Property owners who have added energy-efficient upgrades to their properties could be cashing in on more than utility-savings. Certain states will soon be factoring in energy efficiency scoring on appraisals.
Environmental advocates and the federal government have been urging homeowners for years to make energy-efficient upgrades to their properties.
However, the cost savings were not formally included as part of the value of the home on an appraisal, until recently.
The Residential Energy Services Network (RESNET) succeeded in working with the Appraisal Institute to develop a standardized Home Energy Rating System that would be included on appraisal forms in certain states.
Steve Baden, the executive director of Residential Energy Services Network said, “One of the largest barriers to the building and selling of high-energy-performance homes is that the value of energy upgrades is too often not reflected in the real estate appraisal of a home.”
He added that “Many of the features that make a home energy-efficient are hidden behind drywall and aren’t obvious to home buyers.”
That means homeowners and real estate investors couldn’t necessarily recoup the expense of energy-saving improvements in the sale of their property.
Now in states that have committed to using the new Home Energy Rating System, or HERS, the HERS score will be added to existing green-building addendums offered to appraisers in those states.
HERS scores start at a baseline of 100, which is the score for a new, “unimproved” standard home that does not have energy-efficient additions. Scores lower than 100 are more energy efficient, and scores higher are less energy efficient than that standard home.
This means that if your house has a score of 65, it uses 35% less energy than a standard home. If your house has a score of 165, it uses 65% more energy than that standard home.
At present, HERS scores are included in appraisals in parts of Massachusetts, Idaho, New York, Nevada, Colorado, New Mexico, Kansas, and Arkansas. Alabama, Illinois, Michigan, New Jersey, South Carolina, Texas, Utah, and Vermont have adopted the HERS scores on a statewide scale and incorporated the scoring into their building energy codes.
What does this new appraisal facet mean for investors?
For starters, you’ll want to find out if the state in which you are investing is using this scoring system on its appraisals. If it is, then you will need to consider how that decision affects whether or not you make energy-efficient improvements to your properties.
The advantages are not just added value upon a sale. Green homes can command higher rents and purchase prices because they cost less to maintain, and energy efficient improvements often come with associated tax deductions and other subsidies.
[intense_content_section size=”partial” background_type=”color” background_color=”muted” margin_top=”25″ margin_bottom=”25″ padding_top=”10″ padding_bottom=”10″ padding_left=”10″ padding_right=”10″]Important Note: Before you install everything that promises to save you a few cents on the electric bill, however, read the fine print! Some energy-efficient upgrades qualify for value and inclusion under HERS while others do not.
For example, solar panels are a commonly-recognized improvement, but if you want to include them in your HERS score, you’ll need to make sure that they meet certain criteria. Homes with incorrectly positioned panels may not qualify for a HERS score even if the panels reduce monthly electric bills.[/intense_content_section]
Another benefit to green upgrades on the appraisal is the ability to get financing or to refinance. If the appraisal comes in higher, the LTV may be lower, and that could reduce your rate and hence, lower your payments.
Finally, if an appraiser was unfamiliar with green construction or nearby homes with comparable features weren’t available, homeowners ended up having to sell lower than the value of their home or they weren’t able to refinance with the lower valuation.
With the HERS score becoming more common, more homeowners will be able to make energy-efficient upgrades and sell their homes nearer to the appropriate value.
And the main reason to pony up for energy upgrades is – it’s good for the environment. So thank goodness it’s becoming more profitable to help out Mother Earth.
Here’s a quick recap of the benefits:
Benefits of Making Green Updates for Investors
- It can increase the sale value of your investment property.
- You can charge higher rents.
- You may qualify for more tax deductions.
- It can improve your ability to get financing or to refinance.
- And it’s good for the environment!