a garage into a rumpus room.

Ideally, extensions should be seamlessly integrated with the original home. Many three-bedroom homes don’t “work” once a fourth bedroom and family room are added - the original rooms may be too small to balance the extensions. Furthermore, bad design resulting in poor natural light or an inconvenient floor plan will be reflected in the sale price of the property. Many of these problems could be avoided if architects were consulted before the work was undertaken. “Saving” on the cost of an architect is nearly always false economy.

Sometimes renovators over-capitalise by deviating from their budget during the course of their renovations. Many homes and locations don’t justify the top-of-the-range appliances and fittings some renovators choose. And if renovators run out of money before completing the work or have to skimp on the finishing touches, the overall effect can be disappointing and limit the ultimate selling price.

Home owners concerned about investment potential should also think twice before making changes for their own unique needs. Above all, major work should not be carried out if homeowners plan to sell in the near future. Sometimes a homeowner will ask a question such as: “I am planning to sell in a year but the house could do with a new bathroom. Should I undertake the work?” It could be argued that the home owner will get the benefit of using the new bathroom for the year until the property is sold, but unless they are in a location or marketplace or price range where the cost of the bathroom will be easily absorbed in the overall capital increase during the next year, it would be pointless to renovate the bathroom only to sell it. Prospective buyers may want an entirely different bathroom, or a bathroom that is very new might make the kitchen or other areas of the house look as if they need work.

The state of the market can also be an important factor in the overall cost-effectiveness of renovating a property. In a buyers’ market, such as we are currently experiencing in most parts of Australia and New Zealand, it often makes sense to take advantage of someone else’s hard work and expenditure rather than embark on costly and time-consuming renovations of your own, unless you are so attached to the property that you can’t bear to leave it, or unless you live in an area or type of home where there is always strong demand and low supply. Trading up in a buyers’ market should actually produce a financial advantage as you inevitably ‘save’ money when you purchase a more expensive house on a slow market. (For example, do your sums and work out why a 10% ‘loss’ on a $500,000 home that you are selling is less than a 10% gain you make on the $750,000 house you are buying which is also ‘losing’ its owner 10%). Trading up makes even more sense in areas where First Home Buyers’ Grants are raising the price of the kind of house you might be selling but not affecting the cost of the home you are planning to purchase.

At the same time, quality of life is also important and the good news is that if people stay in a property long term the cost of idiosyncratic changes will usually be absorbed in most locations experiencing growth. The question of whether they would have made more money by making different choices often simply doesn’t come up.

Homeowners wanting to maximise the investment potential of their homes should consider consulting an estate agent with whom they have a good relationship before making improvements. In many instances, agents aren’t called until the work is nearly completed and it’s too late to choose a different path. Builders can tell you what your renovations will cost but only an experienced, well-referenced estate agent can tell you whether the value is worth the cost sufficiently to justify the expenditure.