How Does Energy Efficiency Affect Property Value?
Many builders are skeptical about the value of energy efficiency. Our clients find that their customers want efficiency to come standard, and are not willing to pay extra for it. Is energy efficient building profitable for a new home builder? Do efficient homes sell for more in today’s marketplace? Several publications indicate that energy efficiency does add to the value of a home. In the Spring of 2010, the Appraisal Institute released a paper entitled “Valuing High Performance Houses.” The paper provides guidelines for calculating the monetary value that energy efficiency contributes to real estate. For example, a new home that saves $60 monthly over a comparable home may appraise for up to $9,000 more.
Professor Nils Kok of UCLA and visiting scholar Matthew E. Kahn of UC Berkeley conducted a study of green labeled homes in California from 2007-2012. The green labels considered in the study are Energy Star, LEED for Homes, and GreenPoint, which is specific to California. They find that a green label adds a 9% premium to the sale price of a home.
For nationwide results, we may look to a February 2013 survey administered by the National Association of Homebuilders entitled “What Home Buyers Really Want.” They find that first and foremost, buyers today want energy efficiency. 90% of homebuyers surveyed say they would pay 2-3% more for a home with energy efficient features and lower utility bills.
Builders, realtors, lenders, and homeowners may all place different values on energy efficiency. But they can agree that energy efficiency does have value in the residential marketplace. The same home with a more efficient design can be sold for more.
Appendix: Appraisal Institute Guidelines
The Appraisal Institute provides a method called Gross Rent Multiplier (GRM) Analysis for calculating the contributory value of energy efficiency to real estate. A property’s monthly GRM is calculated as follows:
(Monthly GRM) = (Sales Price) / (Monthly Rent)
In this type of analysis, monthly rent can be averaged for comparable properties in the same neighborhood. Using monthly GRM, the contributory value of energy savings may be calculated as follows:
(Value Contribution) = (Monthly Energy Savings) x (Monthly GRM)
In the Appraisal Institute paper, a case study is given of a home that saves $59.58 monthly over a comparable home, and has a monthly GRM of 154. GRM Analysis indicates a contributory value of $9,175. The Fannie Mae Energy Report on the property gives a contribution estimate of $8,633.60. (1)