Energy efficiency is one of the biggest advantages and most sought-after features of new construction homes today. It is believed that the three most significant benefits surrounding energy-efficient homes are lower monthly operating costs, increased comfort, and an increased level of health.
The first, and most obvious, advantage of an energy-efficient home is the reduction of monthly operational costs. However, many in the new home sales industry struggle to effectively communicate this message to potential customers. It is a critical skill in today’s environment for builders to understand how to properly monetize energy efficiency. Explaining the long-term savings a home buyer can receive from purchasing a new, energy-efficient home can be the major factor in closing a big deal.
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The first step in effectively monetizing the energy efficiency of a new home is understanding the total operating costs associated with a home. According to Statista, the average operational cost for homes in the United States during 2017 was $14,448 per year or $1,204 per month. These costs included property taxes, utility bills, repairs and general maintenance, homeowner association fees, private mortgage insurance, exterior home care, and home insurance. Yingchun Liu, Ph.D. stated in the National Association of Home Builders article titled ‘Home Operating Costs’ that fuels/other utility costs make up 40% of the total operating costs associated with the home whereas maintenance costs are about 10%. Comparatively, taxes and insurance only make up 38% and 12%, respectively. By reducing the monthly operational costs associated with fuel, utility, and maintenance costs through energy-efficient building practices can make purchasing a new home a much better value than resale homes.
When new home builders and lending institutions are working with prospective buyers and quoting monthly payments, they have been traditionally taught to include principal, interest, taxes, and insurance. The largest omission of costs in this payment model is the absence of energy and maintenance costs, which has even been acknowledged by some government representations as a requirement that lending institutions include these costs when calculating debt to income ratios in an effort to protect consumers. Therefore, it is recommended for builders to begin including these costs in every monthly payment proposal for a potential new customer.
To accurately project energy costs of a new home, one must first understand RESNET’s Home Energy Rating System index, better known as the “HERS” index. The HERS index assigns a numerical value to every home to understand the total energy efficiency of that home. The lower the score, the lower the energy costs. This index gives builders the ability to compare the operational cost of their home to the vast difference of a resale home and even other, competing new homes.
A typical resale home can have a HERS score around 120. A new, energy-efficient home should have a HERS score around 50-70. This represents a potential savings of 50% on the monthly energy costs of a new home vs. a resale home. Builders are encouraged to work with their local utility companies to understand the actual costs associated with the operation of the homes in their specific markets. If possible, they should obtain marketing materials from the utility companies to use as third-party testimonials to be distributed to potential home buyers. Builders are also persuaded to know the HERS scores of competing new homes to show the potential advantage associated with their home. These tools will give builders a monthly dollar amount to include in their monthly payment estimates.
Once the monthly operational cost savings have been established, builders should extrapolate the savings over the life of the home. Assuming most buyers will have a 30-year mortgage, this should be the term used. If the energy savings of a new home vs. a resale home equates to $300 per month, that would be equivalent to about a $56,000 advantage in buying power, assuming a 5% interest rate. Therefore, in this example, if a buyer were to compare two homes that were exactly the same size and floor plan, the resale home would have to be at least $56,000 less expensive to justify the difference in monthly operational cost.
When calculating the maintenance cost difference between a new and resale home, NewHomeSource offers a cost-savings calculator that can break down a used home's value, square footage, number of occupants, and year built. It will give builders the ability to monetize the annual maintenance cost difference when comparing two homes. According to the calculator, a resale home that is valued at $250,000, has 2,000 square feet, four occupants and was built in 1990 represents an annual cost savings of $4,000 or $333 per month. Once again, builders should extrapolate this monthly cost difference over the life of the home. In this example, assuming a 5% interest rate, the maintenance cost difference would equate to a $62,000 difference in buying power between a new and resale home of the same size.
The last piece of effectively monetizing energy efficiency is to maximize the appraisal process. Builders who produce the most energy-efficient homes have elected to build above the basic building code. Therefore, they should get credit for doing so. AI Reports offers the ‘Residential Green and Energy Efficiency Addendum,’ otherwise known as form 820.05. This addendum is designed to account for the increase in a subject property’s value due to energy-efficient building practices. Not only will this form assist builders in getting the value they deserve for building a more energy-efficient home, but also it could assist buyers in obtaining additional value on the resale market in the future. Should this legislation pass, including operational costs into the debt to income ratios at lending institutions, valuing energy-efficient building practices through the appraisal process will become increasingly important. It is a best practice for those builders offering energy-efficient homes to include form 820.04, as well as a helpful guide of how to fill it out for their product, when appraisers visit the sales office in search of comparable properties.
Properly monetizing energy efficiency is critical to builder success in today’s environment. While most touch upon the subject, very few are delving into this advantage as deeply as they should. Reduction of monthly operational costs is the single most obvious opportunity to communicate the benefits of offering an energy-efficient home. Properly communicating this advantage not only will help consumers find the home they want, but also it will assist builders in building value in their product.
