Can Geothermal Heating and Cooling Increase a Home's Resale Value?
Beyond Monthly Savings: Some Homeowners may be Underestimating the Value of Geothermal
Residential geothermal heating and cooling may still seem like science fiction to homeowners unacquainted with the concept, but the science behind it is relatively straightforward. The fundamental principle involved is heat transfer, which describes the movement of warmth from one space to another. Air conditioners and heat pumps run a liquid through a coil inside the home to extract heat from the air and move it outside. During the winter, heat pumps can also absorb heat from the outdoors and transfer it inside. Depending on their composition, heat pumps may rely on the outdoor air or the temperature underground for heat to shift indoors. Geothermal heat pumps use the relatively consistent temperatures of the earth to provide predictable heating in a variety of climates. A loop of plumbing cycles water through until it reaches the right temperature for application inside the home. Unlike most furnaces and boilers, they do not require fossil fuels to operate. Instead, they use a minimal amount of electricity to trigger the movement of the heat inside or outside.
At the end of the day, however, many homeowners will often have the same questions before installing something new:
- How much will this cost?
- How much will this save?
- How long will it take to recoup the cost of this investment?
When calculating a geothermal system's potential ROI, a common tactic is to divide the purchase price by the estimated monthly savings after installation. This is certainly a good first step (and may be the primary basis for deciding to move forward with this purchase), but it neglects one potential part of the equation—added resale value.
This guide identifies several ways people can evaluate how geothermal heating and cooling may affect their home values when it comes time to sell.
This article is not an appraisal. The various factors and estimates below serve to outline what some buyers may consider when evaluating a home for sale.
Table of Contents
- Possible Reasons for Increased Resale Value
- Immediate Monthly Savings for Buyers
- More and More Buyers Want Green Homes
- A “Low Hassle” Improvement
- The Inexact Science of Home Values
- Crunching the Numbers: National Averages
- Crunching the Numbers: Finding and Using Local Data
- Geothermal Valuation Example: Home Buyer Perspective
- Other Important Metrics to Consider
- At the End of the Day, The Market Decides
Possible Reasons for Increased Resale Value
Immediate Monthly Savings for Buyers
The immediate savings on energy consumption is one method for sellers and buyers to conceive of the value of geothermal heating and cooling. Of course, savings is a subjective term. What seems like a bargain to one person could be an outrageous expense to another. Sellers can clarify by tracking how much they save on their utility bills compared to the price they paid before they had the geothermal system installed. Showing concrete numbers makes it easier to establish a fair offer.
Similarly, buyers should ask detailed questions about energy costs for any available properties that feature geothermal HVAC. They can use online calculators or ask local utility companies for average bills on similar homes to make a comparison. This helps buyers determine how much a geothermal system might be worth in a higher offer price, as well as how long it might take them to break even.
More and More Buyers Want Green Homes
Sustainability in construction is a big topic at present. As such, it is not surprising that homes with a lower carbon footprint continue to increase in popularity. While trends in new construction move toward efficient building practices and equipment that use less energy, existing homes move to match the demand. Buyers want green homes not just as a status symbol. They know that houses with better systems will lower their utility bills and even help them stay healthier.
Specifically, energy efficiency is rated as an important choice by approximately four out of five buyers of any age. Sellers might look at it from a standpoint of competition as well as price. Buyers have a variety of options that help them decrease their energy consumption. If sellers opt for a system that ranks higher in efficiency and efficacy than most other choices, they have an opportunity to stand out.
A “Low Hassle” Improvement
Although residential geothermal cooling and heating might seem rare, invisible may be a more accurate description. As a system that contains most of its equipment underground or inside the home’s mechanical space, geothermal is much less visible than other upgrades such as solar panels. Buyers may be wary of improvements that make the home look very different from the neighbors. On this score, a geothermal system sits well out of public sight.
The minimal visibility extends to installation and homeowner use, as well. A system that is installed properly requires very little maintenance and almost no regular upkeep from residents. For buyers who are looking for improvements that are already complete, the long lifespan of much of the equipment provides an enticing alternative. They have little reason to worry about the system becoming outdated or demanding a costly repair soon after they buy the home as these can last for many years to come.
The Inexact Science of Home Values
Determining the exact impact a particular improvement will have on a home’s value is difficult to apply on a general basis. Resale value often hinges on the appraisal, which depends on the comparison of other properties with similar features. This means that the increase in a home’s value for the addition of energy-efficient systems relates closely to buyer expectations, demand in the area, and other equivalent homes with or without those features. Attempts to categorize are more likely to be accurate at the regional level.
Since sustainable technology has become such a desired item for home buyers, many appraisers do try to factor that demand into their comparisons. The Appraisal Institute created a form that qualified parties can fill out to help identify and quantify a home’s efficient components as it relates to fair market value. This form may take the follwoing factors into consideration:
- building features, such as a geothermal heating and cooling system
- energy ratings for appliances
- measurable monetary savings
Concrete energy savings translates into an advantage that some may treat as a form of income. In 1998, based on interest rates at the time, the Appraisal Institute estimated that $1 less in annual fuel bills equals $10-$25 in higher home value. Interest rates have dropped somewhat in the years since. As such, these numbers may not be precise for modern estimates. Nonetheless, they offer a fairly broad range and a viable reference point. More recently, the National Association of Home Builders surveyed buyers and concluded that (on average), buyers would be willing to pay $8,728 up front to save $1,000 annually on utility bills.
Crunching the Numbers: National Averages
The amount of energy savings depends on the size of the home, the climate, and the way that the homeowner uses heating and cooling. The U.S. Environmental Protection Agency claims that people can save as much as 70 percent on heating costs and 50 percent on cooling with geothermal heat pumps. This translates into a yearly savings of $400-$1,500. These figures can help homeowners estimate the system’s annual value relative to their homes.
Multiplying Average Energy Savings and Home Occupancy Duration
On average, people will own a home for about 12-13 years. This is heavily dependent on the region, as well as homeowners’ individual needs and expectations. If maintenance costs are expected to be minimal or non-existant, they may multiply their expected stay in the home by their expected savings to create a price "ceiling". When costs like potential maintenance and the cost of a home with this improvement (versus the cost of a similar home without this improvement) are factored in over a long period of time, a buyer can determine if these estimated savings will be "worth it". In other words, if a buyer believes long-term savings will outweigh an added cost, they may be more likely to pay more for a comparable home with a cost-saving feature/improvement.
Using the previously-mentioned average annual savings figure of $400-$1,500, 13 years of time spent living in the home translates into $5,200-$19,500 in savings. This does not factor in any other costs such as maintenance (typically minimal depending on the age of the system) or added mortgage interest (as a result of the higher listing price). Furthermore, the next buyer also may not plan to live in the home as long—although many buyers do plan to stay a number of years to at least break even on their purchase. As such, homeowners may be fairly safe to assume that buyers will likely want to pay at least a little bit less than they think they will save during their occupancy.
Crunching the Numbers: Finding and Using Local Data
Heating and cooling costs vary so much by regional climates and energy prices. As a result, local data can be a way for homeowners to generate a closer estimate of their home’s value with a geothermal system compared to similar properties in the area. People should be careful not to place too much emphasis on general numbers. Approximations can be inaccurate if they are not specific enough or if the property is too unlike the average home.
For example, Las Vegas has a climate with hot summer temperatures and mild winters. Cooling costs are much higher than heating costs. The typical home features average insulation and runs about 2,400 square feet. Comparable homes in the area that are ready to sell usually have HVAC systems of average efficiency that are 3-15 years old.
Using Online Calculators
Using a variety of online calculators, homeowner of a Las Vegas property that meets these average conditions can reasonably estimate annual energy costs of $3,700. With a geothermal system, the cost runs closer to $2,400. These figures are based on current energy prices and average use, both of which might be different for specific homes. A simple comparison of the two totals yields a difference of $1,300 per year. Homeowners may want to use more than one calculator to estimate their savings to provide a greater level of accuracy. Consulting with a local professional for examples/case studies or talking with others in the area who have made this improvement can also give homeowners a great point of reference.
If you've already installed a geothermal system, the best data to use when determining your home's value would be your own utility bills (before and after installation) instead of these estimates.
Multiplying Energy Savings by Average Home Occupancy Duration
The average amount of time a person owns a home in Las Vegas is somewhat less than the national average. Of course, this depends on the cycles of the local real estate market, as well as the ebb and flow of the population. Relatively recent statistics indicate that the typical Las Vegas homeowner occupies a property for 10.6 years.
Multiplying the annual savings of $1,300 by average homeowner duration yields $13,780 in energy savings over that time period. Even when considering the costs depreciation, potential maintenance, and home buyer expectations, the potential increase in this hypothetical Las Vegas home's value is not insignificant.
Geothermal Valuation Example: Home Buyer Perspective
A home with an energy-saving improvement is listed at $255,000 while a near exact copy of the home lacking this improvement is listed at $250,000. A potential buyer has determined the home without the improvement is indeed worth what the seller is asking for but wonders if the home with the energy efficient improvement is worth the extra $5000. This buyer knows that they will stay in a home for at least 10 years and will save around $1000 or more on utilities every year (based on the previous owner's records) due to the energy-saving improvement in the more expensive home. This buyer plans to put down $52,000 and is getting a 30 year fixed rate mortgage with a 4.2% interest rate. The cost of maintaining these homes will be roughly the same.
- $255k home with energy saving improvement (-$1000 per year)
- $250k home without energy saving improvement
- 52k down payment
- 30 year, 4.2% fixed rate mortgage
- $5000 = Asking Price Difference (Not Accounting for Mortgage Interest)
- $8803 = Total Mortgage Difference (Accounting for Mortgage Interest)
- Buyer plans to stay in home for at least 10 years
- $10k = Utility savings over 10 years in home with improvement
The buyer in this scenario may decide that the more expensive home is worth the cost in this case because their projected savings outweigh the higher cost—especially if there is a good chance they will stay in the home longer than 10 years.
Other Important Metrics to Consider
Although resale value is an important factor for homeowners to consider for any major upgrades, it is the only valid factor to consider when weighing the pros and cons of improved efficiency. People who are researching the benefits that geothermal heating and cooling can offer for their homes should evaluate these aspects of the investment, as well:
- immediate savings
- upfront costs
- maintenance expenses
- upkeep responsibilities
- expected lifespan of equipment
- how long they plan to remain in the home
- government incentives/credits
These factors may vary, which means that a relatively easy decision for one homeowner might not be so easy for another.
In some cases, the costs to purchase and install the system can be the homeowner’s primary consideration. This is because people have to be able to pay cash for it or get approved for financing. This initial expense may be partially offset by local and federal tax credits on energy-efficient upgrades. Before making a choice, people may want to calculate their current energy consumption and verify how much they stand to eliminate by switching to geothermal cooling and heating. With this information, they can divide the total cost of the system by that savings to see how many months it will take them to break even. Monthly or annual savings is only meaningful for the time the person plans to reside in the home.
It is important to factor in financing costs, if applicable. At a cost ranging from $4,000 to $12,500 depending on the size of the system, many people may prefer to get a short-term loan to pay for the equipment and labor. However, this often includes interest on the loan, which can extend the time it takes for the upgrade to pay for itself.
If homeowners can break even before they intend to sell the home, the possible increase in resale value may simply serve as an added benefit.
At the End of the Day, The Market Decides
Homeowners may want to take a measured approach in the way they look at monetary benefits of upgrades once it comes time to sell. A product’s value is generally tied to what people are willing to pay for it. For a home with geothermal heating and cooling, this depends on the equipment’s condition and quality. Buyers may not be willing to pay more for a geothermal system they will need to replace, repair, or upgrade within a few years—though one big benefit of this type of system is its longevity.
The presence or absence of viable "comps" may also make increases in value harder to establish. Geothermal systems are becoming more common but they are far from the mainstream. This means that people may hesitate to assign a much higher value, even for a relatively new system. As a result, even the most careful calculations may yield a smaller result during the actual selling process.
No home improvement is guaranteed to provide a specific return on investment. The difficulty in establishing the efficiency of the home relative to comps may require some compromise during the selling process. This underscores the importance of the seller calculating their real energy savings and presenting this data to their agent and appraiser. The result may help increase the likelihood that the geothermal system is valued partially, if not completely.
Ultimately, the way a home is valued depends on the knowledge of many parties relevant to the transaction. Real estate agents who understand how geothermal heating and cooling works and average energy savings for the area can help to market the home appropriately. Similarly, those who know that energy-efficient systems can be a feature in high demand for buyers can more accurately weigh the economic impact geothermal offers for a particular property.