Solar and Geothermal in flips

14 Replies

I was curious if any folks who flip houses in the north have considered incorporating solar panels and / or heat pump technologies such as geothermal or air-source in their rehabs.  To install solar panels and a geothermal heat pump in the Boston area might cost about $100K retail, which seems like a non-starter UNLESS 

  1. incorporating these into a mortgage made financial sense for the buyer, and...
  2. appraisers factored this into the appraisal value

So in other words, if the additional amount on a 30 year mortgage were offset by energy savings & programs, AND the buyer was able to live carbon-free, it seems that this might attract a savvy and enlightened buyer.

@Doug Danoff

I am not at all a developer or real estate mogul with umpteen years of experience on my back but I am a consumer. As a consumer I know what I want and the top of my list of priorities when it comes to anything (food, clothes, cars, house) is price.

Here is a scenario, lets say there are 2 flippers who bought their property for $100K each. The properties are pretty much same square footage. Flipper A put in $100K of work and put in all the necessary accoutrement that would attract the customers (walk in closet, open concept, Jacuzzi bathtub, etc.) and is selling it for $275K. 

Flipper B also put in $100K worth of work and put in all the bells and whistles that Flipper A did. Only, Flipper B added solar panels and geothermal heat pumps for energy savings. He put the house on sale for $375K.

As a consumer, whose house do you think I would want to see first? Flipper A or Flipper B? If both houses are pretty much the same in character and the only difference is $100K in extra amenities, no matter the potential energy savings I would have, my key concern would be the upfront cost. Flipper B's upfront cost is too high.

Yes, there are savvy and enlightened buyers who would buy it. However, you are narrowing your consumer base instead of expanding it. If you narrow the consumer base, you are also taking away chances of bidding wars to occur because that savvy and enlightened buyer will only go so high in price.

A house in which multiple consumers from all walks of life could see themselves there and the cost is reasonable to them, can easily slip into a bidding war.

Just my 2cents on the matter.

Yup, @Brian Adzadi is right - you cut your pool of buyers down to almost nothing.  Definitely not the way to do a flip when you are starting.  And experienced flippers, for the most part, know this and don't incorporate features that limit their buyer pool.  

@Doug Danoff I installed a 48 panel system on one of my barns.  We purchased the equipment instead of leasing it.  

Since that time, I've talked with a few appraisers.  They have all said that they don't add any value for an owned system like mine, which seems wrong, as there is a lot of expensive equipment attached to our property.  But that's what they've all said.

I think something like mini-splits makes sense though.  They're very efficient and also provide whole-house AC.  I think these would be attractive to buyers.

I have heard of geothermal, but I've never seen it in real life.

I've never had a buyer ask me about living carbon-neutral.  My impression is that nobody cares about "carbon" when it impacts their own pocketbook.

@Brian Adzadi , @Ann Bellamy , @Charlie MacPherson ,

Thank you for your valuable thoughts.  

The insight from Charlie that appraisers don't factor in solar panels was especially valuable.  This seems like a wrong position for appraisers to take to me.  It is a valuable system in a house that saves & earns significant money for the owner.  I imagine appraisers take a similar position on geothermal, but if anybody knows for sure, I'd love to hear.

I do understand that the vast majority of buyers don't yet understand the value of tools like these or the cost/benefit of factoring decisions like this into a purchase.  But before this post congeals into a defacto BP opinion, I thought I'd clarify a bit.

ARV's in some of the areas I'm looking at seem to be between $600K and $800K. Several of the source properties need new heating and a new central AC including duct work. So there's already a significant baseline investment here.

Let's say you could get a geothermal system installed for $50K, but the cost for new heat and central AC was something like $15K.  The difference being $35K.  I pick a geothermal as opposed to the mini-split Charlie mentioned because you would not need to augment the system with oil or gas since they have the power to heat at sub zero temperatures.  Adding $35K to a 30 year mortgage might be an additional $175 P&I per month, but would free you from oil and gas bills all year as well as maintenance of heating and AC systems.  Total annual mortgage cost would be $2100, but savings should be significantly more than that, even more when you factor in mortgage tax credits.

I'm sure you're saying, "well you just replaced your oil/gas bill with an electricity bill"...  but that's where solar comes in.  The right house can completely offset this with solar panels.  So for an additional (say) $175 / month P&I amount, you get all the electricity you need and possibly more you can sell.  So no electric bill either.  So for a total of a monthly $350 additional mortgage payment, you eliminate: Oil payments, Gas payments, Electricity bills, Furnace maintenance, AC Maintenance, Chimneys sweeping, oil tanks, plumbing maintenance, etc.  I believe most households do better than break even.  Oh, also, once it's paid off, you continue to get all that stuff for free.

I don't expect average buyers to get this, and I wouldn't consider it in markets where there is no hope.  I do think there is a growing population of people who are ready to take a second look at their carbon footprint, and if you can demonstrate the financial benefits I laid out above, I suspect they might take a 3rd look.  

For this to make sense though, there are some important complexities I'm not yet equipped to navigate such as how the tax credits transfer to new owners, whether appraisers would factor this into the value to preserve mortgage integrity, whether installers have better pricing for investors, etc.  

I would love for this conversation to continue!  Questions and concerns are invited!

Your average buyer is not informed enough on the cost benefit tradeoffs of these technologies to be able to perform a thorough analysis of the improvement, and so they won't perform it, and therefore the demand simply does not exist.  

If people factored in the costs to operate a property as part of the purchase equation, then perhaps they would be able to compare apples to apples, but that's just not how we value property these days. This leads to the unfortunate result that your $40,000 panels that will save the buyer $80,000 over the average home ownership period only add $5,000 to the value of the property for the seller.

@Doug Danoff

Some day these "green" solutions are going to cost substantially less. Elon Musk's solar roof costs 5x a regular roof. The investment pays off in about 50 years. No one is willing to wait that long for anything.

Some day, that roof is going to cost maybe 1.5x a regular roof, or maybe even the same. As of right now I wouldn't do anything fancy. It doesn't add enough value since it's just too expensiv.e 

@Doug Danoff you're right that it'll probably attract a well informed buyer, and may sell faster than a similar home at the same price. Unfortunately, it will most definitely get you a negative return on your investment.

Thank you @Tanya F. , that was meaningful to hear.

And thank you to @Luka Milicevic , it is sobering to hear the general reaction about perception of value.  One note, the expensive part of geothermal is digging a 400 ft hole in the ground, that's tried and true technology.  The best way to drive that cost down is volume.  The rest of the job is actually pretty straight forward.  Regarding tesla's solar roof, yes it is 5X an asphalt roof, but only about 1/3 more than a slate roof, which is a better comparison.  If installing a high end roof, I think it would be foolish to not consider a Tesla roof (when it's actually ready).

And @Jason D. , I agree with you.  It looks like the only way to make it happen is to erode profit.  Attracting a well informed buyer and closing faster would be the upside.  I wonder if there is a way to get those opposing forces to meet in the middle.  If we did, I wonder if that might start enabling appraisers to factor stuff like this into their valuations.

So glad I came across this community...  :).

WHAT IF IT BREAKS

Whether it is supposed to be a reliable system or not, that would scare most buyers from the home even if you were selling for the same price! 

Maintenance on a regular HVAC system can be expensive, can't imagine a 50k system. I can also imagine the seller claiming it doesn't need maintenance/will last a lifetime but that won't sway most in the real world. 

Things.Just.Break.

Hi @Doug Danoff - glad you're posing these questions. As a rabid capitalist, and an even more rabid, foaming-at-the-mouth environmentalist, I think about this stuff frequently. Math is quite helpful here, if you can bear some assumptions.

Let's assume the typical $700,000 house in Boston costs $5,000/year in utility bills. Let's assume that if you spend $80,000 now on geothermal and solar panels, you'll save $5,000 per year on utility bills forever, but if you spend $15,000 on regular heating and cooling equipment, you'll have a typical annual cost of $5,000 in utility bills. (note- this is rife with assumptions already. Geothermal and solar are cheaper to maintain, which is a big plus in their column, and will the cost of electric/gas/oil rise or decline over time?)

One can consider this case similar to a perpetuity, which is an annuity that pays out forever. There's a simple equation to determine the value of a perpetuity, it goes like this:

Present Value = (dividend per period)/(discount rate) 

More concisely: PV = D/r

If the dividend(in this case, $5,000 annually) is divided by the discount rate and the present value is greater than what you spent to install the system, then congratulations! It made sense to make the investment- so long as you can convince a buyer of this, of course. In the above example, an extra $65,000 was spent on geothermal and solar to yield a $5,000 annual payout(really it's divided over 12 months, but let's keep things simple, if it's not too late for that.) Assuming a 6% discount rate, the calculation looks like:

PV = $5,000/.06 = $83,333. 

Since the present value exceeded the investment by $83k - $65k = $18k, it looks like a savvy investment! What discount rate would make this a break-even proposition? $5,000/$65,000 = 7.7%. For discount rates higher than that, the proposition would be a money-loser. 

But I think you'd have a hard time convincing a buyer to pay an extra $65k for the above, regardless of their discount rate. There are air-source heat pumps that work very well down to zero degrees Fahrenheit, and some work well even into sub-zero temps. I think a good economic argument could be made for an air-source heat pump with a natural gas furnace to provide backup below certain temperatures. If you wanted to get really freaky, you could try to come up with an equation dictating the outdoor temperature at which the furnace kicks in based on the ratio of natural gas prices to electricity prices, taking into consideration the variation in efficiency of the heat pump relative to temperatures(but that would be pretty challenging! Not only the equation, but programming that equation into the system so it adjusts the starting temperature according to the current gas and electric rates.)

Before doing any of that, I'd make sure the low-hanging fruit has already been picked- LED lighting, water-efficient fixtures(sinks, toilets, shower heads,) possibly spray-foam insulation to reduce drafts, to name a few.

MG

I agree with what everyone has said, however, with a high-end property things are different. I've seen Geothermal go in on high-end new construction and gut flips. For the most part, people are much more skeptical on solar because it's installed on the roof, impacts athletics, and it's something that needs to be "dealt with" (either maintenance, contract with supplier, etc.).

As @Charlie MacPherson added, mini-splits are a great value-add and through mass saves you can get a 10 year 0% loan if they having heating capability.

As for Geothermal -- A real challenge can be ground rock in this area.

@Doug Danoff May I know if you went forward with solar panels and geothermal heat pump? If you did, may I know if you were satisfied with the decision? In some states, there are C-PACE programs which can roll the installation cost into property assessments and amortize it over the long run. I've been getting quotes about those systems as well.