Austin Energy-Efficiency Property Upgrades at Point of Sale

Some weeks ago I received an interesting email from the Austin Board of Realtors government affairs committee. It was a scare letter warning us, as Realtors, that we need to take action to oppose a new ordinance, and it has since been making the rounds on Realtor email lists and forums in Austin. What struck me about the letter was that, on face value, a reasonably intelligent person can quickly ascertain that it contains biased and untrue information.

Let’s have a look at the content of the letter, compare it to the truth, and see what the proposed “point of sale” upgrades might mean for Austin home buyers and sellers, and if there is cause for alarm.

From the letter:

Austin homeowners will need your help to understand the reasons single family homeowners will be required to obtain a license from the city of Austin prior to selling their homes.

Uh, actually they need our protection from your blatant misinformation campaign. Nothing has been decided. This will be further explained below.

The City of Austin is introducing an ordinance to mandate energy efficiency retrofits for all types of properties in Austin, including single family owner-occupied homes. This is ordinance is being looked at as part of Mayor Will Wynn’s Climate Protection Plan.

They intend to enforce it at the point of sale. In other words, prior to the sale of any single family owner-occupied home, a certificate of compliance proving the required efficiency retrofits have been done must be done prior to closing.

Again, not true. Not only “not true”, but not true at a level of incompetence that’s hard to comprehend. A task force is working on a plan, but there is no ordinance. There is no proposal. The task force has Realtor representation, so one would think our Board of Realtors would be better informed than this letter suggests.

But then it gets better, and this is where my eyebrows lifted as they lay on the fear tactics and dish up even more inaccurate and false information.

* Without a Certificate of Compliance filed of record prior to closing or at point of sale, a single family home cannot be legally sold in Austin.

* Delays in the time from escrow of a purchase agreement to closing due to the compliance and inspection process could exceed, by days or weeks, the typical 30 to 45 day time frame in a sales transaction today.

* Immediately upon the effective date of the ordinance, the city will have to implement methods and processes to meet the demand created by the sale of some 25,000 homes per year. That’s 25,000 inspections, assuming the first inspection results in the issuance of a certificate of compliance. City inspectors say that at least 50% of all inspections result in a subsequent inspection to correct problems found. That’s an additional 12,500 inspections, at a minimum, or some 37,500 new inspections in a typical year to determine if single family owner-occupied properties comply with the new proposed ordinance. Who will pay?

* Homeowners will bear the expense of retrofits to obtain the certificate of compliance. These expenses will vary from home to home, but the range could be anywhere from $1,500 to $10,000 per home.

* Expect delays in acquiring another home as homeowners scramble to comply with the new ordinance, especially if that homeowner needs to sell his or her existing home prior to closing on a new one.

Jeez, where do we start. That’s an awful lot of flimsy conjecture and liberal extrapolation for an ordinance that doesn’t exist. But what caught me eye more than anything was the grossly inaccurate sales numbers used.

ABOR says 25,000 sales would be affected. in 2007, there were 24,565 residential sales through the Austin MLS, so they are probably rounding up to 25,000. Fair enough. But since this would be a City of Austin ordinance, and therefore not affect Round Rock, Cedar Park, Buda, etc., A mojority of the 25,000 number does not apply.

How many sales were in Austin last year? The answer is 10,796. So, already, the Board is grossly misrepresenting and overstating the number of sold homes potentially affected each year by about 250%.

Next, it doesn’t take a lot of imagination to assume that the retrofitting is meant to deal with older homes with aging sewer lines, poor insulation, etc., so the ordinance would probably apply only to homes built before a certain date, perhaps the 1970s or 1980s, but let’s be conservative and use the 1990s.

Last year 5,757 homes sold in Austin that were built before 1990. Of those, we know a certain number have been rehabbed completely and would not be subject to the ordinance.

So ABOR throws out “25,000 sales affected”, when really about 5,000 would be a reasonably accurate guestimate, then they extrapolate their doomsday scenario from the 25,000 in a completely disingenuous way. I emailed ABOR asking for clarification on how they came up with the numbers and sharing my own analysis from above. I received no response.

I also let ABOR know that Austin Realtors deserve better representation and information than the hyperbole and fear mongering that the letter presents. I’m insulted that I would be provided such grossly incorrect information and then encouraged to go spread the information to clients and drum up opposition to an “ordinance” that doesn’t even exist.

Next, since ABOR is not a trustworthy source of information on this matter, I emailed the Mayors office to learn more, and here is a summary:

Me: {Emailed with generic Inquiry about the ideas being discussed and my undeerstanding of the potential home sale new rules}

Mayor Will Wynn’s Office:
You are correct — the Realtor rhetoric is not correct. At this point there is no proposal. A task (on which ABOR has a designee) is working on the issue, but they’re in the fairly early stages and haven’t produced any recommendations yet. The issues the Realtors are raising will be addressed by the task force as they work through the process. Ultimately, the goal of the Council is to produce a policy that makes home ownership more affordable, increases energy efficiency and does so in a manner that is not burdensome to home buyers/sellers or real estate professionals. I expect the task force will produce recommendations in the early summer. The recommendations will then be taken through the City boards/commissions process for public review and input. Any proposed ordinance would probably go to Council in early- to mid-fall. At this point I don’t have anything to send you, since there isn’t a proposal.

Me: I know there is no specific proposal, but there must be a stated intention of some kind. What I’m most interested in knowing is whether the Mayor is hoping to have a point-of-sale requirement for updating existing homes when sold, and if the requirement would pertain to all homes or just those older than a certain age.

Mayor Wynn’s Office Aid:
Yes, the Mayor is strongly advocating for a program to require very basic, cost-effective upgrades to existing homes and buildings. Point-of-sale seems to be the best trigger for single-family properties, and that’s what the Mayor is advocating. We’re waiting to see what the task force recommends in terms of whether the obligation for the upgrades should be the buyer’s or the seller’s. There are good arguments on both sides. …For multifamily and commercial, it may be that other triggers are more appropriate.

I was out of town and not able to make the last couple of meetings of the task force, but I believe they have already started working on the question of what types of properties should be exempt. I’m pretty sure they’ll recommend that homes built in the last decade or so should be exempt. I think they’re also talking about exempting properties that have already participated in Austin Energy’s efficiency programs. Please don’t hold me to the exact details on all that — I think it’s a pretty good estimation of the spirit of where the task force is headed, though.

I am neither for or against the idea of such a future proposal, though I’d probably lean against it on Libertarian principles of less government involvement. But I doubt it would be the end of the world either. And I don’t like being associated, as a Realtor, with a misinformation campaign.

We already have similar retrofit/upgrade rules in place for areas such as Sunset Valley where upon the sale of a home, the home has to be taken off the aging septic system and hooked into the city sewer system. Buyers and Sellers have been able to work out such issues over the years and I’m sure whatever comes of the Mayor’s efforts to implement mandatory energy fitness upgrades will be absorbed by the market and we will in fact still close our deals within 30 days.

The City of Westlake is in the process of bringing sewer line service to that city, and someday in the future, those homes will no doubt be mandated to hook into the city sewer line.

Mandatory retrofitting and upgrading of property is not a strange or new concept, but extending the scope of the concept into optional and discretionary areas such as the energy efficiency of a home is in fact getting out there ahead of the curve. But that’s Austin. That’s who we are.

So, shame on ABOR for being such an unreliable source of information and for their knee-jerk, incompetent response by sending an official letter to all Austin Realtors that flunks a simple truth test.

And to my fellow Realtors, don’t swallow anything spoon fed to you by our Realtor Association. Think for yourself. Go find the facts and information on your own. And stop spreading the bad information to clients and other Realtors. It makes all of us look stupid and clueless.

Here is a link to an article on this topic in today’s Austin Statesman
Austin Realtors question plan to require efficiency upgrades for older homes
City says complaints are premature, alarmist.
Click here to read the article.

Posted by Steve
8 years ago
Steve

Steve is a Real Estate Blogger, Husband and Dad, UT Austin Grad, Runner, Real Estate Broker and owner of Crossland Team and Crossland Real Estate in Austin TX.

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Dusty - 8 years ago

Thank you , Steve.

I have become tired of reading Austin realtor’s objections to this initiative to the point of believing that if the realtors are against it, I should be for it. It was nice to hear your point of view.

All of the city’s various energy conservation initiatives are designed to stave off/delay construction of our next fossil fuel burning electrical plant…a worthy goal. It is about time that we legislated conservation. It is akin to legislating safety.

Dusty

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David Mathias - 8 years ago

Steve, good topic. Another item the task force needs to be looking at is the ability of the finance and inspection professional communities to support this goal. Some of those properties would probably qualify for an Energy Improvement Mortgage (Check here for Fannie/Freddie info on Energy Improvement Mortgages: http://www.resnet.us/ratings/mortgages/default.htm.), but good luck finding a lender willing to offer one on a resale property. Likewise, how many HERS inspectors are there in this area (see http://www.seco.cpa.state.tx.us/seco_links-home-eem.htm)? If a city ordinance does come online, it will certainly create a ripple in the local market. I hope that there will be providers willing and able to step up and provide the needed services.

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Marshall - 8 years ago

Kudos for healthy skepticism, Steve. I’m always dubious of proclamations by self-serving interest groups representing a small sliver of the electorate and of the economy, but its nice to hear such skepticism from one of its members.

I’m still struggling, however, to understand realtors’ strong, public objections to this plan. Perhaps you can clarify it for some of us, since my economist mindset has me spinning my wheels and, of course, the ABOR campaign website provides no opportunity for discourse. Here are my questions:

According to the Statesman article today, it seems that ABOR is invoking principles of equanimity regarding which groups will be disproportionately impacted by this ordinance, viz. economically disadvantaged and elderly residents. But, the fees and commissions connected to real estate transactions are highly regressive–that is, they aren’t pegged to earned income or revenue but, like sales taxes, they are fixed–which seems to undercut these claims and appears disingenuous.

Moreover, it seems that sellers will incorporate these anticipated expenses into the selling price, just as they do the fees associated with closing. Thus, it seems as though the higher selling price will be beneficial to both sellers’ agents and buyers’ agents due to the incentives governing real estate transactions–that is, a buyer’s agent actually gets higher commissions if their client spends more money as does, of course, the seller’s agent.

Furthermore, it seems empirically questionable that tacking on these fees will “precipitate a real estate crisis in Austin”, considering that the fees associated with selling a home typically approach 10 percent. Why is it that the marginal cost of improvements, which are clearly not a deadweight loss on either party and will be modest compared to the fees, are seen as such a trigger for the collapse of the real estate market?

The only legitimate–although I can’t say I’m sympathetic–concern I can see is that this may delay the closing process a bit and, importantly, chasten home flippers since it will erode their margins.

Am I looking at this incorrectly?

Enjoy the blog!

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David Mathias - 8 years ago

Marshall,

I agree the hyperbole is rather thick on this topic from ABOR, but I hope a good deal of thought is put into the concept before any proposals are put forward. To wit:
1) your comments assume that sellers will be able to secure the capital resources to make the improvements prior to sale. Sellers will bear a cost to gain access to the funds (points, closing costs, etc.,) if they have to tap equity to make the improvements. We’re assuming, of course, that all sellers have good credit scores and won’t be shut out of the market. If the owners are deceased, is this a burden they will pass to their estates to remedy?
2) we seem to be assuming that the quality of work performed is good and uniform across all sellers. If the seller is elderly or disadvantaged, then I’d argue there is a greater likelihood that contractors may take advantage of them and perform shoddy work. By sticking the seller, rather than the buyer, with the obligation to make the repairs, you’re asking that seller to assume the risk.
3) re: realtors’ incentives to make marginally more by selling at a higher price, reference “Freakonomics”. Unless the realtor is selling their own property, at the margin they don’t seem interested in holding out for a higher price to make a slightly higher commission on their deals.
4) tacking 10% of the sales price onto a house leads to overall price inflation in the market over and above the already higher prices for homes in the core city. I’d argue that you will see a drive to substitution of new, denser, condo construction that is energy-efficient versus retrofitted older housing. If you have a property that would sell for $360K as is, for $396K improved, or sustain two new $390K McMansion condos on the same lot, you would probably see more buyers opt for the new construction. This would work counter to other city priorities for retaining existing housing stock.
5) the fact that we need to have this conversation is indicative of a failure of PUBLIC policy (local, state and federal), not of private preferences and choices. I dislike seeing private individuals bear these costs, especially when there is to little regard for making these structures PRODUCERS of energy (read: solar, geothermal, etc.) as well as more efficient consumers.

I’ll step off my soapbox now, folks….

Next speaker?

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Steve - 8 years ago

Thanks for the insightful comments.

As I said, I’m not in favor of government involvement in real estate transactions, especially something as tricky as repair items, but I would like our Board of Realtors to present valid merits against the proposal instead of the slop they’ve been serving. Then we can all consider the arguments. ABOR actually hurts their credibility, and that of Realtors, by presenting a shrill, knee-jerk response instead of a measured, articulate overview of the potential impact on those involved.

Also, it’s reasonable and easy to project and assume that any such proposal would create a logistical nightmare, closing delays, etc., but in fact real estate buyers and sellers, and the “transaction” itself are, in my experience, quite resilient and flexible.

Most homes older than 10 years do in fact often have big ticket repair items. Any home built between 1992 and 1996 that still have original HVAC, roof and appliances will have an inspection report the reveals a lot more in needed costs than this proposed ordinance will introduce.

I met an HVAC guy at one of our deals yesterday to evaluate the 16 year old HVAC system, which is leaking freon. Also, the 16 year old roof is at the end if its life. We’re looking at over $10,000 work needed on those two items alone, before we even go into the smaller details of the inspection and the code issues of a 1992 home. Yet this amount of work needed is not uncommon or unusual and buyers and sellers, in most instances, manage to work it out such that the deal happens and both sides are satisfied.

The difference in the above example and the proposed city ordinance would be the possible involvement of a city inspector. So, we’d add him or her to the list of other people who visit and check out the home – inspector, appraiser, termite inspector and other vendors as the inspection report might dictate. That’s something the task force would need to work into the deal, and do so in such a way that the sale is not jeopardized or hindered. But I doubt a 0.5% capped retrofit will kill a deal. Somehow it will get worked in.

Thanks again for the well stated comments and views.

Steve

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Curtis Reddehase - 8 years ago

Steve, I have to say that you are great at taking information and extracting the truth. I have not posted a comment before, but I have followed your blogs and can say that I respect your ability to get at the core of how things really are. Keep it up and thank you for being such a great source of information. You bring a tremendous value to the real estate community.

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Greg Stevens - 8 years ago

My main concern is the delay in the homebuying process, specifically the posibility of a total lack of home inspectors to approve a home to be sold.

Would a “spur of the moment” home sale/flip be delayed weeks awaiting inspection? This prospect is frightening because that places the home buyer in a precarious situation, vulnerable to market swings simply because the sale is blocked by incomplete inspection.

I fear the delays because city home inspectors are not trained to inspect these upgrades and are not regulated by the city. They are trained and regulated at the state level, meaning the city has no authority to change the scope of what they inspect. That means the city would have to arrange for its own inspectors.

Yikes! Sounds like a potential mess in a very important economic exchange.

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Victor - 8 years ago

So, who are the Realtors that are on this Task Force? Are they people from the ABoR like up Board of Directors, or members? If the city has a Task Force, have they released their information or findings as they are being presented?

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Curtis Reddehase - 8 years ago

Steve

I appreciate you putting in so much effort to understand this issue. i have to say that is has not been clear to me for some time. It is funny how a lack of understanding of what is truly happening can scare people so much.

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Victor - 8 years ago

As President of NAHREP (National Assoication of Real Estate Professionals) Austin, the city of Austin has not contacted us for information in regards to how this will effect the lower income population – the minorities are always the hardest hit in regards to these issues. These issues are always effecting the minorites and are always, the last to be consider. I will have contact them myself, tomorrow.

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D. Teetsel - 8 years ago

Steve,

Thank you for the insightful information. Just wanted to comment that Austin is not the first local government to consider requiring point-of-sale energy or water conservation upgrades. There are a number of municipalities that have actually been successfully requiring said point-of-sale upgrades/retrofits for decades, inclusive of both residential (single and multi-family) and commercial properties. If you’d like to review some of the existing requirements in other locals, take a look at San Francisco and Berkeley, California. Links to both are below:
http://www.sfgov.org/site/uploadedfiles/dbi/Key_Information/19_ResidEnergyConsBk1107v5.pdf
http://www.ci.berkeley.ca.us/SubUnitHome.aspx?id=15404
…and considering the real estate markets in these areas, it’s fair to say that adopting such a requirement will not impede the market or its sales.

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