Can you spot profit potential?

It looks like a perfectly ordinary home – but in fact it's a house that could make you big money. Helen Brown gets a masterclass on how to add value

'Potential" is one of the slipperiest words in the estate agent's lexicon. As they lead you through dark and cramped houses, they wave their arms out of drab kitchens towards mouldering patios and suggest "potential" for an extended dining area. They conjure romantic images of Heidi-style bedrooms or trendy home offices while jabbing at loft hatches.

"The original floorboards under here should be gorgeous," they will gush, stamping on manky carpets that haven't been lifted since the 1960s. And they suggest that with only a little bit of work, and your own superior imagination and taste, the run-down home could one day be a palatial residence worth hundreds of thousands more than the current asking price, should you ever want to sell it on.

With rumours of recession on the horizon, it's time we all wised up to the realities of which home improvements will really make money – and which will not. No longer can we sit back and let our property make us money all by itself. We need something more tangible than sales spiel about what's possible. We need to know how much it will cost to turn a property into the vague vision that the agent is suggesting. We need to know the likelihood of getting planning permission for that extension. We need to know if it's structurally possible. And we need to know what it will cost us and exactly how much the work would add to the price of property we're viewing.

Enter a new London-based service provided by the folks at www.upshoot.co.uk, a company launched at the end of last year by the west London architect Adam Tarr. It works on a neat trick: estate agents sign up for their services. The agents then email the company four sample pictures of the house, plus a floorplan, and such is his inside-out knowledge of what can and can't be done to properties, Tarr does the calculations.

Look for their logo in the windows of estate agencies – there are 30 on Upshoot's books so far. "Our target is to be working with 200 agents in all," adds Tarr. "We've launched in 10 London boroughs and by the end of the year we want to be in all 32 boroughs. Many people searching for these properties will be developers but there will also be canny buyers. After all, if the property market does begin to turn down, buyers will want a safety net.

"Say you buy a house for £500,000, and then the market drops and it's worth £450,000," he says. "You'd want to recoup that loss. If you can add a loft conversion or extension, you might still be able to bring yourself back into profit, even taking into account the costs."

Ultimately, Tarr is aiming to build a database of houses he's assessed, and we'll all be able to see their investment potential – for a fee of £9.99 a month. But whether or not you live in Tarr's catchment area, we could all take a few pointers from the master, so that we too can spot real potential – and not fall prey to the sales pitch of desperate estate agents and their vendors.

To illustrate his point, Tarr takes me along to a pretty mundane-looking three-bedroom terraced house in Acton, west London, that has been on the market for a year. "That's too long," according to its owner, Paula McCarthey, who has set the asking price at £500,000. But Tarr, working in conjunction with the Townends estate agency, has worked out that spending around £120,000 in total on development – including £25,000 spent just refurbishing and repainting the existing interior – would push the value up to £750,000, leaving any potential buyer with a £130,000 profit. Not bad in a stale market.

As we get through the door, the place seems in reasonable nick – there's nothing that jumps out at me as a problem. It needs some modernisation but it's not falling down. It's clean, dry and structurally sound. McCarthey is frustrated that the last offer fell through, but she is also cautiously optimistic that the Upshoot report will entice new offers from buyers who are happy to do a bit of work to realise the potential of the home she's shared with her family for 25 years.

"It's a funny process for me to go through, because my husband's a builder and my sons are in the business," she says, "but we've never got round to doing everything we wanted to."

So, now she knows what it's worth, is she not tempted to do the work herself and sell it for a greater profit? "No," she says, "we want to move soon."

What are the signs to look for? The basic are easy to master – remember, Tarr usually works with only four photographs and a floorplan to produce his assessments. He takes a guided tour of this house in Acton to illustrate what exactly we should all be looking for – wherever we may be looking to move.

How to make the most of a property

Going up

McCarthey's house is fairly average in size for a family-friendly terrace – but it could be made a lot bigger, and the first port of call is always building a loft conversion. In almost all cases, this is the most cost-effective way to add value.

"There's a very simple reason for that," says Tarr. "You're adding at least one bedroom and a bathroom – so you can put the price up straightaway. In this case, we're looking at a total spend of about £50,000 – that's a pretty average figure, but it would look great when you're finished."

But can you always build upwards? That depends on the maximum height of the pitch of the roof. "You can rarely get into the loft with a tape-measure if you're just doing a casual viewing of a house," says Tarr, "so it's easier to stand in the garden and look along the terrace. If someone else has added a floor, you should be able to." Seeing that they've done something similar next door doesn't guarantee that you'll get planning permission, though.

"You need to look at the first-floor stairwell, too," he adds. "Sometimes they've added rooms within the house that make it impossible to get the stairs up another level – but that's not very common."

Plan on adding a single dormer window, to the rear of the house – you'll rarely get planning permission for two, or indeed for any, windows at the front of the house.

Step outside

McCarthey has a pretty generous 80ft garden – and that could spell money. It has a lean-to, but Tarr wouldn't think twice about pulling that down: "It's not doing anything to the value at the moment. You rarely get permission to do two-storey extensions on terraced houses, because you get into issues of casting shadows on your neighbours and affecting their privacy, but single-storey extensions are usually fairly good value for money, and straightforward. If you live in a detached house, then you can start considering the sort of two-storey extension that adds bedrooms, bathrooms, a kitchen – the works."

There are certain limits to the amount of space you can add to homes. If you can add a loft extension, do that first. But if you can't, use your maximum allowance on the ground floor. "Although you're not adding bedrooms, think of the wow-factor you can create with the kitchen." In this particular instance, you'd be able to extend across the whole back of the house by up to three metres – which is what some neighbours have done.

"You could budget to spend about £45,000 to extend this house, including the price of a smart-looking MFI kitchen – just the job if you're looking to make an impact and then sell up.

Bring down the walls

You can do a certain amount with decoration alone. "Wooden floors, fitted wardrobes, a decent standard of fixtures and fittings, and white paint on the walls are the key steps. Buy more expensive things if you really like them, but don't expect a £3,000 curved-glass shower wall to be a smart financial move," says Tarr. "In Mayfair, you can spend £400 per square foot. but in suburban London, £80-120 is a more realistic budget."

It's often going one stage further, however, and knocking down walls to create an open-plan living area – especially if you've extended out the back and are putting in a new kitchen – that really makes a difference. "The new interior you create may not add tens of thousands directly to the value of the house," Tarr. "But it would certainly help you sell it quicker if the viewers walk straight into an attractive, family-friendly, open-plan room. And if this year goes the way some people say it will, up-market family houses may be hard to shift, so that 'sale-ability' can be worth £30,000 on its own."

Going down

In recent years, in cities, it has become increasingly common to excavate beneath houses to create basements. Is it a good move? "Well, it's certainly expensive. You have to treat £100,000 as a starting price. And then you're left with rooms that are often dark. It wouldn't be worth it for this house. In fact, in most cases you wouldn't get your money back," says Tarr.

"In London, you can use this rule of thumb. If you're in zone one of the Tube map, then by all means do it – you'll make money. In zone two, do it if you want to, but don't bank on making money out of it. If you're in zone three – or further out than that – you'd be very lucky to get your money back."

And finally...

You can make serious profit by turning a house into flats and selling them off individually. "But," cautions Tarr, "you must take the surrounding area into account."

If the majority of the neighbouring houses are already flats, it may be in your best interest to retain the property as a single dwelling, in order to be unique and attract attention. Also, ask yourself if the area is suitable for a family or whether you are trying to attract young professionals – they're the ones who pay for expensive flats."

In this case, the house is best as a single dwelling – the generous rear garden would be great for a family with young children.