Home energy retrofits: The bottom line

By Steve Hargreaves, staff writer
February 4, 2010: 12:38 PM ET

NEW YORK (CNNMoney.com) -- Investing to make your home more energy efficient may lower the bills, but it may not boost its price, partly because these investments aren't fully valued by appraisers.

"Everyone is talking about return on investment, it's the first thing customers want to know," said Jeff Geoghan, a Coldwell Banker realtor in Lancaster, Penn. "But the appraisal industry is not up to speed on this at all."

Nearly everyone agrees that performing an energy retrofit will make your place more comfortable and save a lot on bills. But if the retrofits don't add value to the home's price, will homeowners make the improvements, regardless of whether or not the government decides to pick up half the tab, as they are considering?

Details have yet to be ironed out and passage is not a sure thing, but it's thought a new jobs initiative being pursued by Democrats in Congress may funnel some $11 billion towards home energy efficiency.

It's designed primarily to put contractors back to work, doing things like adding insulation, caulking windows and doors, and upgrading heating units, air conditioners, hot water heaters and other appliances.

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But it would also cut down on pollution, and the monthly savings for homeowners could be substantial.

If passed, homeowners may be eligible for a tax credit worth up to $12,000, or half the cost of the retrofits, which ever is lower.

If a homeowner spends $24,000 and cuts its energy use in half - probably the most ambitions reduction that can reasonably be achieved - it would save the average homeowner $100 a month on their utility bills, said Lane Burt, manager of building energy policy at Natural Resources Defense Council.

If they get $12,000 reimbursed from the government, then payback time would be 10 years. But if people spend that much and sell the house before 10 years, they may be out some money.

Many homeowners would likely opt to spend less, going for the cheapest options that save the most energy. Contractors who perform energy retrofits say most people spend around $6,000 or $7,000, and the payback time is around 5 years.

But assuming the full amount is spent and the savings are $100 a month, that should result in a substantial increase in home's valuation. After all, an extra $100 a month one could put towards a mortgage means an increase of $20,000 on the purchase price for a home, according to a calculation done on a purchase price calculator.

Yet that extra $20,000 does not show up on a home's appraisal.

'It sounds good on paper, but it's just not how the American consumer makes choices," said Geoghan, the realtor. 'If you're buying a house, and you see a furnace has a 95% efficiency rating, are you really going to make your decision based on that?"

Another realtor agreed.

"How much can you really raise the value, maybe few thousand dollars," said Laurie Hassey of the Long Reality Company in Tucson, Ariz. "It's still all based on square footage."

Part of the problem is that many real estate appraisers aren't trained to look for energy efficiency upgrades.

"There are appraisers out there that have extremely minimal education," said Leslie Sellers, president of the the industry association the Appraisal Institute.

Sellers said that about a quarter of all appraisers only have the most basic of qualifications - a level known as a "licensed appraiser." Up until 2008, when the standards were tightened, that meant all they needed was a high school diploma and half a semester of course work.

Sellers said the institute is currently running green certification programs that will teach appraisers how to better value upgrades like efficiency improvements.

Sellers also suggested going with a better trained appraiser - a "certified appraiser" - when getting a home evaluated, even if they cost more money.