The Value of Functionality

Opinion

6 minute read

April 24, 2019

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?

Written By David Fleming

David Fleming is the author of Toronto Realty Blog, founded in 2007. He combined his passion for writing and real estate to create a space for honest information and two-way communication in a complex and dynamic market. David is a licensed Broker and the Broker of Record for Bosley – Toronto Realty Group

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18 Comments

  1. IanC

    at 8:05 am

    That bathroom is the strangest one I have ever seen!
    They put in two toilets, but not close enough to hold hands or offer encouragement.
    What’s the point, then?

    I guess it’s still close enough to play “Battle Shi+s”

    Hey Bernie, light a match and please close the shower door!

  2. Kyle

    at 8:46 am

    This reminds me of those houses on 25′ lots, that have mutual driveways leading to garages, but the driveways aren’t actually wide enough to drive a car through. So there’s a driveway and a garage, but neither are actually functional at all.

    1. Jeremy

      at 11:31 am

      the house I grew up was like that. I had about 2″ clearance on either side backing up between the houses. It was fine though.

      1. Frances

        at 12:03 am

        That split bathroom would work much better if it had a solid wall on both sides instead of transparent ones. I think I could accept one like that. What isn’t functional is the kitchen – there is almost nowhere to work.

        1. Frances

          at 12:07 am

          I pushed the wrong button, so to speak, and got the above comment in the wrong place. It should stand alone.

      2. Frances

        at 12:05 am

        Those houses were built when cars were smaller. I notice that just about every one like that that I see has parking in the front.

  3. jeff316

    at 10:01 am

    Those toilets would be useful for about 7 years when your kids are little, because you know when one goes to the bathroom the other will follow suit.

    1. Peggy

      at 10:38 am

      Jeff 316 I would never had thought of that. I wish I would have when my kids were small.

  4. Libertarian

    at 11:16 am

    Well-laid out argument, David. Just another example why real estate is so messed up.

    I, for one, would prefer a functional unit over a bigger unit with useless bells and whistles. But that’s because I don’t view real estate as an investment. And so the fact that it’s cheaper is a bonus!

    There were some similar comments the other week on your post about micro-condos – people mentioned custom mill work would make the space really livable.

    Years of happiness enjoying my primary residence is more valuable than years of stress for an extra $20K when it comes time to sell.

    1. Ed

      at 11:56 am

      When you think of it though it’s not an extra $20k when you sell because you’ll have to consider that you paid extra for it when you bought too.
      How about the extra maintenance fees too, 40 square feet x 70 cents per sq ft x 60 months living there = $1680.
      Also higher property taxes all the while.

      1. Libertarian

        at 2:22 pm

        All true. Good points.

        I was referring to the fact that David had to lower the price on the unit. I’m sure his client still made money on the deal, but not all condos (and real estate in general) appreciate at the same rate. So in this example, since there is more demand for the unit having two washrooms, it would appreciate more than this unit that has only one.

        For a real life example, there are condos all over the downtown core, but all we ever hear about is King West.

  5. JL

    at 3:01 pm

    I think part of the problem is that the “on paper” value often reflects the “material” value of an item, which is why it is difficult to reflect the functional value in a purchase price. The buyers may actually agree that the unit with the walk-in closet is better and preferable, but they just do not want to pay the same or more than something with additional material value. A closet is materially/structural cheaper than a second bathroom – if you’re paying more you want to be able to quantify/justify the material “extra” that you are getting.

    Your article is more describing the trade-off between functionality and features and the perceived low value of functionality in these instances, but functionality certainly has value to all buyers; all else being equal you will always choose the unit without the long hallway or concrete pillar, and at some point even 3 bathrooms wont sufficiently compensate if your unit has 3 pillars in the middle of a living area with a 7’ ceiling overhang.

  6. Francesca

    at 3:19 pm

    This reminds me of all the MLS comments that say “was a 3 bedroom but converted to two spacious 2 bedrooms -easy to convert back to 3 bedroom!”. 2 larger bedrooms may be more practical than three really small ones but again the perceived value is that a 3 bedroom house/townhouse is better. I think sellers use this language to justify a higher asking price and buyers are wary of buying the more functional 2 bedroom for fear they will have to lower price to sell down the road.

    1. Condodweller

      at 12:09 pm

      so, the idea then is to find an existing condo like this that already has the better configuration, but below market value and let the original purchaser take the hit. Your example of 3 vs 2 bedrooms it makes sense to advertise the fact it was 3 and can be converted back in case the buyer’s agent doesn’t do his homework and inform them. If there is a significant premium for 3 bedrooms it would make more sense to return it to 3 bedrooms before selling.

  7. Geoff

    at 4:28 pm

    That bathroom is almost a jack and jill bathroom and a good use of space… IF there was a door separating a toilet and sink from the shower sink and toilet. As it is I agree it’s stupid.

    1. jeff316

      at 1:13 pm

      Or even frosted glass

  8. Condodweller

    at 1:00 pm

    For me the key is envisioning how I am going to use the space. If the layout is conducive to my use great, if not then I either don’t want it, or I want a discount if I can make the compromise.

    One bathroom is more than enough in a one bed condo for most peope I would think. In this case I think it’s just a bargaining chip for the buyer. Unfortunatelly it’s a loosing battle even if you hold out and wait for the buyer who appreciates the extra closet vs bathroom because then they are just going to say it’s been on the market for 2 months I am only offering below market value anyway.

    That semi two bathroom unit would work perfectly for a single professional who uses the second bedroom as an office and doesn’t want to share his/her toilet with guests.

    If you frost at least one side of the shower glass so both toilets can be used at the same time if needed it would work for two people. It would definitely not work with three if they all needed the shower at the same time in the morning.

    In this case it looks like more a limitation of the space. They couldn’t fit two bathrooms so this was the compromise.

  9. Peter Sinclair

    at 3:16 pm

    Personally I think walk in closets are a huge waste of space. But I also think that, in a condo, I would rather have one nice sized bathroom than 2 small ones, so I’m not sure either of your client’s options would appeal to me. Give up one bathroom to make a larger kitchen and you’d have me sold 🙂

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