“Value”, in the context of real estate, can be a nebulous term. An insulated opinion is often formed as to what features or renovations contribute to the overall worth of a home. A better suited definition should thus be specified as “market value”, based on objective observation of the collective actions of the market.
Understanding the concepts of conformity and effective age can result in a greater net effect of money saved from spending on inessential renovations, as opposed to over-improving your property in hopes of reaping some benefit. The economic concept of value is not inherent in the commodity, good, or service to which it is ascribed; it is created in the minds of the individuals who make up the market.
Conformity holds that real property value is created and sustained when the characteristics of a property conform to the demands of its market. It is influenced by the imposition and enforcement of zoning ordinances, community plans, local building codes, or private restrictions, establishing basic characteristics with regards to size, style, and design.
Effective age is the age indicated by the condition and utility of a structure and is based on an appraiser’s judgment and interpretation of market perceptions. Similar buildings won’t necessarily depreciate at the same rate, which is typically dependent on the level of maintenance it has received. For example, a 20 year old building that has received a new roof, rainscreen, plumbing, etc., may have an effective age of 10 or less, which will determine the type of comparables selected for direct comparison.
As per the principle of substitution, a buyer will not pay more for a property than for another that is equally desirable. If you spent thousands on improvements, and a property in the same neighborhood is selling for less but is in good condition, it might make sense for a buyer to purchase the other property and customize it according to their tastes without paying a premium.
“On a standard home, in a modest neighbourhood with a very conservative renovation I would predict one would get a 100% return with a small margin or profit. If you do a custom to high end renovation, you would get a 60 – 70% return on your money as not all consumers value high end product nor craftsmanship. That’s what we have seen in our industry. What makes the biggest difference is whether or not the client is renovating to sell or renovating to live in the property for an extended period of time.” – Sheldon Ens, Diamond Contracting
The renovation industry has seen a massive boom over the last few years, partly attributed to what Toronto real estate consultants Altus Group dubs the “HGTV effect”, with shows like Home to Flip, House Hunters, and many others that exaggerate the glamorous nature of home improvement. Altus Group forecasts spending on renovations in Canada to reach $67.3 billion in 2015, accounting for roughly 4% of total GDP.
In a 2013 study by Houzz, a large percentage of Canadian homeowners spent more than expected on their renovation projects, with 34% stating their need to take out a line of credit. It also highlights the motivation as to why homeowners are renovating. While an increasing percentage are improving their properties to increase the value for selling to subsequent owners, 83% are doing it for their own contentment, to improve both the functional utility of the space as well as enhancing the appearance to match modern standards. Other motivating factors are to improve storage, energy efficiency, and incorporating new technologies.
With mediums such as Houzz, and the ever-growing wealth of online resources, homeowners are undoubtedly more empowered to maximize their investment by doing their own due diligence. Conversely, it can be tempting to get trigger happy with additions to a home, but there is a point of diminishing returns, particularly if you are attempting to garner more attention from buyers.
In hopes of dispelling some preconceived notions as to what ultimately inflates the value of a home, there are a few considerations that I can attest will not significantly alter what the market is willing to pay. Bear in mind there are always exceptions, as real estate is an emotional commodity that sometimes elicits irrational buyer behaviour that is not easily quantifiable.
The following information is compiled from reliable sources including the Appraisal Institute of Canada, Marshall and Swift, local contractors, and first hand experience in the property valuation industry.
Unauthorized Suites & Additions
I’ve seen balconies converted into dorm rooms, kitchens sectioned into multiple bedrooms, garages converted to living spaces, extensions crossing property lines, and secondary suites the size of a McDonald’s bathroom (considered a luxury in other parts of the world). While the additional rental income can be a great mortgage helper, when it comes time to sell, room count doesn’t always correlate with marginal increases in value, especially when unauthorized.
Condos are fairly standard in the sense that they typically remain with the number of rooms as initially intended, but it’s not uncommon to see solariums or storage rooms included in the total bedroom count. When an appraiser selects comparables, room counts will mostly be the same as the subject.
Laneway housing is a costly accessory building, but has many benefits for both landlord and tenant. The re-sale value of the property will see an increase, but for the purposes of a standard renovation and being mindful of the required zoning regulations, this addition will apply to few.
CMHC estimates there are over 100,000 accessory suites in the Metro Vancouver region with room for an additional 215,000. Whether the suites are legal or illegal, having insurance coverage is vital (which is about 10% of the cost of total home insurance), otherwise there is a risk that the existing insurance on the primary residence could be void in the event of a flood or fire.
Kitchen & Bath
Renovations to these two areas of a home will provide the biggest bang for your buck. With conformity in mind, stainless steel appliances, new cabinets, granite countertops, and upgraded finishings all provide a higher level of appeal alongside improved durability and functional utility. The renovations should be consistent with the rest of the home, as it wouldn’t be prudent to have the remaining areas in an inferior condition. Return on investment is favorable, ranging from 75% to 100%+, with reasonable costs within $5,000 to $35,000 using standard materials.
As a structure depreciates, proper maintenance is vital to avoid costly repairs down the road. Particularly in condominiums, it’s not uncommon for a poorly kept building to accrue structural or envelope issues, thus holding the owners responsible for the costs of damage with special assessments. Buyers take it for granted that the foundation, superstructure, envelope, HVAC, plumbing, and electrical are all in working order, so upgrading, being un-sexy as it is, is not expected to have a return greater than 25% to 75%.
Going hand in hand with building maintenance, green building is one of the fastest growing movements in the housing industry today. Consider single glazed windows (one pane of glass separating outside and inside) replaced with double or triple glazed windows that are hermetically-sealed (panes sealed together with near-vacuum between). Thermal transmission resistance will be increased, thus making energy consumption more efficient.
Other types of green upgrades can include wall insulation, on-demand water heaters, rain water collection, solar power, and more. Green renovations have the benefit of long term cost savings, and incorporate materials that are less harmful to the environment. Expected returns can range anywhere from 15% to 150%+ depending on the type of remodel. The Vanglo House is a demonstration of green building at its finest.
The type of flooring buyers prefer is highly subjective. Hardwood may be preferred for its durability, and carpet for its comfort, but will be based on whether or not the subsequent owners have kids, dogs, or perhaps expect to host frequently. When selling a condo, I once installed brand new laminate flooring throughout, only to later hear the new owners tore it all up to install carpet. Unless the flooring is in very poor condition, it’s hit or miss on whether or not the type of flooring will appeal to buyers. Regardless, a 50% to 75% return can be expected with new flooring.
Who doesn’t love jumping into a pool on a hot, sunny day…as long as it’s someone else’s. Excluding higher end homes where pools are more common, they aren’t as desirable a feature in lower priced homes as one might think. With costs of installation ranging from $35,000 to $75,000, a return on the investment beyond 25% is highly unlikely, considering with a pool comes maintenance, expenses, and hazards.
As always, due diligence is key, and proper research into your local market can potentially save, or make you the money you anticipated. Happy renovating!