The facts behind the headline when it comes to property do-up's

I can't blame newspapers / media sites / sub-editors or journalists for eye-catching headlines - they need to attract an audience and sell advertising to that audience, and there is no better headline than the combination of property and greed, or is it simply kiwi can-do attitude!

"Owners make $220,000 in a year"

However this article in today's NZ Herald is at best light on fact and rather heavy on drama.

  • "A plain weatherboard house on Auckland's North Shore sold last week for 94 per cent more than its current valuation" - the fact is it the property sold for $876,000; its 2011 Auckland assessment capital value was $455,000. It's current valuation is either the sale price of $876,000 or the valuation assessment made by a registered valuer. So it did not sell for close to double its current valuation.
     
  • "Owners make $220,000 in a year" - the difference between the sale price in March 2013 and the sale price in May 2014 is $226,000, no allowance seem be allowed for in any costs associated with owning or selling the property. As I will show below the owners made around $70,000.
     
  • "A real estate source said the sale showed there was "no sign of the market slowing up" in Auckland" - a single property sale can never be extrapolated to reflect the property market dynamics of the whole of Auckland.

I could so easily have stopped the article there, but  could not help myself when I saw this article to do some research and see what I can assess is the real story here.

The property concerned is at 13 Benders Avenue, Hillcrest - with the services of Google Maps StreeetView it takes no time these days to verify a property from a street image. The property was sold at Auction just over a year ago on the 7 March 2013 for the price of $650,000 it was marketed by Bayleys. The marketing copy described the property as "An original immaculate example of what was a modern 60's bungalow set on a near-level, full road frontage section of 954sqm"... with the ability to create and add value"

It was very clear from viewing these images  of the property just over a year ago that it was indeed an "original" and in need of renovation - a full portfolio of images is available to view via Open2view here.

Over the course of the past year the owners have carried out a classic do-up to improve the appeal of the property as the 'Before & After' images below demonstrate.

The property has been recently marketed by Barfoot & Thompson and went to auction on the 8th May and sold for $876,000.

In my judgement the owners carried out an appropriate make-over to the property to present it in excellent condition which naturally creates appeal and demand and that was demonstrated by the fact that the auction was brought forward.

However that headline keep nagging at me - did the owners really make $220,000 in a year. So here is my assessment of the facts based on my estimation. 

Screenshot_14_05_14_10_26_am.png

Not $220,000 but overall a healthy return in a year of over $120,000 representing a 94% return on the original investment of the deposit of $130,000.

However I think what we have presented here is what the IRD would judge to be a property purchased with the intention of sale and thereby deemed to be a business. The mitigating factors being the property was only owned for a year, it was significantly renovated over the year and it was clearly staged for sale and therefore unoccupied. 

Assessing this project as a business and with the help of tax advisor and accountant I have developed this more accurate financial assessment:

So legitimately the owners have seen a net profit of just around $70,000 giving a 54% return on the original investment of the $130,000 deposit for just a years worth of work, and the government collected $34,000 of tax on earned income.

The property is now a far more attractive home for its new owner. The local community has benefited from the trades people employed to do the work, local real estate agents have earned their income for their work and the owners are rewarded for their risk in this business decision. 

So who loses? - the new owners were not forced to buy; based on their evaluation of the property market they felt that the property was worth $876,000. Potentially it could be argued that the new owners will have a mortgage that is sourced from overseas funds and this costs the country, otherwise the domestic economy benefited as well as the government.