Portland Area Real Estate Appraisal Discussion

November 21st, 2016 2:03 PM

Portland Home Energy Score Policy
When consumers buy products like appliances, automobiles, or even food, they are provided with labeling information about energy.  Such labels increase customer awareness and help buyers make the best decision.  With food, shoppers often select the lowest calorie product and willingly pay more for that product.  A car that uses less fuel will be advertised as such and subsequently sell for a premium.  The problem is that when a home is purchased, particularly a used home, buyers know little about its energy consumption and therefore tend to overlook one of the most important costs of ownership.

Portland, Oregon is a city that recognizes energy conservation as an energy resource and, for this reason, encourages home improvements that reduce energy consumption, thereby reducing the need for new power sources.  The problem is that buyers of homes with energy efficient improvements don’t accurately know how much those enhancements reduce energy costs.  To solve this problem, Portland has proposed a Home Energy Score Policy that would require anyone selling a single-family home in Portland to provide a home energy performance report to the city and prospective buyers.

The performance reports that Portland is proposing cost between $150 and $250 and are produced by a certified home energy assessor.  The report would calculate the total annual energy used by the home and estimate the cost of that energy.  Exemptions from Portland’s proposed policy would include foreclosure related sales and hardships.  The cost of these reports have trended downward in cities that have policies requiring them. 

A similar energy scoring policy is already in effect for commercial properties in Portland and there are similar policies or laws applicable to residences in Austin, TX; Berkeley, CA; Santa Fe, NM; Boulder, CO; the United Kingdom; Denmark; and Australia.  If real estate professionals from these other cities have insight into how the policies have affected real estate transactions, I would love to hear about it in the comments below. 

My guess is that buyers, sellers, and real estate professionals do not become educated overnight, but that they slowly start to weigh these factors just as buyers consider other routine purchases.  This has been the case with green and solar in our area.  Some new home builders in Portland started marketing energy efficiency to differentiate themselves.  Buyers started recognizing the value of these qualities before appraisers did.  However, through published studies, reporting of information in the multiple listing service, and more educational offerings, appraisers are now starting to better identify market reactions to energy efficient upgrades.

Voluntary Home Energy Scores have been in Portland for eight years but are being used in very few transactions.  These are mostly just reported on new homes that have been built with green or Energy Star ratings that are energy efficient above code.  Some might say, “If buyers demanded this information, then sellers would provide it voluntarily.”  The problem is that buyers (particularly of used homes) do not know that they could have this information, and individual buyers do not have much power to ask for this information on homes that they are considering.  The City of Portland believes that a policy is needed to more quickly make energy scores a part of the market and subsequently drive more improvements in energy upgrades like is already occurring in the commercial market.

I know that many appraisers and real estate professionals are thinking that if this information is available, no one will care and it will just cost sellers more.  I do not believe that is the case.  The following lists just a few national and local studies looking at certified energy efficient homes, green homes (that are tied to lower energy costs), and PV solar systems completed over the past twenty years.  The reports show a demand for energy efficiency and a clear relationship between lower energy consumption in a home and its value.

  • Energy Star Pulse Survey of 2014 reported that 76% of homeowners are likely or very likely to pay more for a home that would result in lower ongoing energy costs.
  • More Evidence of Rational Market Valuations for Home Energy Efficiency Appraisal Journal article in 1999 (built on a 1998 article) suggests that energy upgrades have $20 value for each $1 of annual energy savings. The study is old and has its flaws, particularly because it was based on window replacement that could provide value to the owner or home in other ways than just energy efficiency. However, subsequent studies in many other types of energy upgrades have produced similar results.
  • Energy Trust of Oregon Valuation Study of 2014 looked at home sales in Portland with solar and energy performance scoring (EPS, like the proposed Home Energy Score) using appraiser paired sales. The study findings showed that solar systems or green certified homes sold for 3.6% or 4% more respectfully than homes that lacked these energy reduction features. One point in the study suggested that the EPS (Energy Performance Score, similar to Portland’s proposed score) is underrepresented in Portland’s local multiple listing service and not marketable due to lack of market understanding.
  • An Analysis of Solar Home Paired Sales across Six States Appraisal Journal Article in 2015 suggests that offsetting energy costs using solar results in higher sales prices consistent with other studies or about $4 per watt on average over the combined states.
  • The Market Valuation of Energy Efficient and Green Homes of 2015 was done by appraisers in the Northwest. The findings show evidence for increased sale prices of up to 8% related to green certified and Energy Star homes that is consistent with other studies.

Based on the overwhelming evidence in these local and national studies that lower home energy consumption equals a higher sales price, I believe that if buyers have access to Home Energy Scores and are educated about them, they will absolutely be willing to pay a premium for homes that have lower energy costs.  I believe that if Home Energy Scores become policy in Portland, more energy upgrades will be made both by sellers who are motivated to increase the price of the home they are selling and by buyers who generally make additional improvements close to the time of purchase.  Also, more buyers will likely take advantage of new loan products like FannieMae HomeStyle® Energy mortgage and government incentives that encourage energy upgrades.  In the future, if this policy is approved, appraisers in Portland could be reporting the Home Energy Score for each comparable sale and might even be making line item adjustments for market reactions to them.

Are you an Oregon or Washington appraiser interested in seven hours of FREE continuing education about appraising energy efficient homes?  I will be teaching a class in Hermiston, Oregon on December 9th.  I know it is a long drive for many of us, but it’s otherwise free.  Click here to learn more. 

Did I leave anything out or do you want to join in the conversation?  Let me know in the comments below.

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Thanks for reading,

Gary F. Kristensen, SRA, IFA, AGA

Posted by Gary Kristensen on November 21st, 2016 2:03 PMView Comments (8)

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