The positive costs of energy efficient improvements

Energy efficient improvements are expensive to install. But over time, they reduce a homeowner’s utility costs and carbon footprint. At what point do energy improvements make sense — and how can sellers capitalize on these improvements to sell their homes faster, and for more money?

The average U.S. household spends $2,200 a year on utilities, 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).

The biggest energy improvements a homeowner can make include improving their home’s:

• insulation and potential for air leaks, which offers the quickest return on investment;
• heating and cooling systems, which has the potential to bring in the largest savings — though with a significant upfront investment;
• water heaters, which account for the second-largest energy expense for homeowners;
• windows, which can account for a significant portion of lost heat during the cold months;
• lighting, which is a quick and relatively inexpensive improvement; and
• appliances, which not only can reduce energy costs, but improve a property’s aesthetic value for potential homebuyers, according to the DOE.

Homeowners interested in going the extra mile to improve their energy efficiency can install solar panels and other extras like charging systems for electric vehicles or even windmills when appropriate.

Over time, the upfront costs for energy improvements pay for themselves. But what about when it comes time to sell?

Homes with an energy efficiency rating sell for 2.7% more on average, according to a Freddie Mac study. Simply having an energy rating doesn’t mean that a home has energy efficient improvements, just that an energy audit has been conducted on the property. But homeowners with energy efficient features to show off are more likely to order an audit.

Nationwide, homes with solar panels have an even greater premium, selling for 4% more than comparable homes without solar in 2019, according to Zillow. Here in California, the premium is slightly less — likely due to the ubiquity of solar — but solar homes still sell for 2%-3% more depending on the metro area.

Financing energy improvements

Lenders and mortgage insurers recognize the inherent savings of energy improvements, often allowing homebuyers access to higher loan limits on the promise of 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 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
• 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 improving quickly enough to outperform traditional financing options.

In the meantime, forward-thinking real estate agents will advise their clients to pass on PACE and fund energy upgrades through more traditional means.

Related article:

2019 PACE changes attempt to salvage troubled energy program

Next steps for energy efficiency

Clients interested in “going green” or improving their energy efficiency need to start with an energy audit.

The Home Energy Rating System (HERS) index is the U.S. standard rating system for energy efficiency in the home and one that real estate professionals often run across.

The baseline rating is 100. A score higher than 100 means a home is less efficient, and thus more costly to own and operate. A lower score means the home has more energy efficient features and thus costs less to operate.

For example, a HERS score of 50 means the home uses 50% less energy to operate than a newly built home built to the standard and roughly 80% less energy to operate than the typical resale home. A negative number means the home puts more energy back into the grid than it takes, and the home is designated a positive energy home.

To find a certified HERS rater in California, visit the California Energy Commission.

For real estate professionals, knowing the ins-and-outs of buying and selling green homes is quickly becoming a necessity.

From a seller’s perspective, a home with energy improvements needs to be properly marketed. Let potential buyers know about the energy-saving improvements. Have your seller order a HERS energy audit, advertise the results on the listing, and provide it to prospective homebuyers. On the other hand, when the HERS audit comes back high (and thus bodes poorly for energy efficiency), help the homeowner consider which energy efficient improvements they can make to increase the home’s desirability. Or, simply let buyers know how easy these improvements will be for them to make after the sale.

When the seller doesn’t want to order a full HERS audit, you can still draw up a cost-comparison sheet which lays the utility cost of your seller’s energy-efficient home with a similar energy-inefficient home down the block. Circle the monthly savings for the potential buyer, compare this with the monthly cost for the higher purchase price, and they will likely be willing to pay top dollar. [See RPI Form 306]

To market to homeowner or homebuyer clients interested in making their own green improvements, download firsttuesday’s free FARM Letter to distribute to clients: Easy energy efficiency.