Toronto’s Untested Laneway Housing Market Is About To Be Tested!

Houses

5 minute read

October 1, 2021

Let’s say you’re currently tipping the scales at 198 pounds.

If you ate five pounds of food and immediately weighed yourself, would you expect to weigh 203 pounds?

Sometimes, it should be a matter of simple math.

But if you’re an appliance wholesaler and you package together a $1,500 fridge, $1,000 stove, and $500 dishwasher, can you really expect the market to bear $3,000, or would the consumer expect a discount?

What if you were looking to sell your $50,000 sports car but you wanted to put your custom-made $10,000 golf clubs in the trunk and sell them together?  Is the market value then $60,000?

What if you had one child and then added a second.  Can you merely assume that your time commitment, stress level, and reminiscences about the single life will merely double?  Because I can tell you from experience, that estimate is quite low.

So what if you had a house that was worth $1,500,000 and you built a legal laneway house at the back.  Then you wanted to value, and/or sell the property.

How in the WORLD do you value that?

A few years ago, we started talking about laneway houses on this blog back when they were just a pipe-dream.  Some of the long-time TRB readers suggested, as far back as a decade ago, that allowing laneway housing would be an innovative way to increase supply in the city, noting that this has been done in other major cities across the world.

As the years went on, the idea gained more and more traction until finally, the City of Toronto officially opened the door to it.

But a question was asked by one of the TRB readers that would be impossible to answer: how would you value the entire property?

Even up to this point, any answers are merely speculation.

Correct me if I’m wrong, but I don’t recall seeing a sale posted on MLS for a legitimate, legal, renovated single-family dwelling and self-contained laneway suite that would be described

However, all that is about to change…

I don’t know if you guys follow Marty at Laneway Housing Advisors.  He’s a regular reader of the blog and we’ve discussed his work on here before.  I’m on his email list and I read his newsletters, and last year, I started to see a lot of listings coming onto MLS which have his report on qualification for laneway housing.

If you’re the type that has bookmarked Toronto Realty Blog, Toronto Life’s real estate section, BlogTO’s real estate section, et al, you’ll want to bookmark his as well.

There are a lot of interesting reads out there about laneway housing.

If you want to know where it all started, you’ll want to read this:

Toronto Life: “This Is The City Planner Who Made Laneway Suites Legal”

His name is Graig Uens, and years from now, we might be talking about him as one of the individuals who changed Toronto real estate in the 21st century.

He notes in the article:

“Since 2018, there have been 239 permits to build laneway homes.”

But what is it going to be like when one of these double-properties comes to market, you ask?

We’re about to find out!

Just listed this week: 1067 Shaw Street.  Beautifully renovated semi-detached, 4-bed, 4-bath with a 1-bed, 1-bath basement apartment with nice curb appeal too!

Have a look:

It’s a fair size home; an 18.67 x 125 foot lot, and having opened up the main floor, there’s no wasted space.

The renovation is modern, stylish, and looks to have been done well.

Here’s a shot of that main floor which shows the space and the renovation:

And here’s a look at that basement apartment:

But what were we talking about earlier?

All that jazz about laneway houses, right?

You won’t believe what these folks built, it’s just incredible!

Where the garage once stood, you’ll now find this:

Amazing!

Here’s a shot of the laneway house from the actual laneway itself:

Note the street number “26” on the wall.

What does that refer to?

It’s 26 Ivaan Kotulsky Lane, which is the street, er, lane that runs behind Shaw Street.

Whether or not this #26 is just for fun, or whether the address, has, or will be changed, remains to be seen.  Land Registry shows this property as one parcel.  But we’ll come back to that in a moment.

For now, let’s take a look at the laneway house itself:

Pretty neat, eh?

And they’ve left the garage down below so the house on Shaw isn’t a “no parking” house, which would have lowered the value.

This project is absolute genius on behalf of the owners who have now listed the property for sale on MLS at $1,799,900 with an offer date.

So what immediate questions come to mind?

I’ve got a few.

How do you value a property with two houses on it?

This was the question that I asked at the onset via some childish examples.

If the main house is, or should be, or could be worth $1.8M, then do you simply look at the back house as worth $600,000 and add this to come up with a value of $2.4M?

Do you expect a package discount, ie. the A + B = C but you expect to pay less than “C” in the end?

If that back house were a condo, it might cost $600,000 based on the square footage.  So is that how we value it?

Or do we look at the rent and then simply add some sort of value based on capitalization rate or how much mortgage the rent would carry?

If you could rent that unit out for $2,000 per month, this would carry approximately $600,000 in mortgage at a 1.35% rate over 30-years.  Over 25-years, it would carry $510,000, so you can play around with the numbers if you wanted to use this method of evaluation.

In the end, there are a lot of ways to come up with a value here, and every buyer would do this differently.

How would a mortgage lender view this property, appraise it, and loan on it?

Great question!

And unfortunately, it’s one that I don’t have an answer to.

Somebody had to go first, right?  There had to be somebody who wanted a mortgage on a 2-dwelling property in downtown Toronto, and I don’t even know if the lenders have any idea how they’ll handle this.

Perhaps they’ll appraise the property in the same way that we suggested above: by looking at the combined value, and perhaps they’ll even use our method of analyzing how much mortgage the rent would cover each month.

But perhaps they’ll only loan on the value of the main dwelling itself, regardless of the price paid for the full property.  That would be problematic.  Time will tell…

Will the City of Toronto allow the owners to legally change the address?

Another great question!

Is it odd that I asked a question and am now complementing the question itself?

In any event, this is what a lot of buyers would wonder, not just because it makes things like mail delivery easier, not to mention ordering Uber Eats, which we’ll be doing for about 50% of our meals in a decade (or less), but also because it dramatically changes the appeal of this property.

Suddenly, it ceases to be one property with two dwellings, and almost becomes two distinct properties.

Can a future owner keep one dwelling and sell the other dwelling?

This is the logical follow-up question, and it all depends on the next important question.

Can you, or would somebody want to sever the two properties?

The only way you can sell one of the two dwellings is if you have two distinct and separate titles.

In order to do this, you would have to apply for a severance.

And circling back to several questions ago, the only way you can 100% legally change the address is if you have two separate properties registered via two separate PINs.

There are work-arounds, of course.

Consider that you might live at 123 Smith Street and you have a basement apartment, so you put “B” on the number plate, and VOILA!  Overnight, you’ve got 123B Smith Street and it didn’t cost you anything.

But to build a laneway house at the back of the property located at 123 Smith Street and legally change that address to 789 Laneway Drive is far from automatic, and the only way you can guarantee that outcome is to sever the lots and register two titles.

So, any other questions, discussion points, or opinions?

This sale is going to be a game-changer, folks!  Ten years from now, this might be one of those “Do you remember where you were, when…” questions for those real estate nerds among us.

Kudos to the owners of this house, they did an absolutely incredible job.

Happy Friday, everybody!

 

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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14 Comments

  1. Appraiser

    at 8:52 am

    Appraisers nightmare.

    Direct Comparison Approach: Nada.

    Cost Approach: Almost always irrelevant. Not to be relied upon.

    Income Approach: Maybe?

    Personally, I would decline the assignment. Not worth the time and / or liability.

    Any other appraisers out there wish to comment on how they would approach this job?

  2. Condodweller

    at 9:32 am

    Very cool. I’m going to wager in this case the sum will be worth more than the parts. I would definitely value it higher than an equivalent size condo for to the privacy and no elevators/neighbours to deal with.

    Also this may be a great retirement option without having to lose ~$100,000+ in fees if you want to downsize by simply moving into the basement/laneway apartment. Or just stay in the main part and rent out the other two.

    First question that comes to mind is how do you deal with the backyard? Fence it off to provide exclusive areas for each?

    I’m sure the cynic in many of the jaded buyers think agents will have no problem running up the price. I mean think how high house prices are which is due to lack of supply and consider there are only a few hundred of these around so far.

    The next interesting question is what will happen to the prices of homes with the potential for one of these? How about if you secure the permit for one? Will these homes all of a sudden be worth ~$600,000 more? If so, will there be a rush to buy these properties before the owners and incompetent agents wake up to this opportunity?

    1. Writer

      at 9:55 am

      1. Although this may be the first laneway house in downtown- there are still many comparables out there for two house properties. Forsure in cottage country.

      2. Another possibility- would be to add the square footage to the house and just consider it a larger house. So if the whole house is 1500 and now you have an additional 500 sq ft – maybe you add on a third of the value?
      Plenty of people have a parent or older kid living in a separate in-law suite already- so this would be ideal for them.
      That’s my guess it will sell for a similar price as if it was one big house.

      1. Condodweller

        at 10:09 am

        Sure, and according to David this has been done in other cities which should be a good example as well. I think it will fetch more than just simply adding the extra space due to the income potential.

        Another concern is taxes. Is the city going to charge extra property taxes and what about capital gains and the principal residence exemption?

    2. cyber

      at 11:20 am

      Permit will be worth ~$0, or few thousand to compensate for architect/engineer design fees.

      The whole point of laneway housing is that they’re allowed “as of right” across known laneways, as long as building and site design meet prescribed requirements. Heck, there are (or will be) companies offering prefab/modular options specifically designed to meet laneway housing rules, so it shouldn’t be too hard for the homeowner to directly apply for a permit without any professional help.

      As for valuing the whole property, this particular one just seems effectively equivalent to a nice triplex…

      1. Kyle

        at 2:12 pm

        While Toronto’s new rules spell out that a laneway house can be built as of right, the lot needs to allow for emergency fire access for a laneway house build to be feasible. This requires an unobstructed 90 cm path between a neighbouring house, that is no longer than 45 m from the street to the laneway house’s door or an unobstructed path less than 90 m long from the street at a point that is no more than 45 m from a fire hydrant to the laneway house’s door.

        https://www.toronto.ca/services-payments/building-construction/apply-for-a-building-permit/building-permit-application-guides/renovation-and-new-house-guides/new-laneway-suite/providing-access-to-a-new-laneway-suite/

        On a typical Old Toronto street, very few houses actually meet this requirement (probably less than 2%). If there’s 90 cm between you and your neighbour, but it is partly on their lot, you can spend $ with a Lawyer to get a limiting distance agreement between yourself, your neighbour and the City, but the agreement goes on both yours and your neighbour’s title, so assuming freindly neighbours, this still only increases the number of qualifying houses by a couple more percent, but requires a great deal of rigmorale and dollars.

        There already is a premium starting to be added to the few houses that can truly accommodate a laneway house. Anyone who sees a real estate listing claiming laneway house potential, should definitely take it with a grain of salt, because the reality is very few houses actually qualify.

  3. Libertarian

    at 11:00 am

    David, you made a point of mentioning the garage is still part of the laneway house, but it belongs to the main house so that there is still parking. So if they sever the properties, who gets the garage?

    I agree with what Writer wrote above – I just consider it a larger house. A second basement apartment – so to speak.

    So if someone wants to live in the main house, rent out the two units, and still park in the garage, I don’t think severing the property will happen. Too complicated otherwise.

  4. Adam

    at 11:34 am

    If I recall, the utilities for the laneway house are brought in from the main house so there is no precedent for severing in these cases. I think a flat A+B = C is fair.

  5. Kyle

    at 1:28 pm

    There have been houses with coach houses that have sold before (e.g. 878 Palmerston, 38 Summerhill Gardens), and there have been standalone laneway homes, that were built before the new rules came out, that have also sold before (e.g. 2 Miles Pl, 1 + 3 Croft St, 9 Croft St, 11 Croft St,16 Croft St, 432 Clendenan Ave, Rear 51 Indian Grove). I’m sure i am missing many others, but from what i’ve seen the laneway dwellings / coach houses always command more per square foot than the prevailing pricing at the time.

    There is a hip, urban, cool factor to them and they are always very upscale and built for the wealthy. Combine that with the flexibility they provide and no wonder they always attracts a premium. Can’t wait to see how the Shaw house does.

  6. Condodweller

    at 12:51 pm

    Meanwhile back in the jungle…. The Pandora papers leak. Almost 3TB of data leaked.

    Interesting to see how you can save the storage fees in re legally using offshore companies.

    https://www.bbc.com/news/world-58780465

    1. Condodweller

      at 12:53 pm

      Storage= stamp duty

  7. Joe Unfresh

    at 2:28 pm

    If it’s a shared backyard then it’s worth less than the sum of its parts. I would rather just get my own house with its own backyard.

  8. Kevin Graham

    at 7:31 am

    Nice Post!
    I found this blog really interesting for all the Toronto’s Untested Laneway Housing Market. We can take assistance from JD Puri to take care of all the needs for the desired home.

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