The matter of valuation and whether energy efficiency and total cost of home ownership is a factor used in determining fair market value is crucial. Before even getting any deeper into details we should understand what FAIR MARKET VALUE is---fortunately the US Supreme Court defined the term in 1973 and that definition is still widely accepted.
The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. United States v. Cartwright, 411 U. S. 546, 93 S. Ct. 1713, 1716-17, 36 L. Ed. 2d 528, 73-1 U.S. Tax Cas. (CCH) ¶ 12,926 (1973) (quoting from U.S. Treasury regulations relating to Federal estate taxes, at 26 C.F.R. sec. 20.2031-1(b)).
I recently attended an all day course, primarily intended for appraisers, addressing how energy efficiency could best become a consistent part of the appraisal process. It was a very interesting (and tiring) day, but during the afternoon I realized that if the BUYER didn't fold energy efficiency into the price he or she agreed to pay and the SELLER didn't fold energy efficiency into the list price and make sure the marketing efforts featured that attribute, how the appraiser addresses energy efficiency isn't highly important. Market value is established at contract creation. If a house is highly energy efficient and the appraiser perceives that characteristic at all, but energy efficiency did not play a part in list price or contract price--- the appraiser merely has additional wiggle room in justifying that contract price. What happens at present is that many appraisers treat energy efficient upgrades as an indication of "high quality construction", rather than open the door to a new array of adjustments that haven't been established. Efforts to quantify energy efficiency upgrades in terms of value adjustments remain highly arbitrary, largely because Buyers and Sellers are rarely part of the equation and THEY set Fair Market Value, not appraisers. Appraisers use data from Buyer and Seller contract prices on comparable houses to estimate value of the subject property.
If Buyers and Sellers are not now in possession of reasonable knowledge concerning energy efficiency as a relevant fact in determining fair market value, how might that change? Does it need to change? The real estate industry seems to perceive energy efficiency as a complication that might delay escrow closings, cause Sellers to incur additional costs of sale, stigmatize properties with poor energy efficiency, increase liability for agents by imposing a new knowledge base, etc, etc. That perceived load of responsibility and risk comes without any additional compensation. Predictably, the real estate industry has rolled out their long standing, one size fits all doctrine of "no point of sale mandates, not ever, no how". Business as usual, as long as possible may sound extreme, but much of corporate America is on that same page regarding climate change. That raises another very interesting question. If the real estate industry won't support point of sale energy upgrades or point of sale energy ratings, what level of participation in greening the housing supply will it agree to? If they won't do THAT, what will they do?
If you read my previous post you know that I'm enthusiastic about achieving small changes in behavior among large numbers of people to effect significant reductions in CO2 emissions over a very short time. For that change to occur we need ABILITY, MOTIVATION and a TRIGGER. So far, one or more of those elements is missing where housing is concerned.
The small steps are easily within the ABILITY of almost everyone, but what about MOTIVATION? Change is hard. Change is uncomfortable. It's easier to do business as usual or continue with the present lifestyle, particularly when your trade associations fight hard in the lobbying arena and with PAC money to insure change isn't necessary. However, there is a cost/benefit balance at play here. How much cost in potential inconvenience, increased costs at time of sale and higher liability offsets the benefits to Buyers, Sellers and planet Earth if energy efficiency becomes a part of fair market value? Discussion of that cost/benefit balance is not happening.
Who might introduce the TRIGGER into this setting--not even a trigger to commit to reducing CO2 emissions, but a trigger to address the costs and benefits of doing nothing? Doing nothing is always an option. Problem is (the old ecologist is talking now) the environment changes constantly. As it changes, sustaining a "do nothing" position initiates a random walk through the realm of adaptivity. A strategy of stasis (business as usual) may prove more or less beneficial, depending on the current state of the environment. It's a simple strategy, but it's not responsive to changes in the environment, be they ecological or economic.
I'm not optimistic that the real estate industry will provide the trigger to open discussion. The Climate Action Plans now in place in most communities offered a potential trigger, but most municipalities postponed using that trigger in deference to lobbying by the real estate community and good old fashioned political expediency. Most of the present Climate Action Plans will fail to meet AB 32 requirements unless modified significantly, but short term victories are the driving force in the current political and business world. Not so, for global climate change.
The City of San Luis Obispo CAP includes a crucial passage near the end of the Executive Summary, "The majority of the GHG reduction strategies in the CAP are based on voluntary behavior from the community. The most vital step towards achieving the reduction target is public outreach and education.
A well informed community is empowered to make alternative decisions, or in many cases, to continue environmentally sound practices already taking place in SLO. The City will work with the County, State and other regional organizations to develop a comprehensive education program targeting energy-efficiency, renewables, alternative transportation and other CAP community wide objectives."
Is organized real estate the "go to" authority on housing (and other real property) in all it's diverse environmental and economic aspects or is it a service business driven by sales metrics? The answer is soon to be revealed.
Meanwhile back in the real world, the consumers, those Buyers and Sellers seeking the RIGHT BUYER/RIGHT HOUSE match (see related post), may represent a more sensitive trigger. If they start ASKING for the services associated with making energy efficiency part of the purchase process and start ASKING why those services aren't available if they receive a negative or evasive response, change will happen.
1. How will you assist me in purchasing a house with high energy efficiency that also meets my other wants and needs from among those houses now available for sale?
2. I want list my house for sale. How will you assist me in receiving maximum value for its array of attributes, including its energy efficiency?
Ability + Motivation + Trigger = CHANGE!
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