- October 14, 2016
- Posted by: Jeff Julia
- Category: Uncategorized
For most of us, purchasing a home is one of the biggest decisions we’ll ever make. It is often the most expensive decision, too. When I think about the home buying process, it makes me wonder, do we speculate or validate?
The same question applies to energy efficiency projects.
Consider this example, once we’ve done a little online research, get pre-qualified for a mortgage and find a home in our price range, we have a real estate broker give us a tour. Do we evaluate the home based on how fresh the paint is, how glossy the wood floors are or how manicured the lawn is?
Of course we do! That is why the sellers make these low cost improvements prior to listing the home for sale.
So what then is the purpose of having an appraisal done? Is it strictly for tax implications?
What about an inspection? Is it strictly for insurance requirements?
I don’t think so. It’s for the peace of mind to confirm that yes, the home is worth the investment. That the new paint, polished floors and landscaping are not masking issues blind to the common eye.
To build on this, what if the appraiser notifies us the property is undervalued, meaning its appraisal value is higher than the sale price. What does that insight tell us?
Well, if subsequently the inspector informs us that the chimney is cracked, the foundation is unstable and the moisture barrier in the walls is compromised, it tells us why the home is undervalued. In fact, the home is not undervalued at all.
The same concepts hold true with energy efficiency projects.
Allow me to explain.
If an appraisal of the project reveals it is undervalued, does that necessarily make it a worthy investment? To be honest, the opposite may be true for the same reasons as described above.
If an inspection of the proposal uncovers the equipment being specified is of low quality, then the cash flows will be impacted as a result of new maintenance and repair costs that should be expected. Especially if there is no labor warranty or service agreement included.
In addition, if the inspection reveals the energy savings are inaccurate, then the impacts to the utility expenses will be lower than anticipated and the return on investment will be compromised.
And seeing both the equipment quality and energy savings are correlated with the utility rebates, those will be impacted as well.
These factors, plus many others, inevitably make this initially undervalued project riskier than a premium priced project with solid dynamics.
Yes, it can be challenging to evaluate each component of an energy efficiency project, especially if you are short on time and in-house resources to do so. But, it’s important nonetheless to ask yourself, am I speculating or validating?
Energy Project Advisors
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