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a contract where a buyer said, “Seller to update all plumbing fixtures or provide a credit to the buyer to cure the outdated fixtures”?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.
Recent Podcast: By the way, I did a podcast a couple of weeks ago with Marguerite Crespillo. It’s always fun to talk shop. Listen below (or here).
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? Iād love to hear your take.
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Great post Ryan. It is interesting to hear about what might be coming in California. I agree with all of your thoughts and I’m glad we are not going through water shortages in my area. This is all I can think about when I read your post https://youtu.be/vMITcQUe-9M LOL
Yes!!! That is golden, Gary. Thanks for the clip. I actually never saw that one.
It must be nice to live in a place that is not in a drought. When traveling with my family a couple weeks ago in Seattle and Portland, my oldest son said, “I just want to take a long shower.” You see, here in California we have to keep things short. š
Good timing Ryan. I just received the message below in an email from an AMC whose panel I was added to a couple of months ago:
As a California appraiser, you may already be fully aware the changes within your state regarding water-conserving plumbing fixtures.
What is the responsibility of the appraiser? We do not expect the appraiser to become a plumbing expert. However, the appraiser should be aware of the requirements and provide commentary as felt needed.
Situations that may arise where an appraiser feels the need to disclose what is known regarding the subject’s plumbing is when the subject is a sale, newly construction or appears to have had any alterations. The appraiser would want to provide commentary if the subject is improved with water-conserving plumbing fixtures.
Possible verification sources; owner, seller’s disclosure statement and local building department to verify if plumbing permits were pulled. Basically, provide commentary regarding what is known within the report. At this point, leave it up to the lender to determine if they require any plumbing inspections from a professional.
This is great Scott. I’ve yet to have an email like this come across my desk. Kudos to the AMC for being on top of communication before others. I really appreciate you sharing too. Thank you very much.
Someone emailed me earlier and said there is no value impact for the new law unless it is discussed by USPAP, Fannie Mae, or HUD. Yet laws can be a beginning place for the creation of value. In other words, if laws begin to cause sellers, buyers, and lenders to think differently about an issue, we might see expectations change in the marketplace. I’m not an alarmist by any stretch and this new law will hopefully just blow over and be no biggie. Yet at the least agents are going to need to step up their game to carefully disclose, and appraisers are going to craft some statements for their reports I imagine (for lending reports). On the purchase side this should be disclosed in a TDS in California, so that should be easy. But the refinances are what make me wonder. I’d like to think lenders will use common sense and not treat this like a point of sale issue, but we shall see.
Anyone want to pitch in thoughts?
I’m not a fan of having to update so many fixtures, but we’ve seen ways that it’s super easy for some homes/buildings to become compliant. We had a board member who became green certified and one of the things he did was just put a brick in the toilet bowl so it displaced more water and didn’t require as much water to fill it up. Although not all fixes are that easy, I thought that one was pretty cool. Thanks for sharing Ryan!
Thanks Cynthia. I appreciate the comment and the heads-up on the brick solution. I’m such a fan of anything DIY. I will say I read a piece by a lawyer who said a brick would not bring the toilet into compliance (despite the result being water saving). It seems compliance is about having a toilet that is manufactured to save water rather than hacked to do so (I love the hacking job though).
I’ve fielded a few questions about this too. My answer is “Time will tell”. Last year, there was a state law passed that smoke detectors had to have batteries with a 10 year life. Luckily, we aren’t being required to inspect for those. I doubt lenders will require Appraisers to certify plumbing is in compliance, as there is very little liability or cost if they aren’t.
And lenders don’t ask for silly things from Appraises.
Thanks Anthony. I appreciate your take and I think you’re right about time. I am glad nothing came of that smoke detector law. This one is more involved in my mind, so it has more potential to be an issue – especially since sellers will have to disclose the lack of these fixtures. Hopefully it’ll blow over and be no big deal. We shall see though. You are so right about lenders. They never ask for silly things (we’re kidding for any onlookers who think we’re serious). š