Let The Block Glasshouse results serve as a reality check for all would be renovators

Guest observation

The sales results on The Block may be shocking to some, but not to those of us who understand renovating and development risk.

Developing and renovating property by nature is a high risk activity. Many an enthusiastic investor has been sucked into the idea of renovating or developing for profit, without fully understanding the ramifications let alone their own risk profile or that of property developing as a strategy.

The results on The Block are evidence of the reality of what can happen when renovating; the need to fully understand the importance of location, the target market, the competition of other stock in the marketplace and not overcapitalising within the development itself.

Risk is the extent to which you are willing to expose yourself to loss, in return for a particular level of gain. This applies to an individual's personal tolerance for risk as well as the risk associated with different types of wealth creation strategies including renovating or developing for profit.

In short, The Block is a television program that is built around the strategy of renovating for profit. In each instance, the production company determines the type and location of the properties purchased. They take the risk hoping they will recover their costs while enabling the competitors to potentially win a cash prize and earn any profit made, over and above the reserve that they set (assuming there are profits).

The risk that the competitors take on board is their willingness to sacrifice income, time and time with family in exchange for a possible prize of $100,000 plus profit share. In doing so they are totally dependent on the production company purchasing not only the right type of property that will appeal to buyers (apartments or houses), in the right location (suburb and position in suburb), but ensuring they don't overcapitalise on the renovation, so that the reserve is reasonable and allows the contestants to make a profit.

So why is it that one of the worst properties (Chris and Jenna's) earned so much profit and three superior properties earned almost nothing by comparison?

What I observed in Sunday night's auction were several things:

1. There were at least two buyers who were prepared to substantially overpay for the first two properties, given their location, size and type of property (i.e. average location in a reasonable but densely populated suburb on a busy main road). These first two buyers skewed the results for the rest of the properties.
2. The three other buyers weren't prepared to overpay and once the first two buyers dropped out, there was little demand (competition) to drive the prices up beyond the reserve on the remaining three properties.
3. The calibre of auctioneer i.e. where they start the auction and how high their increments are can make a difference to the result
4. Auctions only work to create outrageous results when the demand for a property is greater than the supply, especially if the property is unique or boutique. The results indicate that The Block brand wasn't enough to make up for Prahran being an inferior location to Albert Park and even South Melbourne.
5. While design is a factor and important, it's not everything. Buyers want to ensure that they are also buying a property that has the potential for strong capital growth, even if it is as an owner occupier.
6. These apartments weren't on single floors, like those on The Block Sky High, or in an attractive boutique property like Fans v Faves. Neither were they houses, like the Dorcas St properties. Attracting ridiculous prices was always going to be a struggle.

In addition, the concept of buying below 'replacement value' is irrelevant if the renovator over capitalises on the renovation in the first instance. That is often just poor decision making on behalf of the renovator and means nothing when it comes to actual 'market value'. This is where the importance of suburb, location in suburb, level of competing stock on the market, type of property and other factors come into play.

While devastating for three of the couples who walked away with almost nothing, the moral of the story is that not all property performs the same way. It is a highly complex beast and not for the faint hearted.

Renovating or developing for profit is always high risk and only those with a high risk profile and solid understand of how to reduce development or renovation risk should undertake it.

Understanding these issues will minimise the chances of making costly mistakes and ensure the greatest possible change of success and importantly profit.

Miriam Sandkuhler is the founder of Property Mavens - a specialist property advisory firm based in Melbourne. She is an Accredited Property Investment Advisor (PIAA), Licensed Buyer Advocate and REIV member and award nominated Buyer Agent, with fourteen years of real estate experience in two states. She is also the author of the book Property Prosperity.

Main picture courtesy of Channel 9.