How The Renovators broke the cardinal rule of overcapitalisation

Without giving the results away, the auction prices on the Channel Ten renovation series The Renovators were pretty ordinary, because the houses had been seriously overcapitalised within a short period of time.

Flipping property in quick time is a complicated task that tests even the experts.

So spending 20% of the purchase costs on renovation was always going to be a hard ask on resale.

The rule of thumb is to keep the reno spend to less than 10% of the value of a home.

The prices paid by the producers of the Channel Ten series were not excessive, but they went awry in their allowances.

They took the purchase price and then the stamp duty costs into their calculations before adding the 20% renovation outlay.

There were also extra prizes thrown into the mix, making the auction results that little bit more disappointing.

The respected renovation blogger Alex Brooks from RenovationPlanning.com.au says it’s easy to spend more on the renovation than the increase it will deliver to the property.

Indeed she suggests that if the renovation will put your house near the top end of local market prices, you’d be better off selling and upgrading rather than paying more in building costs than you will gain in prices.

However, if the house was undercapitalised, it could be perfect for renovation. Brooks suggests undercapitalised houses are worth about 10% less than the area’s median house price.

Obviously if the house only needs or gets cosmetic improvements without major structural changes, you are less likely to overcapitalise.

But of course the whole point of the television series was to stretch it out for the full three-month airing timetable duration.

Cutting corners and keeping it cheap wouldn’t have been the drawcard.

Selling Houses Australia, on The LifeStyle Channel presented by Andrew Winter, typically has three days to transform a home – on a budget of only 1% of the property’s market price.

While the ratings for The Renovators was well short of expectations, that hasn’t stopped agents experiencing a dramatic increase in buy, renovate and sell project enquiries.

But buyers’ agent Patrick Bright suggests many are blissfully unaware of the true costs involved in renovating property.

“Whilst they are great entertainment, the biggest downfall from programs like The Renovators and The Block is that they don’t reveal to viewers the real cost of labour to make these improvements as well as the total costs associated with buying and selling real estate like stamp duty, legals, marketing and selling agents costs,” he says.

“The concept of buying, renovating and selling property as soon as the paint is dry can be profitable if executed correctly, however for most people is almost a guaranteed way to make a loss,” says Bright.

“Most would-be renovators who try to copy the formula seen on TV hoping to make a quick profit will end up bitterly disappointed and lose a lot of money.”

Following three months of hard work, August, Peter, Luke, Melissa, Natalia and Michael’s houses will have their auctions broadcast tonight.

The winner will be the contestant with the property that has increased the most in value. They will take home the combined profit of each of the six houses after auction, which somehow just doesn’t seem fair.

This article first appeared on Property Observer.