Low Impact Living: The Bottom Line — Green Home Upgrades & Home Values

June 30, 2008

This post was originally published on June 29, 2008.

With many cities experiencing a real estate “slump”, homeowners around the country are looking for ways to stand out from the slew of homes on the market, while improving their home’s resale value. Other homeowners are planning for the future: a future of ever-rising energy prices.

Regardless of your situation, you may be asking yourself if green home improvements increase the home’s value. The answer isn’t as straight-forward as some might hope.

The old rules still apply…

Before we dive in, there are a few things to consider when thinking about making home improvements – green or not. First, remember the three rules of real estate: location, location, location. The return on your investment will depend on the value of your house and others in the neighborhood, as well as your local housing market. Other factors like the quality of the workmanship, and how soon you move after making the improvements weigh in as well.

One man’s treasure…

That said, there are actually two different values to consider when judging the return on home improvements, according to Dr. Harold Hunt, a research economist at the Real Estate Center at Texas A&M University: value in use and value in exchange.

To explain these concepts, let’s use a little story. Ted owns a home, but is looking to move soon. Ted is concerned about climate change. After some research, Ted decides to make a few eco-friendly improvements around his home that will increase its resale value, including a new energy-efficient air conditioning system and installing bamboo floors. This is exciting to Ted. He looks forward to bragging about going green to all of his friends, and selling the house at a premium.

Bill is looking to buy a house. Bill wants to get the best deal that he can on a new home, closer to work. When Bill sees Ted’s house, he is excited – with high energy costs, the new air conditioning system will save him money. Bill looks forward to seeing how much smaller his energy bills will be in his new home. Oh, and the new floors look nice, too.

OK, back to reality! Ted provides a very good example of value in use. His satisfaction in the green improvements can be measured in both monetary terms (saving money on energy) and non-monetary terms (reducing his impact by using bamboo versus hardwood flooring, and bragging to his friends). Unfortunately, Bill may not value the non-monetary rewards enough to pay a premium for them, illustrating value in exchange.

So how does Bill and Ted’s adventure apply to you? If you’re not planning on moving any time soon, invest in changes are eco-friendly and that you’ll most enjoy. Until green features become mainstream – and corresponding increases in home values can be measured – it’s hard to know what buyers will be willing to pay for. Just keep in mind that come moving time, green amenities and features may not appeal to everyone, but energy- and money-saving green features will.

Hedge your bet…

If you’re building a new house, or diving into a significant remodel, you might want to consider getting it certified as green. Come resell time, certification can provide buyers interested in all kinds of green benefits assurance that they are getting what they paid for.

Nationally, the US Green Building Council, developers of the LEED rating system, have put forth a new residential certification called LEED for Homes. LEED certified homes use less energy, water and natural resources, and their construction creates less waste, among other benefits. LEED is probably the most well-know certification standard in the US, mainly due to its widespread commercial acceptance. Certification by LEED comes with a significant amount of cache, though some feel that the requirements need refinement and that the registration process is cumbersome.

Other nationwide programs include the Environments for Living certification, which includes an energy usage guarantee, and the EnergyStar program, which focuses on home energy efficiency.

Other programs exist locally, like Austin Energy’s Green Building Program and Earth Advantage in Oregon and Boston. For homes certified green by Built Green in Colorado, Countrywide Home Loans even offers ½ point off for home buyers. There is also the Build It Green program in California. For links to programs in your state, check out the Public-Private Partnership for Advanced Housing Technology.

The Big Question: Solar

One of the biggest dreams that many green homeowners have is living “off the grid”, meaning that they can supply all of the energy needed to power their home. If you dream of this, or even if you just dream of reducing your electricity bills, solar is usually part of the equation.

Residential solar installations have always been an expensive prospect, but as technologies have improved and costs have come down, solar has become feasible for many. Still, full systems can cost upwards of $30,000, so it’s important to understand the economics up front. Fortunately, some incentives exist at the state and federal level.

First up, the Feds. For the past three years the US government has offered homeowners a 30% tax credit on solar projects (including photovoltaic systems and solar hot water heaters) up to a maximum of $2,000 per project. However, this incentive is set to expire at the end of the year. Whether these incentives are extended beyond December 31st remains to be seen – the bill to continue them is currently being filibustered in the Senate (don’t get us started.)

Fortunately, states have stepped into the leadership role, providing incentives beyond those provided at the federal level. For example, California’s Solar Initiative provides incentives for existing homes (amounts vary) through 2017, while the New Solar Homes Partnership does the same for new homes. Many states provide tax breaks and rebates for solar installations, so take a look at the Database of State Incentives for Renewables and Efficiency (DSIRE) to find out what you may qualify for. Depending on where you live, these incentives can reduce your cost by up to half. To learn more about green home improvement incentives and tax breaks, please read this earlier post.

In addition, if you live in a “net metering” state, like California, New Jersey, and Texas, you can be credited for any surplus electricity that you generate. In other words, if you use less energy than you make, your meter literally spins backwards, selling energy back to your provider at retail rates. Currently, 35 states offer net metering – again, check the DSIRE database to determine if you qualify for this big benefit.

However, after applying all of the rebates and incentives, there will still be a hefty price to pay for your newfound energy independence. So how to finance that?

Though commercial institutions have options like Power Purchase Agreements (PPAs) to finance solar installations, residential customers must look to more traditional methods like home equity loans. Most manufacturers are also teaming up with sources of financing to offer loans or lines of credits to homeowners looking to install solar. Sharp and CitiMortgage have such an arrangement.

In addition, some banks, like Wainwright Bank & Trust in Boston, offer a reduced interested rate for “green” home improvement loans (in this case, one point is knocked off the loan’s interest rate). Pennsylvania-based AFC First Financial Corp offers residents in Pennsylvania, Maine, Vermont, Massachusetts, Connecticut, New York, New Jersey, Delaware, Virginia and Maryland up to $20,000 through their EnergyLoan program.

The Big Payback

With the evolution of solar’s efficiencies, cost reductions, and net metering, payback periods for the original homeowner can now be in the single digits. But what about when you sell your home? Can you recoup that investment? Since residential solar installations are still relatively rare, it’s difficult to say. To answer the question, appraisers are using this rule of thumb: half of the cost of a solar installation can be recouped at selling time. Or you can look at it from the energy savings perspective: according to The Appraisal Journal, every $1 decrease in energy costs results in a $10 to $25 increase in home values. If this holds true, eliminating a $1200 annual electricity bill translates into at least a $12,000 increase in home price. Not too shabby.

In general, if your electricity bills are low, under around $100 per month, it’s unlikely to be worth the cost and effort. However, it they are over $200 per month, the economics really sell the project. Regardless of where you land on home improvement projects, big or small, keep in mind that it’s not all about the money. Benefits to the environment are immeasurable!

To find solar installers near you, click here.

To find green real estate for sale across the country, click here.

Image credit: clownfish at Flickr under a Creative Commons license