Heating Systems

[mtngirl]

I have a client that is asking about a geothermal heating system. They said: We are in the process of replacing our worn out heating/air conditioning system and are looking at all options. One particurally interesting option is geothermal. The system cost twice as much as a conventional system ($20k vrs. $10k) but the payoff if fairly quick as monthly operating costs are very low.

My question to you is this; If a home was so equipped, would that be reflected in an appraisal?

My question is do you adjust for geothermal vs. conventional heating systems?

 

[Dennis J. Black ASA IFAS]

You could base on adjustment based on the discounted value of future savings.

 

[Ted Martin]

In my market there is no market based adjustment for a geothermal system. Doesn't make any sense but buyers around here just aren't willing to pay any more to save money on their utility bills.

There are Fannie, Freddi and HUD lending programs that realize the advantage and will modify the LTV to reflect the monthly utility savings and will increase the amount that borrower will qualify for. As an example a buyer could qualify for a $100,000 loan on a home with a conventional heating system but could quality for a $120,000 loan on a home with a higher energy efficiency rating. The problem is that most lenders don't know about these loan programs or want to mess with the extra paperwork. As utility costs rise they may dust off these loan programs and start offering them again.

 

[Mountain Man]

As heat pumps have increased in efficiency, in GA you can't get anything less than a 13Ser now and increasing to 15Ser, it seems alternative systems have lost appeal... I no longer hear the ads on radio.

 

[stefan olafson]

"My question to you is this; If a home was so equipped, would that be reflected in an appraisal?"

On page 1 you would list the heat as High Efficiency FWA/CA - Geo Thermal. In the Cost Approach you have to include the increased cost of the system. That's how it's reflected in the appraisal.

"My question is do you adjust for geothermal vs. conventional heating systems?"

The appropirate answer is does your market recognize the difference? Both heating and air conditioning is dramatically reduced, cost wise with Geo Thermal. In my market area the savings are rather dramatic, with winter temps at or below -20 degrees for quite a while, then +90 degree heat in the summer.

Yes, if you look deep enough you will find a market adjustment in my market, I'm not sure of yours.

 

[Terrel L. Shields]

Doesn't make any sense but buyers around here just aren't willing to pay any more to save money on their utility bills.

the lack of sales is a problem as most systems are installed by homeowners who tend to live for long periods in the same place. Therefore, I would adjust it as Black suggests. If typical utility bills are $300/mo and the geothermal is $150/mo. then the 150 x GRM = contributory value.

 

[Amy Perkins]

Would a typical buyer pay more for such an item? Can you extract this from the market?

 

[Ted Martin]

Terrel, you would think that would work but it doesn't around here. I've had some subjects that had old lease agreements provided a tap into a gas line that allowed them all the natural gas they could use for the home free. I've even found comps that match this amenity, but there just isn't any support for a market adjustment. I hate to say it but most buyers just aren't smart enough to look a gift horse in the month and see what they are getting. They may get smarter later in the year when they figure out that propane and natural gas are following the price of oil UP, UP, UP.

I think you would want to use NPV rather than GRM in your analysis after you factored in the additional cost of the system. It may be that the buyers are recognizing the risk associated with these systems when potential future repairs are factored in. Most of the extra cost of these systems is a) bragging premium and b) the cost of the circulation system. Otherwise they are just glorified heatpumps.

Even so this analysis is more an academic exercise rather than a reflection of the markets reaction.

 

[Kevin A. Spellman]

I just did a Geo system back in September on an island. This is what the basement could look like. This basement reminded me of my days in the Navy.

 

[Doug in NC]

Addressing energy efficiency is going to be a factor that we all will have to learn to recognize sooner or later. With skyrocketing oil and gas prices, it is becoming an economic necessity that we start building more energy efficient homes. All other things being equal, which would you rather own, the 2,500 sf house with the $250/mo. electric bill or the same size house with a $125/mo. electric bill? That extra hundred bucks a month might still be able to buy you a extra tank of gas. Fuel prices are going to go much higher before we are forced to use cheaper alternative fuel sources.

I plan to do some value comparisons on this, but these pesky appraisal orders keep getting in the way of my research.