How many times have we seen this in an MLS listing: “Featuring $30,000 in Upgrades!”

Does this excite you?  Should it?

How do you evaluate this “so-called” $30,000?

Let’s have a look…

I swear to you – I have a friend who would buy that car if he had the money.

There you see a Mercedes Benz made of……wait for it……diamonds!

That’s about as “upgraded” as you can get.

And I have a friend who is so obsessed with image, brands, status, and all around consumer-BS that if he could put a price on his mother and physically sell her to be able to buy a diamond-studded Mercedes, he would do it.  Thankfully, he and I don’t hang out anymore…

While it’s hard to put a price on one’s mother, it’s equally as hard to put a price on “upgrades,” whether you’re buying a new car or a used condo.

Upgrades in new cars are so incremental that it’s almost impossible to say “no.”  You’ve got the “standard” rate, then a $500 upgrade for Product-A, a $1000 upgrade for Product-B, and a $2000 upgrade for the superior Product-C, but they’re offering a $750 rebate on Product-C so it’s really like $1250…

Before you know it, you’ve accepted every upgrade they’ve offered.  It’s also kind of like buying, er, ‘building’ a Dell computer online…

The same goes for new condos, whether it’s worth it or not.  But this blog post isn’t intended to analyze the upgrades purchased with new developments, but rather how to value the upgrades once that condo is sold on the resale market.

For example, take a condo at 60 Bathurst Street which is listed today for $449,000.

Let’s assume that this condo was purchased way-back-when for $310,000 and the purchaser paid $19,500 to the developer for “upgrades” as follows:

-Hardwood Flooring “Level 3”: $8,900
-Kitchen Cabinets “Level 4”: $4,200
-Kitchen Counters “Level 3”: $2,200
-Appliance Package “Level 2”: $2,800
-Bathroom/Kitchen Faucets “Level 2”: $1,400

Yes – this is how it works, for those of you who have never had the privilege of choosing your finishes in a new development.  Every finish is of a different “level” and you choose based on price.

Some of the finishes are marked up about 300% from fair market value, and some are basically just junk thrown into your condo by a tradesperson on their first day of work.  You truly never know what you’re going to get, unless you’ve purchased through one of the few reputable, high-quality developers in Toronto.

In my experience, no other feature/finish in a new condo is marked up more than flooring.  I am astounded at the prices that developers charge for engineered hardwood flooring.  It seems to me that the price they charge for their basic, cheapest laminate is still more than what “my flooring guy” will charge me for the best engineered hardwood.

A word to the wise: when you choose your finishes, leave the floors bare.  The building will slowly settle over time and thus you’ll end up with gaps in your floors anyways, so why not install your own floors a few months down the road since it’ll likely cost HALF of what the developer charges anyways?

Moving on…

In the example above, the purchaser has added $19,500 in upgrades at the time of purchase.

Let’s also assume that the buyer installs all new light fixtures, pays a carpenter to construct custom-cabinets in the bedrooms, pays to paint the entire condo.  Let’s say this costs $10,500, and the purchaser ended up putting in $30,000 total.

Now my question: How do you value these $30,000 in upgrades two years later?

If you’re looking at this condo on the resale market tomorrow and it’s listed for $449,000, what do we make of the text that reads, “Includes $30,000 In Upgrades!”?

First and foremost, these upgrades are NOT worth $30,000.

I’m of the mindset that almost anything you purchase will depreciate.

Won’t it?

When I was in St. Maarten, I went into a jewelry store and looked at Rolex watches, just for fun.  I actually wanted to see if they would let an oiled-up, shirtless Canadian dude in sandals try on an $8,000 watch – and they did!

The woman at the counter told me, “Next month – these prices go UP, UP, UP!  Rolex watch always go up!  Rolex investment for life!”

Is that true?  Is it even remotely true?

We all know that a brand new car will depreciate 15% as soon as you drive it off the lot (for all you car buffs out there – I’m sure there are some stupid $300,000 James-Bond-type cars made for rich old white (hair and skin) men that don’t depreciate…), so can the same be said for most other consumer products like Rolex watches? 

Or how about upgrades in your condo?

But before we get to simple depreciation, let’s back-track.

I mentioned above that most developer charge inflated prices for their upgrades.

So if somebody paid $19,500 for developer’s upgrades at the time of installation, they might have only been “worth” $15,000.  Had the purchaser sourced this work him or herself, the cost could have been minimized.

Let me conclude with my first reason why upgrades can’t be taken at face value:

Reason #1: Inflated Developer Prices Do Not Equal “True” Value

The second reason kind of blended in with the first, and it has to do with the fact that anything will depreciate, within reason.

I can’t tell you the number of times that I’ve met with a prospective seller (usually some out of touch old lady) who thinks she’s going to sell her furniture and chattels with the property.  She’ll want $1,500 for the TV that she purchased ten years ago for $1,500.

The five-year-old Dell laptop I’m using to write this blog post cost me over $2,000 but it’s only “worth” a few hundred, and I could purchase a similar one today for $900 as prices have come down.

If somebody paid $5,000 for appliances two years ago, they aren’t worth $5,000 today.  And if it cost them $1,500 to “upgrade” to the better, shiner stainless steel, you can’t count on that money today.

Reason #2: Depreciation

So what else goes hand-in-hand with depreciation?  Or perhaps the better question is: why do some things depreciate?

One answer is wear and tear.

I was in a condo the other day that claimed to have $50,000 in upgrades.  The condo was beautiful, but let’s think about how much $50,000 really is.  This condo had very dark hardwood floors and they were scratched to hell by the owners’ dog.

The floors need to be replaced asap, and it’s embarrassing that they’re in that condition in the first place.

Those beautiful granite counters that you picked out of the sales centre three years ago are now dirty with grunge and mildew, and there are scratches on the vanity in addition to the odd chip in the granite itself.

Reason #3: Wear and Tear

The last reason is a bit subjective but it’s also quite hard to argue with.

Styles come and go, and if your condo is older than five years, it’s hard to believe that buyers today are going to put the same value on the items that you chose, if they even like them at all.

Come to think of it, I think there should be some sort of statute of limitations on how long you can quote the “upgrade value” on your condo.  If you paid $15,000 for upgrades at King George Square in 1999, I don’t think you should be detailing this in the MLS listing.  Chances are – those upgrades are now standard finishes in condos.  Show me a new development downtown where some form of granite counter isn’t standard.

Reason #4: Styles Change

My advice to you: get a detailed, itemized list of all the upgrades from the listing agent and the seller.

They probably won’t provide receipts and work orders, but if they’re saying that there’s $30,000 in upgrades, they should be able to account for it.  If they can’t, then they’re making that number up, which they probably are regardless of whether they can account for it or not.  One thing is for certain: they definitely rounded that number up to the nearest ten-thousand!

Happy Hunting!