Deep retrofits redux: crunching the numbers
Last quarter my article on “Deep Retrofits, Broad Paybacks” generated several questions about how these types of retrofit add value to a house over time. How does a deep energy retrofit compare to something like a kitchen remodel? Is it worth the cost of doing the retrofit? If I spend $50,000 on a deep retrofit will it add $50,000 to the value of my house? Probably not. Or, it depends. Maybe. Possibly. It’s a tricky question, with some complex answers.
Let’s start with whether you plan to sell your house soon or not. If you are planning to sell in the next few years, or are forced to sell, the ROI picture is probably pretty bleak. We can draw some clues from other big remodel projects. Looking at the numbers might scare you. At mid-range national averages for 2015, adding a steel door is the only remodel project that adds value. That is, you’ll recoup a little more than you spent to buy and install it. (Move quickly before a toddler dings up that new door!) All of the other remodel projects are a losing proposition. It’s even worse for upscale projects, where the best ROI is upgrading to fiber-cement siding, and it doesn’t recoup even 85% of the $15,000 average cost of the project.
But anyone spending $100,000 on a deluxe kitchen upgrade isn’t doing it to make money when they sell – they’re doing it to improve their quality of life while living in the house. A temporary reduction in full value because of a quick sale isn’t anyone’s best financial plan. I think this will be true for deep retrofits as well.
Some remodels do add value even when a house is sold soon after, particularly in hot real estate markets. Sometimes specific projects are in high demand from buyers or make a big difference in how buyers perceive a property. As the folks at remodeling.hw.net put it, “If a remodeling project helps a house meet buyers’ expectations—adding a second bathroom in an area where every other home already has two—the homeowner can expect a good return either in the form of a higher selling price, a quick sale, or both (assuming everything else about the house is up to standard).” Unfortunately, this is unlikely to apply to deep retrofits, thanks to the current low cost of home heating fuel and the pitiful status of energy efficiency on most buyer’s checklists (10 of 10?).
There are other problems in realizing the full financial value of a deep retrofit. A 2012 paper by Cynthia Adams, “Valuing Energy Efficiency in the Real Estate Community,” highlights the complexity of the real estate market and the many stakeholders in residential home transactions who are ignorant of energy efficiency and its contribution to home value or the long-term costs of ownership. Add in the lack of a standardized home energy rating system, and it’s no surprise that change is happening slowly.
There’s one more factor in realizing full value in a deep retrofit, and it’s a big one, the number one factor in real estate value. You’ve heard this before: location. If you’re in a substandard location, such as right next to a busy interstate, it’s very difficult to envision a scenario where you could realize the full value of your investment. Location problems can be specific to a house but can also be regional. We’ve probably all visited ghost towns in the West that were once bustling outposts but are now just a scattering of foundation stones. Or perhaps you’ve heard about mansions in Detroit selling for $1000. It’s very difficult to realize value on your home improvement investments when the entire region is going through an economic depression. Conversely, there are some markets in which those grim payback numbers look much better than the national averages.
OK, enough of the negative perspective. If you are not planning to sell in the next 5 years or so, and assuming you live somewhere that’s not about to become a ghost town, than it matters less what the improvements have done for your home’s immediate resale value. I think a good argument could be made for the long-term realization of return, if we look beyond just the resale value of the home. After all, when looking at a long-term stock investment, we include both the eventual selling price and the annual dividends received along the way in our assessment of the returns.
Reducing ongoing and future maintenance costs is a big deal. The previously mentioned fiber-cement siding is a good example. If properly installed it should last 50 years and require paint perhaps only once a decade. That’s a substantial savings, one that follows directly from the initial investment. I discussed using less energy in last quarter’s article, but remember that value will compound over the years as well – every hundred dollars saved each year is a hundred more you can save or invest toward other goals, either of which will pay their own returns over time. Reducing the energy demand of a house can also make it much easier to afford a complete photovoltaic solar system, or even to add more solar to fuel an electric car. With careful attention and enough insulation you can “tunnel through the cost barrier” (an Amory Lovins phrase) and eliminate the need for a furnace or air conditioner at all; now you’re talking some substantial annual financial benefit! Or perhaps you’ll only need a $1000 ductless mini-split heatpump to efficiently heat, cool, and dehumidify your house.
What is comfort worth? How do you value the improvement in quality of life that comes from living in a more comfortable, functional, and well-tuned home? What value do we place on reducing carbon emissions related to our own life choices? My answers to these last few questions float somewhere in the region of a lot, priceless, incalculable, and vast. How would you value these?
This article first appeared in the Winter 2016 edition of the Natural Investments News
Tags: close to home strategy, energy, financial assets, tangible assets, your home