GUEST AUTHOR: Debra Little was selected to direct this study because of her combined expertise in home performance and residential appraising. She led a team of senior appraisers who were on site in Los Angeles. See Debra at the ACI national conference in Baltimore this March where she’ll be presenting twice on this study
Results of a valuation study of three existing homes located in Los Angeles indicate the energy upgrades in these cases, added 6-9% to their current market value. In query of proof that energy upgrades contribute value, the study determined appraised market values of the before and after upgrade conditions.
The question is how much, in today’s market? Debra Little, a home performance consultant with an appraising background, directed the study, “Most would agree that it’s rational to expect a knowledgeable buyer to perceive added value. A text book scenario is when we have a shopper looking at two houses with prime assets that are similar in location, size, age and amenities, and the only differentiation is that one house has energy upgrades and the other does not. We would expect the house with the upgrades to sell first. The question is, will it earn a premium?”
The challenge for appraisers is in finding direct market evidence, comparables, required to make a strong enough case with a level of support acceptable by underwriters. It’s particularly challenging when valuing upgraded existing homes, which represent the majority of the market focus of the emerging home performance industry. There is more evidence for new energy efficient homes than is discoverable in the existing home sector.
Data affirmation that energy upgrades add value to existing homes may be a long time coming. Along with energy upgraded homes, the numbers of happy home owners continues to climb. How can happy home owners be a problem for valuation affirmation?
Two reasons why evidence is tough to find in the existing home sector:
1- Happy owners of energy upgraded homes don’t often sell. This is a compelling part of the story as we witness market transition. As home performance contractors are out there doing good work, they are creating a segment of occupants who are so comfortable in their homes that now cost less to live in, they are looking to stay, not sell. These homes don’t often turn over. What is the value of a home that is so treasured by its owners, they say they will never sell?
2- The second reason is the need for accurate, accessible, sales data of green homes. By now, many of us have heard the call for “greening the MLS”. More data may actually exist but goes unreported. To get there, training is needed for real estate agents, appraisers and lenders. And, we need to get 800+ MLS systems up to speed, or create another information solution. Is it realistic to hope this will happen any time soon?
When there are no comparables what methods can appraisers use to read the local market? Debra Little continued, “Our mission going into this assignment was to turn every stone in search of evidence. We knew that after we exhausted our typical sources, we would need to dig deeper.”
There are approved methods available to appraisers when challenged with valuing a unique property or a variety of other factors that can make market evidence scarce. Several approaches may be employed, and then reconciled with the others for a resulting range of value. A white paper will be published later this year that will describe the approaches employed in this study.
Energy and non-energy benefits. Energy efficiency, as it reduces operating expenses, produces numbers appraisers can work with. Proof of performance as evidenced by utility records will be one of the foremost considerations. Non-energy benefits such as improved durability and indoor air quality are also important but more difficult to quantify. The control of heat, air and moisture of a house envelope should significantly extend its effective life. Effective life is a question appraisers raise, not only about the house being valued but each comparable researched.
Appraisers may include further support of their conclusions by citing what they term as secondary evidence.
Secondary evidence is in accelerating growth mode. We know that energy efficiency awareness is increasing and home owners are responding by talking with their dollars as they invest in their homes. Incentive programs and home performance contractors are driving the business of energy focused remodeling. Build It Green, California’s premier green certification program surpassed the 10,000 mark in 2011 for number of certified new homes. Shoppers are asking about operating costs. Financing for energy upgrades is a hot topic as the market spurs new opportunities and innovative loan products, some of which require valuation of the home “as improved”.
We see these market shifts, but appraisers must ask how they translate locally.
A look at the effects of upgrades on two of the study’s homes. Family “A” opted for extensive upgrades as summarized: envelope, mechanicals, interior and exterior water fixtures and a 2.5 kWh solar PV system. Attic and crawl space were air sealed and can lights replaced to reduce infiltration. New insulation was installed to crawl space walls and ceiling, and to attic. A new heating/AC/ducts system and variable speed pool pump completed the improvements for a total cost of $44,500 after their $8,000 rebate.
The appraisers were able to obtain 3 months of utility records subsequent to the completion of work which they measured against the contractor’s modeling projections. This house appears to be on track for total annual savings of 73% or more.
This family is enthusiastic about the results. Mr. “A” boasted that their recent bill was $19 as compared to $110 for the same month last year. “My wife and I have discussed the possibility of moving in the future but have concluded that we are not willing to compromise in living without the benefits of energy upgrades we have become accustomed to. If we were to put a number on it, we would definitely be willing to spend 5-10% more for a house with upgrades that are at minimum, equal to or better than what our home now has.”
The second family, with a smaller budget, chose a similar but less extensive scope without solar. Their case is interesting in two ways.
1. The result they’re most excited about is the notably improved indoor air quality. Their sons suffer from asthma. The significant reduction of asthmatic symptoms they experienced immediately after the upgrade work was an unexpected benefit. They are thrilled!
2. The second, and an interesting twist for the appraisers, was the home office over the detached garage with literally loads of electronic equipment. A disaggregation of the electric bill indicated a large plug load. This required the appraisers to differentiate the effects of upgrades to the house as separate from the office, in effort to derive relatively accurate numbers to account for energy savings.
This case underscores the need for appraisers with green expertise to have the skills to analyze utility records and understand how a house uses its energy, as well as the recognition that energy upgrade scopes of work often produce important non-energy benefits, such as healthier indoor air.
These cases are two examples of happy home owners who now have experiential knowledge. Having lived in their upgraded homes for a few months, they now value the improved comfort, indoor air quality, reduced costs and other aesthetics so much, they say they would not want to move. They stated to effect, that if they were shopping today, they would want a house that has, at minimum, similar energy efficient elements and they would spend more to get it.
Knowledgeable buyers. The definition of market value incorporates the concepts that buyers and sellers be willing, able and knowledgeable. Home shoppers who could be defined as “quite knowledgeable” about energy efficiency today are ahead of the curve. They represent a minor percentage of the collective market. A few examples were found where shopper education is occurring with focused intent. The study looked at two businesses that are extraordinarily proactive in informing their buyers; Green Earth Equities in Fresno, CA and Green Canopy Homes in Seattle. Their model is to buy distressed properties, improve with deep energy upgrades and resell with fast turn times. Their effort to educate not only the individual buyers but also their local communities is a key to their success.
Home owners and buyers will drive the market. Real estate professionals with green expertise may be pivotal catalysts as they are on the front lines, working face to face with these decision makers. Agents can help guide to ask important questions about utility costs, longer term operating and maintenance considerations as well as cost and availability of energy. Appraisers are called to define and report the actions of buyers, while they recognize the complexities of new building methodologies, standards, products, terms, trades and sources. Lenders need the knowledge base to understand all these.
Proof of value of energy efficiency upgrades. Until more energy upgraded homes actually sell, the task to find proof as expressed in dollars will be a tough job for valuation analysts. Appraisers will need to look beyond their typical sources to find what evidence they can. It may not be 100% proof, it may not be undoubtedly clear, but they are called to understand the current state of their local market. As more real estate professionals gain green expertise they will be key contributors to the awareness building of home owners as well as the affirmation of their green-informed buying decisions.
A white paper on this study will soon be published and look for Part 2 later this year, the study of four sold energy upgraded homes.
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GUEST AUTHOR: Debra Little was selected to direct this study because of her combined expertise in home performance and residential appraising. She led a team of senior appraisers who were on site in Los Angeles. See Debra at the ACI national conference in Baltimore this March where she’ll be presenting twice on this study. Contact Debra Little, Debralittle1@gmail.com , 530 320-2107, PO Box 2183, Nevada City, CA 95959
Author: David A. Braun, MAI, SRA
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