The Governor doesn’t like my toilet. Or my faucet. Or my shower head. If you didn’t know, on January 1, 2017 it’s going to become law in California for residential and commercial property owners to install water-conserving plumbing fixtures if the property was built before 1994. You can read the details of the law here, but let’s consider how this might play out. I’d love to hear your take too. Any thoughts?
Question: Will home values be affected depending on whether water-conserving plumbing fixtures are present or not? How will appraisers deal with this new law?
1) Wait and see: This is one of those issues that is only theoretical right now. We are going to have to wait to see how it plays out. That’s the truth.
2) Laws & value: Just because a law exists doesn’t necessarily mean value exists. For instance, smoke detectors and carbon monoxide alarms are required by law in certain instances in California, but the lack of these items doesn’t mean the house is worth less. Is the market that sensitive where buyers would walk through and say, “I’m going to pay $25 less for this house because a smoke detector is missing in the bedroom”? I doubt it. My sense is buyers would probably pay the same amount for a house whether smoke detectors or CO alarms are there or not. I realize toilets are more costly than smoke detectors though, so that is something we have to consider.
3) Expectations of buyers & value: A key issue is whether buyers will expect water-conserving plumbing fixtures once sellers are required to begin disclosing if there are any non-compliant fixtures at a property. The truth is right now buyers really don’t expect these fixtures. Have you ever seen a contract where a buyer said, “Seller to update all plumbing fixtures or provide a credit to the buyer to cure the outdated fixtures”? Probably not. This doesn’t mean buyers aren’t willing to pay more for newer features, but only that buyers don’t tend to draw a line of demarcation for these features right now when making an offer on a house. But will they in the future because of this law? In short, if it becomes a big deal to buyers, then it needs to be a big deal for appraisers. If buyers come to a place where they expect a price discount when specific water-conserving plumbing fixtures are not present, then it is a value issue. If buyers could care less, then it really wouldn’t be prudent for appraisers to penalize a property for not having these items – even though there is a law in place.
4) The silliness of focusing on small-ticket items: Let’s be cautious about asking appraisers to analyze the value impact of a toilet that flushes 1.5 gallons vs 4 gallons. Can appraisers or anyone for that matter really be that precise? Is the market honestly that sensitive to the point where buyers would pay more or less for this minor difference? Let’s be realistic and consider many buyers would likely notice the age of the toilet rather than how much it flushes exactly. On a different level though, some buyers want/need toilets that have a more powerful flush because… well, you know. On the other hand, if the cost to replace plumbing fixtures throughout a house is going to be thousands of dollars, then that is something buyers might really care about.
5) The way lenders handle this is a big deal: The state law doesn’t require sellers to replace fixtures when selling a home, but sellers do need to disclose non-compliant fixtures. Thus when lenders read about non-compliant fixtures in a purchase contract, will they require plumbing fixtures to be updated? That is the million-dollar question. What will lenders do during a refinance too? Will they ask appraisers to identify if there are any non-compliant fixtures? That would be a bad idea since appraisers aren’t trained to identify such fixtures. If lenders are strict about applying this law, it can end up impacting how sellers prepare to sell their homes, repairs buyers request in contracts, and what lenders ask appraisers to do when these features are not present.
I hope that was interesting or helpful.
Questions: What impact do you think this law will have on real estate (if any)? Did I miss something? Appraiser colleagues, what else would you add? I’d love to hear your take.