Does a $20,000 solar system really add $20,000 in value?

Would you pay $20,000 for a solar system if you knew it added $20,000 of instant home value? That’s exactly what a solar salesman told the client of a real estate friend. Is that legit though? What advice would you give someone talking to this salesman? This is a timely scenario, so I wanted to share my friend’s question and my response. I’d love to hear your take in the comments below.

solar panels in real estate - sacramento appraisal blog - image purchased and used with permission from 123rf - 2

Real Estate Friend: I have a client that wants to add solar to his 1989 house and was quoted a price of $20,000. The solar guy told my client that it would add value dollar for dollar…doubt that. Let me know your thoughts.

My Thoughts: Where is this SALESMAN getting “dollar for dollar” from? Is he a real estate value expert? Could he prove the value actually? Would the system add $20,000 in value regardless of the neighborhood, state, or price range? What if the system cost $40,000 or $80,000? Would that add $40,000 and $80,000 respectively? It’s a great sales claim, but achieving dollar for dollar is not something that happens in real estate in every case. For example, a kitchen remodel might cost $50K, but that doesn’t automatically mean buyers are going to line up to pay $50,000 more for the house. Or a built-in pool could run $35,000, but we all know buyers don’t expect to pay full price in the resale market (sometimes they’ll go for $10-15K or so, right). Thus the cost of something doesn’t necessarily translate dollar for dollar to the value. When it comes to solar, it’s more of a marathon of value so to speak because there will be value recognized over time as savings happen (as opposed to an instant rush of full value at the present time). I am not saying the house could not be worth $20,000 more, but my BS alarm is beeping I am skeptical. Appraisers and the real estate community have to consider what buyers are actually presently willing to pay for the system. Granted, we have limited data, and solar is still an emerging field, but we have to study homes with and without solar. What sort of price difference is there? Also, how much money will the system actually save the owner each month? Moreover, when considering monthly energy savings, how much more home could a buyer effectively afford because of the savings? If I were your contact, I would read this solar Q&A I did, but I would also do the math. Will the savings from solar far outweigh the cost of the system? If not, what energy conservation steps might your client’s household make instead? Lastly, if the solar system is leased, it won’t actually add anything to the value because it’s more or less considered personal property.

Questions: What do you think of the solar salesman’s claim? How would you respond? Any thoughts, stories, or further insight? I’d love to hear your take as an agent, appraiser, or home owner.

Home Office Update: By the way, I’ve been building a new home office these past few weeks, and it’s been fun to make progress. Shoutout to Keith Klassen for helping me with the framing. If all goes well, crown moulding will be up this weekend.

home office

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How do you price a larger home when there are only smaller comps?

How do you know what a larger home is worth if the only recent sales are much smaller in size? A friend asked me this question recently as she was trying to price a listing. There are a few things I do when in this situation, and since this conversation helped my friend, I figured it might be useful here too (she said it was okay to turn this into a blog post).

weighing value by sacramento appraisal blog - image purchased and used with permission - 1

Question: I can find properties that are great comps, except for square footage. The property I am trying to value is 1730 square feet. All the others are less than 1200.  Is there some kind of formula you use to make up for the difference?

Answer: I only wish there was a formula so I could hire a computer to write all my reports and make adjustments for me. In this case the first thing I wonder about is why this house is 1730 sq ft in the middle of 1200 sq ft homes. Is the square footage legitimate? Or are we talking about a lower-quality add-on or garage conversion? Or maybe there simply haven’t been any larger sales that have sold recently.

  1. Image purchased at 123rf dot com and used with permission - 14688774_s - smallerImmediate Neighborhood: The first place I would start would be to look at older sales in the immediate neighborhood. I would go back in time as far as needed to see what properties around 1730 square feet have sold for. This would help me gauge the market and begin to get some sort of a price point to understand what buyers have been willing to pay for larger-sized homes. I probably wouldn’t use these “oldies” as comps in my appraisal report, but they are still valuable to help paint a price context.
  2. Price Percentage Differences: When finding older sales I would look at how much of a price difference there has been between larger homes around 1730 sq ft sales and 1200 sq ft sales. If I can extract some sort of a percentage difference based on those sales, I might be able to apply that percentage adjustment to any 1200 sq ft sales today.
  3. Competitive Neighborhoods: Lastly, after gleaning a better understanding of trends in the immediate neighborhood, I would probably branch out to find some larger-sized comps from competitive neighborhoods.

Question: Any insight, additional points or questions? I’d love to hear your take in the comments below.

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Price per Sq Ft and The Costco Principle

Using the wrong comps can lead to the wrong price or value. I realize that’s a no-brainer, but at the same time it’s still a common mistake when using price per sq ft figures to list or appraise a house.

A Recent Scenario: The subject property is a 3-bedroom unit at just about 1500 sq ft. There were zero sales at the contract price and really no reason why it should be selling so high, so I asked the Listing Agent what influenced him to price the property at that level. He shared that the price per sq ft of two nearby homes supported the value. The only problem was that the nearby sales were closer to 1200 sq ft, which was about 300 sq ft less than the subject property. While this might not seem like a big deal, the smaller homes actually had a higher price per sq ft than than 1500 sq ft models. Take a look at the graphs below.

Price per sq ft in nhood 1100-1300 sales

Price per sq ft in nhood model match sales

Price per sq ft in nhood

The smaller units were easily between 180-190 per sq ft, but the houses very close in size to the subject property were much closer to 170-ish. This just goes to show how important it is to compare apples to apples in real estate. Or in other words, it’s vital to use data from similar properties when making a comparison. As a rule of thumb I might suggest using sales 10% or so above and below the square footage of the property you’re working with. In this scenario the smaller units easily had a 5%+ higher price per sq ft. You may wonder of course how a property could get into contract 5% too high. Remember that inventory is still tight, but most of all the offer was from an FHA buyer putting very little money down. When you’re not spending your own money, you tend to offer more, right? That’s how it usually works.

peanut butter costcoThe Costco Principle: Why do smaller homes tend to have a larger price per sq ft? Because they cost more to build. It’s sort of like buying one can of 16 oz peanut butter at your local grocery store for say $4.00, but then going to Costco and getting 96 ounces for $12.00. Just as it can be less expensive to buy groceries in bulk, the same is true in real estate when building. Think about how much less it costs to build a second story on top of a one-story house. During new construction it saves a ton of money to simply add the second level because there is no need for an additional roof, foundation or much infrastructure below because it’s already there. This is also exactly why a house double in size is probably not worth twice as much because it didn’t cost twice as much to build.

Questions: Any thoughts or insight? By the way, chunky or creamy peanut butter? I say chunky all the way.

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