Follow up on the Solar discussion from an Installer

[prasercat]

I have no intention of reading 300+ pages of this stuff, but a couple items in the Executive Summary kinda jump out at me:


- The Scripps Highlands area is one of the premium areas in the region and the location alone would give a new subdivision project a competitive edge over other areas regardless what the economic conditions are like.

Yeah, buyers everywhere *should* be more motivated to go green(er), but appraisers look for what is, not what should be. I probably *should be* growing my own vegetables, composting my refuse, leading the vegan lifestyle with no animal products of any kind, buying Greenpeace-approved goods that are clearly marked as being produced by fair trade artisans. But the "what is" for my lifestyle is a fair bit different than that. Sorry.

High end buyers are very prestige oriented and keeping up with the trends is a very important part of prestige. In the resort areas I appraised in Park City, Utah, and now in Summit County, Colorado, you have a large portion of high prestige homes. Having a $100,000 (+) commercial grade custom kitchen, and even sometimes hand-built on-site, it not that uncommon in these markets, yet the buyers and owners mostly don't cook and even if they did, they are most often second homes so opportunities to use these kitchens is limited. Does that make sense? Sure it does.

Would you buy an Esprit or Lamborgini without their emblems? Let's say, Costco arranged to have them build the car for them and the car would then sell for a bit less for Costco customers but then have the Kirkland Signature Emblem on the car - heeeee! They could do that with Peanut Butter, but not a prestige vehicle. That would be a disaster. It would make perfect financial sense, but all the prestige is gone, which is a big portion of the motivation to buy. The kitchen completes the home (it is like the Emblem of the car maker) and it has to fit the prestige of the home, regardless of its use or non-use.

I heard of a wealthy individual describing his red Ferrari Testa Rosa as a very expensive couch. Since it was very problematic and costly in terms of maintenance and to keeping it operational - it spent a lot of time in the garage not being used - a nice place to sit back and relax. Prestige markets are very "not by the numbers".

In prestige markets, Solar PV only needs to be considered a "must have" for prestige, then the actual generation of power would only be secondary.

 

[Cigar]

Randolph:

Would you say that solar panels would be classified by an appraiser as "functional obsolescence"? Example, Larry Ellison built his Woodside home for a reported $200 million, the assessor assessed it for $166 million, he appealed on the basis of functional obsolescence and the assessment was dropped to $25 million, he listed the home for about a year for $25 million and it didn't sell, it is now on the market for $19 million the last I heard.

I am currently attempting to permit a home in the same area, I have already installed a $50,000 emergency generator set up on the property, I don't expect the generator to increase the appraisal by one dime, I am also spending a couple of hundred thousand more to build with a steel frame for earthquake protection, I don't expect the steel construction to increase the appraisal by one dime, I am also installing well over a thousand square feet of special triple pane windows for passive solar, I don't expect the passive solar to increase the appraised value by one dime. No matter what I do the appraiser (if there ever is one) will assess the home based upon comparable sales in the areas factored by square footage, people how build these kinds of homes don't build them with resale in mind, in my case over 50% of my costs will be considered functionally obsolescent and my owner doesn't care, he wants what he wants and is willing and able to pay for it.

For those interested, here are three IG units, on the left is my triple pane unit with 14mg of glass, in the center is my dual pane unit with 10mg of glass, on the right is a standard CertainTeed dual pane unit with 4mg of glass, the coatings that I am using on this home are all Cardinal Triple-Pane w/LoĒ³-366, LoĒ-179, LoĒ-i81, Argon 0.15, the appraiser is probably not going to know the difference and will not assign additional value.

In my own home my utility bill went from $37 a month in 2000 before triple pane windows, to $80 a month in 2009 after triple pane windows, what good would solar panels do me? Also attached is our tiered rate system. As I said on another current thread, I just saved over $200 a month in my water bill by disconnecting my reverse osmosis water purifier under my kitchen sink.

 

[prasercat]

Would you say that solar panels would be classified by an appraiser as "functional obsolescence"? Example, Larry Ellison built his Woodside home for a reported $200 million, the assessor assessed it for $166 million, he appealed on the basis of functional obsolescence and the assessment was dropped to $25 million, he listed the home for about a year for $25 million and it didn't sell, it is now on the market for $19 million the last I heard.

I am currently attempting to permit a home in the same area, I have already installed a $50,000 emergency generator set up on the property, I don't expect the generator to increase the appraisal by one dime, I am also spending a couple of hundred thousand more to build with a steel frame for earthquake protection, I don't expect the steel construction to increase the appraisal by one dime, I am also installing well over a thousand square feet of special triple pane windows for passive solar, I don't expect the passive solar to increase the appraised value by one dime. No matter what I do the appraiser (if there ever is one) will assess the home based upon comparable sales in the areas factored by square footage, people how build these kinds of homes don't build them with resale in mind, in my case over 50% of my costs will be considered functionally obsolescent and my owner doesn't care, he wants what he wants and is willing and able to pay for it.

Yes, that is correct. We appraisers call it a "Value in use". Certain features of a custom home may have special value and meaning to the owner, but not most of the people in that particular market. When you are in a neighborhood of highly individualized custom homes with little uniformity, then that would be the place to have such homes. The worst place would be in an area of uniformly designed or predicably designed homes and have one odd-ball property.

An astronomy buff may put in an observatory with retracing roof, or a botanist may put a plant maintenance room in his office. This is a value-in-use, and functional obsolescent with respect to the market.

However, using triple-windows, may have particular value in your area if energy consumption is high or noise levels are high (since they are more effective in blocking noise). Steel frame may have value in your area for the reasons you stated. These things are have much greater acceptance than many other types of features that may be considered a value-in-use. In any regard they factor into the quality of the home, which affects value.

Buyers will find the quality/manufacturer of the triple pane window even more important than the additional pane, but the additional pane most often does have value if there is a reason for having it.

What is a value-in-use in one neighborhood may be fully valued within the market of a different neighborhood. A swimming pool in Phoenix may often be considered at full value; whereas, in a ski town of second homes, seen more as a liability for absentee owners due to water damage risks and extra maintenance and insurance costs.

 

[George Hatch]

Not only does cost not automatically equal value, the contributory cash flow in an income stream doesn't necessarily equal the value, either. That contributory value can be less than, equal to or greater than.

As an example, cell antenna leases come to mind. They have an identifiable income stream and legal contracts stipulating the length of time a lessor can expect to continue to receive that income. However, the contributory value of those leases to the whole isn't necessarily equal to the aggregate of the cash flow. That's one reason why appraisers valuing those income streams often have to use varying discount rates to convert them into the present value. Incidentally, the discount rates used for cell phone lease income isn't necessarily the same rate used for the rents of the units themselves.

It would be a huge misconception to believe that as appraisers we have the latitude or the discretion to either "push" or validate prices to where someone thinks they should be based off a projected savings; or any other amenity, for that matter. It would be more accurate to say that we look for the market's reaction to that potential and we measure that reaction. The relationship of any amenity to value is seldom direct, it's usually indirect. We don't measure and quantify the cause, we seek to measure the effect.

That's why it doesn't matter how much money a borrower is projected to save or how great that black-bottom pool is or how scarce that ocean view is or how popular that architect's designs are. Our jobs as appraisers isn't to assign a value to any of those amenities. Our job is to observe and report how most of the buyers who actually buying these properties are reacting to these amenities.

Informing me that most buyers in one neighborhood are paying extra for their PV systems is cool and all, but that factoid, even if true, doesn't necessarily translate into the support I would need to apply that adjustment factor anywhere else. Even if it is true, I'd still have to see it for myself before I could honestly say I held that opinion.

In God We Trust. All others bring data.

 

[George Hatch]

BTW, I'm sure someone already mentioned it but it bears repeating anyway. Homebuyers don't always react to various features in a logical way. They don't always make the "right" decisions. Nevertheless, it is those decisions, right or wrong, that we seek to identify.

 

[Randolph Kinney]

Randolph:

Would you say that solar panels would be classified by an appraiser as "functional obsolescence"? Example, Larry Ellison built his Woodside home for a reported $200 million, the assessor assessed it for $166 million, he appealed on the basis of functional obsolescence and the assessment was dropped to $25 million, he listed the home for about a year for $25 million and it didn't sell, it is now on the market for $19 million the last I heard.

I am currently attempting to permit a home in the same area, I have already installed a $50,000 emergency generator set up on the property, I don't expect the generator to increase the appraisal by one dime, I am also spending a couple of hundred thousand more to build with a steel frame for earthquake protection, I don't expect the steel construction to increase the appraisal by one dime, I am also installing well over a thousand square feet of special triple pane windows for passive solar, I don't expect the passive solar to increase the appraised value by one dime. No matter what I do the appraiser (if there ever is one) will assess the home based upon comparable sales in the areas factored by square footage, people how build these kinds of homes don't build them with resale in mind, in my case over 50% of my costs will be considered functionally obsolescent and my owner doesn't care, he wants what he wants and is willing and able to pay for it.

For those interested, here are three IG units, on the left is my triple pane unit with 14mg of glass, in the center is my dual pane unit with 10mg of glass, on the right is a standard CertainTeed dual pane unit with 4mg of glass, the coatings that I am using on this home are all Cardinal Triple-Pane w/LoĒ³-366, LoĒ-179, LoĒ-i81, Argon 0.15, the appraiser is probably not going to know the difference and will not assign additional value.

In my own home my utility bill went from $37 a month in 2000 before triple pane windows, to $80 a month in 2009 after triple pane windows, what good would solar panels do me? Also attached is our tiered rate system. As I said on another current thread, I just saved over $200 a month in my water bill by disconnecting my reverse osmosis water purifier under my kitchen sink.

I am familiar with Larry Ellison's home. The county suffered a huge decline in property tax revenue after they lost the appeal. I was laughing at that.

There are functional obsolescences. When the market value does not return at least the cost value, there is obsolescence.

There are many people who don't get it. Correlation does not mean cause and effect. There are things that can correlate nicely such as the increase consumption of alcohol and the increase in teacher's pay. One might get the idea that we should not pay teachers more because they just increase their drinking.

We as appraisers value single family residential homes according to the definition of market value and the sales comparison approach. Lenders won't lend based upon a discounted cash flow approach. We extract (isolate) the contributory value of the amenities, quality factors, improvement size and lot size. That study did not even attempt to isolate or identify variables. It just lumped homes into 2 categories; homes with solar panels and homes with out them. And the conclusion was homes sell faster and are worth more, like 17% more, with solar panels.

 

[George Hatch]

Even if appraisers could make the case that the income approach is relevant to the valuation the cash flow isn't the value; it would have to be converted into a value by use of some form of rent multiplier or yield capitalization. By definition these analyses take into account both the effects of time on the cash flow as well as the investor's perspective of its value.

 

[prasercat]

BTW, I'm sure someone already mentioned it but it bears repeating anyway. Homebuyers don't always react to various features in a logical way. They don't always make the "right" decisions. Nevertheless, it is those decisions, right or wrong, that we seek to identify.

I agree. Many have posted here and have looked at how income influences value with respect to buyers of single family homes by looking at the issue in detail; however, the reasons cited help to explain in detail why income streams and the income approach is such a poor value indicator for single family homes (something we all understood previously, but, pehaps, didn't fully appreciate).

It isn't exactly that these incomes don't have value, but that there is no uniform buyer methodology in the interpretation of value, as is largely the case found with commercial real estate. If buyers don't agree on their motivations, then the appraiser predicting their actions can't agree on their motivations. It is much the same case as a value-in-use situation - we need to first understand buyer acceptance and then we can work to breakdown motivations for contributory value.

However, it may be possible to discern acceptance of PV or value given PV installations at a given point in time, for a specific neighborhood, based upon paired sales or other empirical evidence. However, extrapolating that value determined as directly correlatable to income generation alone is likely making an error in logic, since acceptance and value is likely a composite of buyer preferences, only one of which may be value assigned to income - Many independent variables are likely at work and we appraisers have already proved over the years that value in residential real estate is not directly correlatable to income.

I want to add one more thing that wasn't discussed but it should be my last comment in this thread:

There are places (even in my coverage area) that do not have a power grid and yet there are homes built in that area. What is the value of their PV systems? I use this logic: The lack of a power grid is a sort of locational obsolescence and the extra costs and installation and even inconvenience of having to rely upon PV is factored already into the land value. Therefore, the PV system is simply not valued separately but rather an accepted and expected part of a fully functional home (that is, access to electricity). If power generation is insufficient to satisty needs, then this creates a functional obsolescence in the home that may be curable. Your neighbor may be able to generate power much more easily than you and this should be represented in the land value.

 

[Spartacus]

Let me make a point to you about buyers of million dollar homes. If you have to ask how much are you utility bills, you can't afford the home. That does not enter into the buyer's mind when shopping for a home.

Just for reference, the property taxes on a sale of a million dollar home will be $10,000 a year not county other assessments. Anybody who thinks about utility bills ought to think about property taxes since they will be paying much more every year than their utility bill.

Thank you for the first part of this quote, I will look it over and think about it all.

As it pertains to this ..

When I was a young lad scraping away to make a living .......(have I gotten the poor me out of the way ...?) I worked at a hardware store. Folks who came in driving a Ford, Chevy or sum such care made their order .... paid for it .... then left.

Folks who came in driving a Mercedies, BMW or Jag ... came in made their order then when told the price would begin to negotiate. We sold a 10 inch grade 9 bolt for $9 at the time. The gentleman began to negotiate with me trying to get me to sell it to him for $5 .... "how about if I buy 4 .... what is my discount then?" he would ask.

The morale I came away with ..... Rich people did not get rich by paying retail ... Rich people don't stay rich by paying full price ... the middle class simply pay the bill and go on about their lives. Rich people aren't going solar because they are concerned if they can pay their electricity bill or not ... they are doing so because they recognize the value in it and don't want to pay for something when they don't have to.

I was stopped in a neighborhood just the other day ... guy with a top of the line Ferrari sitting in his driveway came up to me and said, "I'm tired of paying $1300 electric bills in the summer! Can solar help?"

Presercat also makes a great point about prestige .... Kitchen and Costco ... but that I think that is for things others can see ... which is not always the case in Solar. Course that may not stop them from bragging about it at cocktail parties.

There have been a few other recent posts here that got a bit technical for me so I'm gonna have to go over them a few times and think about it.

Thank you all for the comments. I appreciate it!!

 

[Randolph Kinney]

Thank you for the first part of this quote, I will look it over and think about it all.

As it pertains to this ..

When I was a young lad scraping away to make a living .......(have I gotten the poor me out of the way ...?) I worked at a hardware store. Folks who came in driving a Ford, Chevy or sum such care made their order .... paid for it .... then left.

Folks who came in driving a Mercedies, BMW or Jag ... came in made their order then when told the price would begin to negotiate. We sold a 10 inch grade 9 bolt for $9 at the time. The gentleman began to negotiate with me trying to get me to sell it to him for $5 .... "how about if I buy 4 .... what is my discount then?" he would ask.

The morale I came away with ..... Rich people did not get rich by paying retail ... Rich people don't stay rich by paying full price ... the middle class simply pay the bill and go on about their lives. Rich people aren't going solar because they are concerned if they can pay their electricity bill or not ... they are doing so because they recognize the value in it and don't want to pay for something when they don't have to.

I was stopped in a neighborhood just the other day ... guy with a top of the line Ferrari sitting in his driveway came up to me and said, "I'm tired of paying $1300 electric bills in the summer! Can solar help?"

Presercat also makes a great point about prestige .... Kitchen and Costco ... but that I think that is for things others can see ... which is not always the case in Solar. Course that may not stop them from bragging about it at cocktail parties.

There have been a few other recent posts here that got a bit technical for me so I'm gonna have to go over them a few times and think about it.

Thank you all for the comments. I appreciate it!!

Solar panels already installed on the home is not a negociable item that will lower or raise the sales price, unless you are dealing with the builder of a new home and that home has not been completed. Existing homes with solar panels versus one that doesn't have them should be reflected in their listing prices. Everything else being equal, why would you pay more for a home with solar panels that would exceed the cost of buying new solar panels? An educated buyer will know what the seller paid net for those solar panels. Subtract the depreciation for the age of the solar panels and the tax credits. Instinctively an educated buyer would pay less than what it cost the seller for new solar panels.

Today, the market is declining in most areas of San Diego county. That means you might have paid too much for the home if you bought during the period of tax credits for home buyers and if you tried to sell it today, you might have a loss, at least a portion of your equity. And you would not come close to recouping the cost of the solar panels.

The only claim you can make is the savings on your utility bill at $218 per month. Better not sell the home until the solar panels pay for themselves. Otherwise, you will take a huge loss on them.

See attached graph of SCRIPPS HIGHLAND 2000 to 2010 SOLAR VS NO SOLAR $/SF versus Close of Escrow date.