A property’s energy consumption: known and demanded in a recession: Part 1

This article explains how seller’s agents quantify the financial consequences of a listed property’s energy consumption.

The greening of real estate marketing

Most buyers and sellers of real estate are aware that a home is a heavy consumer of electricity, gas, water, internet and other services needed to use a property. However, a buyer does not know how much in concrete terms. For most buyers, it is just an (un)educated guess. By contrast, sellers are intimately aware of these operational realities, including the monthly cost in real dollars.

Energy bills have in the past been given and are still given the silent treatment by seller’s agents. Ironically, every seller knows full well the amounts paid to operate their property, and listing agents all know how to ask their seller for a property operating data sheet. In an asymmetrical display of non-disclosures, buyers don’t and are left in the dark. However, these energy demands are a significant monthly cost incurred to carry the operating expense of owning a home — and need to be considered by the prudent buyer.

More than just the daily management of turning off unused lights or running the sprinklers fewer times a week, the way a home is built — and its location — have a drastic impact on how much energy it causes the owner to consume — on site and off site — and thus the size of energy bills.

For prospective buyers, the cost of each energy source consumed or caused to be consumed by owning a home are material facts they need to become sufficiently informed to consider owning a home, and whether one home is preferable over another on these grounds. Disclosure of the data might alter negotiations, or chase some prospective buyers away, which of course is why the energy costs are material facts required to be disclosed. [See RPI Form 306]

Related article:

Pivot to find profits during a recession: Focus on homebuyers

Most owners do not presently realize the actual structure of a home has a positive or negative impact on the monthly cost of their energy consumption. However, buyers are becoming more aware of these impacts and in a recession-generated buyer’s market, sellers will more acutely feel the effect of energy efficiency concerns on the pricing of their home.

Perhaps most importantly, the location of the home is a significant part of a homeowner’s energy cost calculations. The further a commute to the nearest jobs, amenities and services, the higher the energy costs committed to transportation. Thus, it’s reasonable to expect a price premium for a home closer to urban centers. Likewise, a home located on the outskirts of a metro will see a reduced price — even if the home is newly built or otherwise has energy efficient features.

Energy efficiency is a public policy trend

Living a “green” lifestyle is a concept now permeating the American psyche for more reasons than a reduction in one’s energy consumption bills.

Public policy, social media and evolving general environmental awareness — and dollar costs — all encourage individuals to make eco-friendly lifestyle choices. The use of renewable resources has become mainstream thinking for reasons of science, not implicit beliefs, and this creates an enduring demand for efficient homes.

The idea of renewables is significant both in the training of real estate agents and their treatment of homebuyers. The agents and homebuilders advocating environmental sustainability are visionaries, grasping the shift underway in homebuyer decision making as they lean into energy efficient new and used homes.

Related article:

Energy efficient properties will reduce emissions by 2030

Solar on every new roof top

Beginning in 2020, California adopted minimum energy standards for newly built homes, the result of the changing attitudes toward energy sources in our population.

The new standards for residential homes and multi-family buildings of three-stories or less built beginning January 1, 2020 are:

• installing smart solar systems on rooftops (exempting some properties where shade makes this choice inappropriate);
• installing smart battery storage and heat pump systems that allow the home to store energy produced during off-peak periods;
• improving indoor air quality with high-efficiency air filters; and
• tightening the building envelope, including more effective insulation in attics, walls and windows.

For commercial buildings built beginning January 1, 2020, the new standards are:

• improving indoor air quality with high-efficiency air filters;
• installing LED lighting;
• installing motion sensors in bathrooms for lights; and
• requiring new healthcare facilities to adopt energy-efficient, commercial building standards (they were previously exempt).

But what is the cost of this new solar requirement and its effect on home pricing?

The Consumer Electronics Control (CEC) estimates the new standards will increase the purchase price of new homes by about $9,500. For buyers of these homes, this translates to $40 more a month in mortgage payments due to a higher purchase price.

More critically, the average energy savings is $80 a month as a return to the buyer on this increased investment in a home. Thus, the price increase reflected in higher mortgage payments is offset by a reduction of over 50% less in the cost of energy than homes built under the old standards adopted in 2016.

While California struggles to work its way through a severe housing shortage, is it really the best time to introduce upgrades in housing standards which increase the cost of construction?

To stave off critics of change, California has kept open a few loopholes for builders who wish to circumvent the new solar requirements. For example, instead of installing solar, homebuilders may choose to buy into a solar credit system which uses solar energy farmed at an off-site facility. This system still saves homeowners money, but less than half of the likely savings for new homes with a rooftop solar system.

Financing energy improvements

Lenders and mortgage insurers recognize the inherent savings of energy improvements by providing homebuyers with higher loan limits on the basis of reduced property operating costs from energy savings.

For example, the Federal Housing Administration (FHA) offers an Energy Efficient Mortgage which allows homebuyers to exceed their loan limits when energy efficient improvements contribute to savings on monthly energy costs. The program requires a home energy assessment to determine the amount of money homeowners will save each month, and thus how much they qualify to borrow.

Fannie Mae also offers homebuyers and homeowners their HomeStyle Energy Mortgage to upgrade their homes with energy efficient improvements. Unlike the FHA’s program, Fannie Mae does not require an energy audit under their simple program, which allows existing homeowners to borrow up to $3,500 for basic renovations. Homeowners can also use a HomeStyle Energy Mortgage to pay off their existing Property Assessed Clean Energy (PACE) loan.

Here in California, the PACE program aims to address the need for sustainable energy retrofits of both residential and commercial properties, including:

• solar panels;
• heating and cooling systems;
• water pumps;
• LED lighting; and
• improved insulation.

However, the PACE program offers mixed results, and has contributed to problems for homeowners and lenders alike. Atop complaints, foreclosures and lawsuits, PACE is simply not structured to outperform traditional financing options.

Related article:

The positive costs of energy efficient improvements

California energy consumption

In today’s post-Millennium Boom culture, homeowners are receptive to living more efficiently. Cutting living costs, deleveraging out of debt and building up savings have become acceptable family financial planning solutions following the Great Recession of 2008.

However, in their quest many owners and buyers are not aware of the government programs sponsoring and subsidizing energy efficiency to encourage smarter consumption. Forward-looking brokers and agents will do a bit of professional homework — evening reading — so they can better inform their buyers and sellers about the subsidies, grants and financing programs available to renovate a home to improve its energy rating.

Significantly, 2022 saw the beginnings of a buyer’s market in California. In other words, buyers are no longer willing to offer the asking price — much less more than the asking price — for a home in need of energy improvements. To stand out from the competition and attract a homebuyer from the dwindling supply of active market participants in 2023 and 2024, sellers will need to pull out all the stops — including their consideration to make energy efficient improvements.

To put the concept to work, the federal government has developed Home Energy Score programs designed to:

• encourage homeowners to make their homes more energy-conscious; and
• motivate homebuyers to buy homes with better improvements that allow them to consume less energy for shelter.

The federal Home Energy Score is a rating assigned to each home by a home energy specialist. Using this rating system scoring, buyers can determine the relative amount of energy the home and its occupants consume due to its current physical condition and location in a community.

Homes with a high energy score require the expenditure of a lesser amount of energy — they are more energy efficient. Conversely, homes with low scores are less energy efficient. For homeowners and sellers, the specialist will suggest changes to the structure to improve the score.

Builders also are motivated to construct homes with the home energy score in mind. They will be better able to compete with multiple listing service (MLS) resale agents. Agents may need to advise sellers to consider spending money on renovations so they can drop their energy score to compete with new home sales.

The influence of agents on energy efficiency

Presently, very few homebuyers are advised by their agent to consider the energy efficiency of a home when deciding to purchase one.

The primary cause is due to the lethargy of seller’s agents, and unwillingness of sellers, to disclose more about a property than is minimally required using legislated forms. Yet, energy disclosures are material aspects of a home since energy consumption data when disclosed to a buyer might well affect decisions about taking on the carrying costs of owning one property over another.

All agents — either representing sellers or buyers — have a duty owed to prospective buyers to disclose known and knowable energy costs and energy efficiency data on a home upfront — before a price is set by a buyer in a purchase agreement. Operating costs are conditions affecting the price of the property in the sales transaction they are negotiating. [See RPI Form 306]

A forward-thinking listing agent will see these coming shifts in disclosures of property data and consumer thinking as an opportunity, particularly in a recession long on MLS inventory, to label themselves as an expert in energy-efficient homeownership.

What do buyers want?

Buyers are motivated to purchase energy-efficient homes for two reasons.

First, and easiest to quantify, is the savings on operating costs.

The average U.S. household spends $2,200 a year on energy costs, the majority of which is spent on heating and cooling. But making energy improvements can reduce this cost by 25% on average, according to the U.S. Department of Energy (DOE).

Second, the social motivation present in energy efficiency (mostly in high-tier communities) gives a homeowner green bragging rights. Since two-thirds of home sales involve mid- and low-tier housing, we will focus on the operating cost motivation in decision making.

Strategies for making energy efficient improvements

When installing any home improvement, the homeowner needs to ask themselves: why am I doing this?

In other words:

• Is this improvement going to increase their use and enjoyment of their residence now?; and
• Is the improvement going to increase the value, and thus the resale price of their home at any given time?

The vast majority of energy-efficient improvements will increase the home’s value to some extent and in turn its pricing relative to comparable properties, while also allowing the homeowner to save money on energy costs over their years of ownership.

However, there are some notable exceptions.

First, leasing solar panels can prove financially tricky when the homeowner decides to sell. Most solar operators that provide solar leases are eager to transfer their service (but not ownership of the equipment) over to the buyer of a home who is required to take title subject to the existing lease. More accurately, the solar company is leasing the roof area to place their electrical generating equipment so they can sell energy to the local utility which is generated but not consumed by the homeowner.

But what happens when the homebuyer doesn’t want any part of a solar lease obligation and its encumbrance on title?

There are several options, but — as experience has taught many agents — solar lease encumbrances can prove to be a burdensome obstacle when trying to close a deal.

Second, any energy-efficient improvements that are owned and part of the real estate (not a solar lease situation) need to be installed for a number of years before the homeowner’s investment fully pays off. The inverse is also true: if an energy-saving improvement is owned and has been installed for too long, it becomes outdated and obsolete. In this instance of obsolescence, the improvement can actually lower the value of the home.

Thus, timing and the ownership of the solar equipment is significant.

Related article:

Solar on every roof? New construction standards in California.

Learn how to transparently market the energy efficiency of the property to buyers in next week’s Part 2. Make sure you don’t miss an update — subscribe to firsttuesday’s newsletter, Quilix.