A Solution for Appraising Efficiency- The buyer's point of view

How much is it worth to a home buyer to invest in energy efficiency improvements? A minimum estimate is that the annual savings on the energy bill pay for the annual cost of the investment when financed. This removes the primary reason for home buyers not to invest in energy efficiency -- lack of money. When faced with a choice of continuing to pay for wasted energy or making improvements that will make the house more comfortable and more valuable, buyers will opt for the improvements.

It is essential that the appraisal of the value of energy savings are based on the existing features of the house modified by the improvements to be made. Otherwise, the energy savings will be too high since additional improvements can only reduce the savings of related improvements. 

By obtaining a dollar appraisal that shows the group of improvements that save more than they cost, the house is easier to sell than with an appraisal that lists which efficiency features the house has, or lacks. The latter shows the problem, the former gives the solution. (See my first Home Energy Pros article for more details).

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Comment by Jan Green on January 22, 2013 at 9:38am

Tim, it depends on the homeowner.  It isn't necessary, but it's a win win if they enjoy the upgrades and don't expect a quick ROI.   There are homeowners who are upgrading their homes and decide to spend a little extra on better efficiency because they'll stay in the home, no matter the ROI.  Then there are those that think they'll recoup the money and don't do their homework to learn if they are over-improving for their value.  What sells in homes in the Southwest are newer AC units due to our extreme summers.  The average consumer also likes new windows.  They don't usually understand spray foam or radiant barrier insulation.  When I explain why block construction isn't better than stick built, their jaws drop.  It's mostly personal preference. 

Thankfully our production builders here are offering a longer list of energy efficient homes.  And we're in the top for 5 for energy efficient production built homes.  Recently I sold a Shea Xero (production built) home wherein my client (a snow bird from Chicago) decided to go ahead with solar and paid the entire amount up front.  While he'll only use the home for a few months a year, they'll maintain the AC at about 90 degrees.  I can't wait to hear about their utility bills.  Imagine the home is vacant in the summer and the solar panels are slurping up that sunshine without them being in town.  Then when they come for their winter golf outings, our sunshine continues and the AC isn't even on, much less the furnace.  Although lately we've turned on our furnaces thanks to some strange freezing temps.  We're now back in the 70's. 

Their home was not a gazillion dollar home.  This home topped out at $388,000 for about 2000 sq ft on a golf course.  It has radiant barrier, low e windows, Energy Star appliances, 5 K solar panel system, etc.  This same home without all the upgrades would have cost about $280,000, which isn't a boat load for a home on a golf course in Northern Peoria. 

And reading back through my comments - we did hold 3 speaker events last year.  Our Speakers were CR Herro, Meritage Homes; Robert Oglesby, AppraisalTek; James Ball, Energy Inspectors; Marlo Newman, Starboard Financial, Sandra Adomatis, Appraiser & co-founder of the Green Addendum, and me.  The events were well attended and one was at the EEBA conference, standing room only with builders from across the US.  We gave them ideas as to how to raise value for their features (Green & Energy Efficient Addendum attached to the appraisal)  and how to market to consumers. 

Does this help?

Comment by Tim Hook on January 22, 2013 at 8:11am

I'm not getting this right, Maybe my question is, is it a necessity for home owners to invest in energy efficiency renovations? or it is just merely a preference? would investing entitles bigger chance of selling a home?

Comment by Doris Ikle on October 23, 2011 at 3:42pm

What is the value of energy efficiency to a buyer? The general concensus, clearly detailed by Robert H, is that we don't know.  "Value defined as the perceived worth of something" is generally calculated by investors as the savings that will result. These savings will depend on all changes made due to their interrelationships. The more improvements made, and the more efficient the house, the smaller the individual savings. Thus if the home is insulated and no other changes are made, the insulation savings will be larger than if a new efficient heating system were also installed. To obtain an accurate savings estimate, each house must be examined in detail, and all recommended changes to be made must be taken account of.  

Rather than attempting to determine a value for the energy efficiency improvements that a house has, the Home Tune-uP software calculates the savings for the group of improvements the house does not have that would pay for the cost of the improvements when financed. This will make it easier to sell these houses and provide the financing to make the improvements from the savings.       

Comment by Tom on October 20, 2011 at 1:52pm

Robert - It's true that energy costs are not included in underwriting and appraisal standards. Thus energy savings from efficiency improvements are not accounted for in mortgage eligibility calculations.

In practice, the bill isn't looking at efficiency at all, but rather energy costs as a household expense to be included in mortgage eligibility.

Comment by Jan Green on October 20, 2011 at 11:32am
No, I don't know Debra.  Will remember her name and ask when I speak to the President again though.  Thanks!
Comment by Robert H on October 20, 2011 at 11:27am

Jan

Do you know Debra Rudd, I believe she was on the appraisal board for a while.  I worked with her when I lived in th valley around 1990.

Comment by Robert H on October 20, 2011 at 10:41am

Tom


I read the link. Here is a quote "But current federal mortgage underwriting
and appraisal rules do not recognize the real value of energy efficiency, and
thus mortgages often cannot cover the initial cost." This is a lie. If the
buyers and sellers are recognizing the value AND the appraiser support the
value it can and should be included in the report. Currently most buyers will
not pay extra.



The new home market is different in that energy star homes is a program buyers can
understand and has perceived value to a buyer.



In respect to energy efficiency there is a big problem in measuring the
contributory value of  improvements to existing homes. If buyers are not paying a premium then there is cost but not value. Value defined as the perceived worth of something.

I will go back to my example of a swimming pool. They cost a heck of a lot to
install but when you sell the home you will not recoup the investment. In fact
it can make it very hard to sell the home and could decrease the value of a
home.

Home energy efficiency is a very complex issue. What is the cost and added value of
insulating an old home? What is the cost and value of a solar hot water system
or PV? What about a combination of doing these things. Who did the work and was
it done right also play in to it.

Then  there is the law of diminishing returns. If I take a house that has a lot of
air leaks and is poorly insulated and fix those issues I will get the biggest
bang for the buck. I could likely see a 20% return on investment or another way
of saying it is a 5 year payback. Now say I take it a step further and pull off
the siding and install several inches of foam. The cost went way up and the
return on investment got much smaller. Now you could be looking at 30 to 50
year payback. What would a typical buyer pay for that?

I don’t see lumping this on the appraisers back to put a value to it. When buyers
are paying extra for it and it is showing up in market data then the appraiser
must place a value on it.

Sometimes there is not a cost savings because home owners adjust their living habits.
Sometimes occupants turn the heat up or ac down because now the utility bill
will not be more than it had been. The improvements went to comfort and not
savings.

I got out of appraising due to the corruption of the lenders all the way up to
Fannie/Freddie. The appraiser should do 1 thing - provide an appraisal that
tells the true market value of the property while reporting all the positive
and negative attributes of a property. Who is going to guarantee these loans? I
do not want congress to interfere with home lending. Their regulation of the
industry lead to the meltdown.

As a business owner that is expanding in to energy retrofits I see many of the
government programs as counter productive and a waste of money.  People are replacing windows to get a tax
credit when the first dollar should be spent on air sealing and insulation.  I am for saving energy and
giving people comfortable livable homes but lets come up with sensible programs
that work. $500M to Solindra is not a program that works.

 

 

 

 

Comment by Jan Green on October 20, 2011 at 9:23am
Tom - Thanks loads!  I've forwarded this to another committee member.  Don't know if I mentioned it, but I'm the Builder Committee chair for RGBC, subcommittee to UZGBC AZ Chapter.  We're putting together a Builder Forum and Appraisal Class re green features.  Meeting with a bank next week to host the event.  I've spoken with the President of the Appraisal Association here in AZ and she is ecstatic and will include the invite to 14,000 appraisers.  I understand that you have to be held accountable for appraisal numbers and you can't just "give" value to something because it's an energy efficient upgrade. I appreciate your information!
Comment by Tom on October 20, 2011 at 8:32am

Likely of interest for you all on the appraisal/mortgage issue: http://ase.org/resources/save-act

Comment by Jan Green on October 19, 2011 at 10:28am
Robert - Agreed!

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