At a high level there are two components to the value of a house. There's the value of the land and there's the value of all the improvements. That is, the bricks, wood, and other stuff that form the actual house. When a media outlet runs a sensational headline about some shack in Toronto selling for, oh I don't know, a million dollars, what it actually means is that the land in this particular area was just valued by somebody at this number. In fact, if the property is very clearly a "knock down" the improvements sitting on the land become a liability/cost rather than anything of value. Because whoever buys the land will almost certainly need to remove the improvements before they can build whatever it is they want to build.

This distinction between land and improvements is a valuable one for many reasons. Here's one example. In cases where the improvements aren't some shack, you may be faced with a scenario where a property can be valued in two different ways. You can value it based on the development potential of the underlying land or you can value it based on the income (either in-place or potential) that the improvements are generating, or could be generating with some hard work on your part. If the development value is greater than the value of the improvements, then there will be pressure to redevelop. Conversely, if the opposite is true, it is likely that not much will happen other than maybe capital expenditures applied to the existing building(s).

Of course, you could also run into a scenario where there's little development potential and there's zero ability to invest in the existing improvements, either because the market rents are too low in the area or because they're capped and/or controlled in some way. In this scenario, it's likely that not much will happen other than the normal and expected depreciation of the improvements. Maybe one day the development/investment math will work. But in the interim, you probably won't be seeing any of those sensational media headlines.

Photo by Andre Gaulin on Unsplash

Earlier this week I wrote a post about a new build home under construction at 37 Canerouth Drive in the west end of Toronto. As part of that post, I asked people what they thought the home would be valued at when it was completed. There were just under 10 responses (many thanks!) and I thought it was really fascinating to see the ranges.

A lot of you responded in the comment section of the post, but a bunch of the other estimates came in via Facebook, Twitter, and email. It isn’t a huge data set, but I’ve nonetheless consolidated the ones I could remember I received:

$2,375,000
$2,750,000
$1,800,000
$3,000,000
$8,500,000
$2,600,000
$3,500,000
$1,750,000

If you average these estimates, you come to a value of $3.3M. However, the clear outlier is the $8.5M. So let’s take that one out and see how the number changes. If you do that, you then get an average estimate of $2.5M. A pretty big swing.

Now, I don’t know offhand how accurate that number really is, but I’m fascinated by this idea of “the crowd” determining value. Particularly for markets such as housing where supply can be completely heterogeneous and there isn’t a lot of transaction volume to refer back to (compared to other types of markets).

Because my strong belief is that under the right circumstances and with enough data points, this number could end up being hugely accurate. And, it could also be more forward looking since it’s capturing current market sentiment as opposed to being based on historical transaction prices.

If you have any thoughts on this, I’d love to hear from you :)

Earlier this week it was announced that home remodeling site Houzz raised a $150 million Series D round, which would value the company at around $2.3 billion, post-money. Meaning, that’s the value of the company including the money it just raised.

If you’ve never used Houzz before, it’s a platform that offers design inspiration for remodeling projects, products for sale, and a directory of home professionals. The company makes money by selling products through its online storefront and through premium accounts for the pros.

The perceived value of Houzz likely stems from the fact that it provides a platform to address the estimated $300 billion home improvement market. But what I see as really exciting is the potential for Houzz to bring even greater transparency to the whole renovation and construction marketplace.

Already Houzz has started to aggregate data on average renovation costs throughout the US. But there’s a lot more they could do. Professional reviews and design inspirations are great, but I can imagine them “moving up the stack” to start acting as a king of virtual general contractor that manages more of the actual renovation process.

And that would be pretty powerful.