The Value of Functionality – Toronto Realty Blog

You’re all familiar with the term, “on paper,” correct?

When something is “on paper” as opposed to in reality?

There’s an argument to be made that something is either better or worse, on paper, or not.  Or that it’s worth more, on paper.  Or not…

Like when my stock broker told me not to sell my shares of Nortel Networks in 2001 as they were spiralling toward zero, because to sell them would make the loss real.  For now, the loss was merely………wait for it……….on paper.

I have long argued that when it comes to real estate, the “on paper” values that exist, should not.

When I first got into the business, I was working with a builder who taught me a thing or two.

He walked me through one of his projects during the framing stage and showed me what was going to go where.  The master bathroom was absolutely gargantuan, compared to the rest of the house.  “Why so big?” I asked him, to which he replied, “We need room for the jacuzzi tub.”

I laughed.  “Who actually uses those things?” I asked him.

“Nobody,” he said as though the answer was obvious.

“So why are you putting one in?” I replied, and he shot back, “Because it makes the house worth more.”

Wait.  What?  Nobody uses jacuzzi’s, but they’ll pay more for a house if it has one?  Why?

“It just does,” he explained.  “A house with a 5-piece master ensuite is worth more than a house with a 4-piece master ensuite, even if we made an awesome steam shower out of the space where the jacuzzi goes, and added extra storage.”

It made no sense to me.  Those Jacuzzi’s get very little actual use, and yet their presence increases the value of the home?

Call me naive, but I’ve always thought that function is everything in a house or condo.  And yet I see this play out in the exact opposite way in practice, all the time.

The idea of “on paper” value as it pertains to real estate essentially infers that the value is less, in practice.

So would somebody pay more for on-paper value in a house or condo, than actual functional space?

Take a look at this photo:

What do you see here?

I know, this feels like an “MLS Musings” picture, and it almost was.

Because I too felt like that toilet int he back of the photo was a reflection in the mirror.

But it’s not.

Those are two toilets in the same bathroom.

Or, is this two bathrooms?

Really confusing, I know.  But take a longer look at this photo and tell me what you see.  Is this one bathroom or two?  How is this laid out?  How does this make any sense?  And above all, is this functional?

Let’s take a look at the actual floor plan:

There you can plainly see that there are two bathrooms; one is an ensuite bathroom to the master, and one is a guest bathroom, or “2-piece” in the hall.

This developer got cheeky with this layout for two reasons:

1) He’s used the shower essentially in both bathrooms, so they’re both kinda, sorta, maybe 3-piece baths.
2) This likely saved money from a construction standpoint, since all the plumbing is inclose proximity (as well as in the kitchen behind the wall).

But when you sit down and look at this layout, and the picture, how can you not channel your inner 7-year-old and just say “That’s stupid!”

Because in my opinion, this layout, while trying to be cool, or smart, or save space, is just really, really stupid.

Why would any condo owner want their 2-piece guest bathroom to have a shower separating it from the master ensuite?

Why would any condo owner want this lack of privacy?

Why would any condo owner pay for a “two-bathroom” condo and be satisfied with this?

In my opinion, this “two-bathroom” setup exists as such only on paper, and the actual layout lacks functionality.

And yet I’m sure that there was zero difference in price when this buyer purchased off floor plans.  In fact, I’m willing to bet that this was sold as a condo with two “full” bathrooms.

The most interesting example I’ve had in recent memory of “functional” versus “on paper” value had to have come with an east-side listing of mine earlier this year.

By way of introduction, let me ask you this: how many bathrooms do you need in a 700 square foot condo?

Loaded question, perhaps.  In days’ past, a 700 square foot condo might have been a 1-bedroom.  Today, this could be a 3-bed, 3-bath, based on how condos are shrinking.

My listing was a 700 square foot, 1-bed, den, 1-bath, and it was spectacular.  The layout was open, high ceilings, upgraded finishes, floor-to-ceiling glass, and there was a free-standing wall between the living/dining and the bedroom, meaning both the bedroom and the living space faced the window – something that’s becoming more and more rare these days as so many bedrooms are in the middle of the condo, with no window.

There was one unique aspect of this condo, however, and that was the fact that it’s the only version of this particular floor plan in the entire building.  You see, this was originally a 1-bed, den, 2-bath unit, but my client purchased the unit in pre-construction (not through myself), and edited the floor plan.

The original floor plan had a 3-piece ensuite bathroom, and a closet that would have been suitable for John Smith, circa 1878, in that it really only fit one pair of pants and one shirt.  There was a full 4-piece bathroom off the living space, and my client, upon examining this floor plan, concluded that he didn’t really “need” two full bathrooms in a condo of this size.  More importantly, he did need a place to put his clothes!

So he edited the floor plan, and turned the 3-piece bathroom into a walk-in closet, decked it out with custom closet organizers, and basically had the only floor plan like it in the building, with a closet that would suit a couple, or a single clothes-horse.

He lived merrily in the unit for several years, and then we put it on the market.

But low-and-behold, every buyer that expressed interest in the unit turned around and told us that the unit wasn’t worth nearly as much as the comparable sales, because this had only one bathroom.

On paper, I agree.  Sort of.

You guys will likely fight me on this one, but that’s exactly my point!

A 700 square foot condo doesn’t “need” two bathrooms, and it sure as hell needs a place to put clothing.

If this was me personally, I would much rather have a massive walk-in closet than a second bathroom, that merely means I can pee to the east, or pee to the west.

This layout has way more functionality for a person actually living in the unit than the original layout with the second bathroom and a shoebox for a closet.

But on paper, it hurt us.

Every agent that chimed in with his or her two cents said, “Yeah….but….you don’t have the second bathroom.”

It doesn’t matter that most of these people didn’t want or need the second bathroom; it matters only that it doesn’t have one.

A unit with two bathrooms is “worth” more than a unit with one, correct?

Okay, so what if this unit had three bathrooms?

Or four?

Am I being silly now?  Because if I am, then where do you draw the line?

How is a 700 square foot condo with two bathrooms worth more than a 700 square foot condo with one bathroom, but a 700 square foot condo with three bathrooms makes no sense and is suddenly worth less than the condo with one?

This sale was a frustrating one, and we actually ended up reducing the price, which is rare in this market.

The buyer pool valued something that we did not, and vice versa.  And while I know I’m right, I also know I’m wrong.

That is the trouble with “on paper” value in real estate.

Time and time again, we place a higher price on features of a home that might not actually give us more marginal utility.  In fact, many of these features actually provide us with less.

And in this context, we almost blur the lines between “price” and “value,” since we may value the feature monetarily, and this might result in us applying a higher price.  But when it comes to “value” in a functionality setting, it’s just not the same.

In effect, we really confuse ourselves as to what “value” is.

I suppose we could apply the same logic to real estate on the whole, which is to suggest that none of us truly “value” a 495 square foot junior-one-bedroom at $1,200 per square foot, but that is the price that the market has set, and we accept it as “market value.”

By that logic, my suggesting that a walk-in closet has more intrinsic value to the buyer because it’s far more functional, and provides greater utility than a second bathroom, may also be flawed.  By that logic, the on-paper value always wins out.

If you were comparing two floor plans – one 565 square foot, 1-bedroom, 1-bathroom, and one 525 square foot, 1-bedroom, 1-bathroom, but the first floor plan had a massive, long, useless hallway that ate up square footage, and three awkwardly-placed concrete pillars, which unit would you rather have if it were gifted to you?

What if the living space in the 525 square foot unit was 200 square feet, and the living space in the 565 square foot unit was 140 square feet?

What if that 565 square foot unit was one of the worst layouts you had ever seen?

Which unit would you want?

Most of you are tempted to say you’d rather have the functional, well-laid-out, 525 square foot unit.  But you’re kidding yourselves if you think you could pull that trigger.

“On paper,” that 565 square foot unit is worth $30,000 – $40,000 more than the 525 square foot unit.

So what really is the true value of functionality?

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