Hidden Benefit of Home Performance: Increased Home Value
One of the more frequent questions fielded by Clean Energy Works is: What exactly is home performance, and why should I—a homeowner—invest in these upgrades? Practically speaking, a home is an investment that will grow over time, as long as the homeowner pays careful attention to important maintenance and upgrades. As every Home Energy reader knows, a home is essentially a system, with many moving parts. When one part of the home functions poorly, the entire system is affected. For example, installing a new, highly efficient furnace in a poorly insulated home doesn’t reduce energy use as much as installing that same furnace in conjunction with duct sealing and insulation work that will allow the furnace to heat the home quickly—and keep it warm longer.
Homeowners choose to invest in home performance upgrades for many reasons: saving money on energy bills, improving comfort, reducing their carbon footprint, improving the indoor air quality of the home. For many years, these multiple benefits have encouraged our customers in Oregon and Washington to invest in home performance—improving heating and cooling systems, adding insulation, sealing up air leaks, upgrading windows, and more. Home performance companies, nonprofit organizations, and energy efficiency programs throughout the country have used these benefits to persuade their customers and clients to invest time and/or money in energy efficiency retrofits.
And while homeowners often begin their journey with Clean Energy Works looking to cut utility bills or increase comfort, many soon realize that energy efficiency upgrades will increase their home’s value and its salability as well.
This is an important message that someday soon you will be able to share with your clients who are considering an upgrade no matter where they live: Good maintenance and home performance upgrades will build equity in your home—so you will realize greater value at the time of sale.
I’ve experienced this in my work with Clean Energy Works in Oregon and Washington. There is strong evidence that it is happening in California. You readers, and appraisers especially, can fill in the blank for other areas of the United States and Canada. (Please email email@example.com, or comment online.)
Younger Home Buyers Fueling Demand
Taylor Watkins, residential home appraiser in Portland, Oregon, and the Southwest, and a national expert in the value of energy efficiency upgrades, isn’t surprised that some people are seeing a bump in their home’s value when it’s time to sell or refinance. But he thinks that many more may be missing out on capturing that value. “A lot of things that make a high-performance home are not readily observable, and it’s harder to put a value on them,” Watkins says. “I always tell Realtors and homeowners that providing as much information as possible is key—we can’t value an upgrade to a home that we don’t know about.”
A 2012 study on the value of green homes in California found that a green label on a home resulted in a 9% (+/- 4%) price premium when these homes sold. (See the end of the article for more on the study.) This price premium is being driven by greater consumer demand for energy efficiency and renewable-energy features. Between 2011 and 2013, the number of LEED-certified homes doubled, and in 2014, 62% of U.S. firms building new homes reported that at least 15% of their current projects could be classified as green.
Watkins sees younger home buyers coming into the market as driving this trend.
“Green building has gone up every year, and part of that is the young home buyer or young family whose concerns have changed,” says Watkins. “When I started working in this area of the appraisal market, there were very few appraisers who were looking at the value of home energy upgrades when determining home value, and homeowners were not particularly interested in upgrading their homes from a value perspective. As younger home buyers enter the market and demand more-efficient homes, we are seeing more appraisers respond to that demand.”
On-Bill Financing Makes It Simple
Home performance projects can be extensive and expensive, and the extra hurdle of obtaining a loan and then paying it off can be daunting for homeowners. On-bill financing makes it easier to obtain a loan—and to pay it off through a utility bill that homeowners already receive on a monthly basis.
Here’s how it works. Home performance organizations like Clean Energy Works work with a loan partner—usually a community development bank or a small regional bank—to provide loan packages for home performance upgrades. These upgrades must meet specific criteria in order to qualify for the loans. Customers of the home performance organization are directed to the loan provider for financing at the appropriate point in the project. After the loan (and the project) are approved, work is completed and the loan payment begins to show up on the customer’s natural-gas or electric bill, where it can be compared to the cost of energy used that month. Since most home performance projects deliver significant energy savings, comparisons can be made between energy use prior to the project, energy use after the project, and the cost of the project after those savings.
One of the benefits of on-bill financing is that default rates are often lower than on other types of loan, as homeowner are more likely to make payments on their monthly utility bills than they would be to make payments on a separate bill. Only about a dozen states have enacted on-bill financing legislation to date, but more states are considering doing so.
Case in Point—Alex Pasco
Alex Pasco’s Portland, Oregon, home is an old English cottage, built in 1938 and extremely inefficient. “We had actually sworn off our upstairs bedroom because on cold nights, we could literally feel a breeze come through the walls,” says Alex.
In 2010, Alex’s wife was expecting a child, so they moved into that frigid upstairs bedroom to make room for the baby. After nearly two years, they decided they couldn’t stand it anymore —it was time to upgrade their home. Sealing up cracks cut drafts. Adding new insulation, along with a modern furnace (and a new water heater) went a long way toward keeping their home warm in winter and cool in summer.
The work paid off. Alex's energy savings were greater than his loan payment for the upgrades, and he was able to pay for the work on his monthly utility bill, with Clean Energy Work’s easy on-bill financing program. (For more, see “On-Bill Financing Makes It Simple.”) After all those immediate benefits, Alex and his family were pleasantly surprised when it came time to sell. Their Realtor evaluated their home and told them to increase the asking price by $10,000 over the price of other, comparable homes, because of all the efficiency upgrades.
“We made improvements potential buyers want to see,” says Alex. “The investment paid for itself and then some.”
Marshall Runkel Is Another Great Example
Marshall Runkel’s North Portland home is an old Craftsman, built in 1910. He made a number of upgrades last year, including insulation and air sealing, modern windows, a new heat pump water heater, and an efficient furnace. He was pleased when these improvements cut his energy bills by $150 a month. Marshall’s home was a “very extensive” retrofit by his own admission, work that needed to be done to bring a 100-year-old home up to date. But with the energy savings he’s generating, his cost on the project is only about $60 a month.
Perhaps even more important, the upgrade has made his home far more comfortable and has given him and his family space that was basically unusable before. His seven-year-old daughter used to routinely complain about the cold in her bedroom, something that “never happens anymore,” he says. In addition, a 300 ft2 too hot/too cold extra bedroom on the south side of the house was so uncomfortable that it went unused; today, the space is cozy enough for Marshall’s wife to use it as an office.
But that wasn’t all.
Energy Performance Scores
Consumers have mpg ratings for cars and Energy Star ratings for appliances, but until now, they have had no numerical ratings to assess their home’s energy efficiency. An Energy Performance Score (EPS) is the first such rating; the lower the score, the more efficient the home. Ranked on a scale from 0 to 200 (zero being the best possible rating, one reserved for net zero homes), an EPS evaluates a home based on historic costs to operate it, including annual and estimated monthly energy bills; the home’s relative efficiency compared to that of similar homes; and its carbon footprint. It gives a detailed breakdown of the equipment and systems evaluated to achieve the score.
In Oregon, where Clean Energy Works is located, most EPSs have been given to newly built homes; they are used to differentiate efficient homes from similar, relatively inefficient homes during the sales process. Clean Energy Works introduced the EPS to older homes that have undergone efficiency upgrades, and these scores are part of the service Clean Energy Works provides to homeowners.
There is some evidence that the ability to reflect actual energy use and efficiency in the form of an EPS may affect a home’s value in the future. In much the same way as consumers compare cars and decide to purchase the one that has an efficient engine, home buyers may add the EPS to the criteria that help to inform a purchase. While only a few jurisdictions have been giving EPS-like scores to new and existing homes, many experts believe that scoring homes based on efficiency is an idea whose time has come.
For an example, see Figure 1.
When Marshall Runkel decided to refinance his home, he sought out an appraisal, but he was disappointed when the first appraiser didn’t include the value of his energy efficiency investments. When he hired a second appraiser—one with knowledge of high-performance features and the local market—the appraised value increased by $13,000.
“We were pleased to find out that our home was worth more,” says Marshall. “And while it makes sense that a more efficient home would be worth more, I feel like the real estate market is just starting to wake up to the value of these investments.”
The Rise of Energy Performance Scores
The real estate industry is well versed in using ratings to place a value on the features and amenities of a home. Homes in neighborhoods where schools are perceived as good are often more valuable, and many prospective home buyers and home sellers use walk scores to demonstrate the value of a livable location.
Get specific recommendations and advice for homeowners on upgrades—including what projects provide the quickest and largest payback—and to calculate potential energy savings.
Home performance contractors can view the latest best practices and innovative projects in residential home efficiency by visiting DOE’s Better Buildings Accelerator.
Read a great story about an older home and the value of having an EPS.
The idea of a home energy performance score, which allows homeowners to compare their home’s energy efficiency to that of other similar homes, is beginning to gain traction. In Oregon, where Clean Energy Works is located, Energy Performance Scores are being applied to both newly built and existing homes on a scale of 0 to 200. The lower the EPS, the more efficient the home (see “Energy Performance Scores”).
To determine a home’s score, a third-party verifier analyzes the home’s features and construction techniques and tests performance factors such as air leakage and duct tightness.
For the time being, determining a home’s score is voluntary in Oregon, and the score is not disclosed at the time of sale. But empowering home buyers to compare similar homes’ efficiency before purchase (in much the same way as we compare cars and appliances) is an idea whose time just may have come.
Finding the Right Professionals
It’s clear that part of realizing the value of an investment in home performance lies in finding the right appraiser and/or real estate agent, and in helping them understand the benefits for potential buyers. Watkins hosts trainings for real estate professionals where he teaches them how to value duct sealing, solar panels, and insulation in the same way as they value a kitchen remodel.
“The laws of real estate valuation have not changed,” says Watkins. “I believe almost all real estate professionals should be able to include green upgrades in their valuations if they understand the benefits of the investment, and if they believe it will make a difference to a buyer.”
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