To over Capitalise on a property is when you improve a property beyond its resale value. In other words, you spend too much money on renovations and won’t be able to recoup all your money if you decided to sell.
For example, you buy a property for R1.5 million and do R400 000 of renovations, but when you try and sell the property it will only sell for R1.8mil, you would have effectively lost R100 000.
The total investment would have been R1 500 000 + 400 000 = R1 900 000
Market value / Sale price = R1 800 000.
Loss = R100 000.
Now you’re probably asking, “why wouldn’t it sell for R1.9million or more if I invested that money into improving the property?”
This could be due to a number of factors.
The type of renovations.
Not all renovations have the same value. For example, if you added a 3rd bedroom to a 2 bedroom house, that would add a lot more value than a 5th bedroom to a 4 bedroom house.
A pool for example, might not add as much value as it cost to install. Whereas a small investment into the garden could fetch you better offers, higher than what it would cost to improve.
No demand for the type of property or the renovations you made.
When making renovations, especially if you’re planning on selling the property, it is important to find out what the current trends are. What does the market want? 4 Bedroom houses with a cottage? Or 3 Bedrooms with plenty of garage space? What’s trending, tiles or carpets? Curtains or blinds?
The neighbourhood price cap.
Say you buy a property for R2 000 000 and the do R800 000 worth of renovations. But the median price of the neighbourhood is around R2 200 000. When you bought the property you may gotten a good deal because it's below the median. However, now that you’ve invested a total of R2.8 million into the property you may find it hard to sell above the median of R2.2m.