Can your properties compete in the netzero housing market?

Question

Tick-tock!

Are your California investments ready for the new 2020 net-zero Building Code requirements ahead?

It’s only one year away. Come January 1st, 2020 California's Building Code will MANDATE that ALL newly constructed single-family homes be net-zero (homes that are able to produce as much energy on its roof as it consumes in a year).

See: https://www.latimes.com/business/la-fi-solar-power-new-homes-20181206-story.html

As real estate investors, building/home owners, rehabbers and flippers, those who play in California will, come January 1, 2020, be competing for potential renters against much more energy efficient homes, “Super-homes”!

Biggerpockets Flippers know that in order to compete, we must remodel our homes as good and or better than the new home development across the street in order to achieve top dollar. Historically, we just had to use the same color palette, the same carpet, the same tile, the same appliances, etc., etc. If a potential home buyer or renter could get the same features as a new home for less money, most would. That’s the beauty of our business. By finding deals and adding value we can theoretically compete against new homes.

Now, us flippers will have to make a choice. If you are a flipper and your competition is a newly constructed home, you will at some point have to make changes to the stuff that’s “behind the walls” (adding more insulation, energy storage, pipe insulation, HERS ratings, equipment and appliance change-outs, etc.), stuff that we could never capture a good return on the investment for. How do you sell better insulation?

For newly constructed homes to be able to pass the upcoming 2020 Building Codes here in California, builders will be making the house itself differently than it has in the past. Some of these new construction changes will include: requirements for beefier 2x6 walls that are thicker to provide more insulation depth, installing more attic insulation, installing tighter and more efficient HVAC systems and water heating equipment that may need to be certified by third-party Inspectors for compliance. In addition to all these features that the buyer may never see, they are also going to get enough solar PV panels on the roof so that they’ll have NO ENERGY BILL every single year! Not just a few panels, but enough panels to offset ALL their home’s electrical energy needs.

How is your property going to compete with that?? I can tell you as an Energy Consultant, you don’t have enough roof space to simply add PV panels and achieve net-zero. You are going to have to make lots of changes to lots of different areas to be able to make the PV production work and be compliant.

Take a look at your own inventory. How old is it? How much roof space is there to install PV? Can you increase the wall/attic insulation values? Can you change all the HVAC and water heating equipment? Will your rehab math still work if now you’ll have to add solar PV to all your flips? If your investments are older than 1980, you’re going to have huge upgrade projects ahead if you want to compete against the new home offerings across the street.

For large multi-family property investors, you have a little more time. By 2030 ALL existing commercial buildings will be required to be net-zero. These retrofit projects will be BIG.

I wanted to bring this up to the Biggerpockets community because I want us all to succeed and not be blindsided when these requirements affect our livelihoods.

These changes are not impossible but will take careful planning and consideration.

Take heed friends and be careful out there.

Kevin Beck

Kevin Keith Beck · Answer

Nik,

At least you're in a different state! Lucky guy.

I have been a part of the energy efficiency community here in California as a builder and consultant for the last ten years and have raised objections in meetings with the CPUC about the feasibility of their "Big audacious goals". That's what these targets were in our minds.

But here we are, ten years later and the State has not backed down or slowed the "code train" as far as necessary energy efficiency upgrades at each code cycle revision. They are on track to reach their targets. BIG? Yes. AUDACIOUS? Certainly. But that doesn't change the reality of what's ahead for builders, developers, investors, and realtors.

I'm not sure how you flip houses up there, but here and everywhere else I have flipped homes I am absolutely trying to attract buyers who might otherwise buy a new unit. This choice happens every day to each one of us as consumers. Buy new or used? That is the question. Each of us has priorities in our buying habits, but for the most part we would generally prefer something new to something old. That's just human nature. Seasoned flippers know this and use all sorts of tricks and features to lure buyers to their side of the street.

I've spoken with many production builders of new homes during these ZNE (Zero Net Energy) meetings with the CPUC and Energy Commission and they are all concerned about the requirements ahead and how will they deal with it. Some are planning on reducing home size in an effort to offset new requirements and purchases necessary to adhere to the new code. IMO, this is a great 'nudge' to build more responsibly. McMansions are not going to save energy. Other builders will be raising prices for their units to absorb the added costs. Still others will be moving their developments farther and farther out from city centers where dirt is cheaper. This contradicts the efficiency goals whose major objective is to reduce greenhouse gas emissions. Cars (currently) are major contributors to GHGs. Perhaps, in combination with emission standards for cars escalating along with the building codes the Commission is of the belief that every home in the future will have an electric car in the driveway and polluting while commuting will be mute?

What I didn't address in my initial post was what you mentioned in your response. You mentioned it would be impossible to address existing building stock due to accessibility, etc. I wholeheartedly agree with your logic. We've expressed the ridiculousness of trying to retrofit 13 million homes in the state to the CPUC and the Energy Commission. You want a surprise? They didn't care. However, they did back down a bit. There used to be a goal (I don’t see it any longer) to mandate that all existing housing stock be retrofitted to be net-zero by 2050. I don’t see that language any longer. Probably due to so much backlash. What they have required though in the new plan is that in addition to all new commercial buildings being net-zero by 2030, 50% of the EXISTING commercial buildings in the State will have to be retrofitted to net-zero status. This is still a HUGE undertaking. Can you imagine going into any city in California and retrofitting every other skyscraper and building to be net zero?? Crazy!

Plenty of work ahead if you’re in the efficiency business I’d say.

Kevin

Nik Moushon · Answer

I don't think you will ever be able to match new home builds with a traditional flip on non-new houses and make money...or at least worth while money. Contractors are going to be buying all the new, in demand , materials up like crazy and at such bulk that they will be getting good discounts. Enough so that the average person flipping is not going to be able to get good deals. Now a larger flipper that has a dedicated contractor and does enough work to get those bulk discounts will be less effected and should be fine.

Plus most of the stuff that that law will require is not going to be feasible, if not impossible, to do on an non-new house. i.e. You can't cram insulation thats meant for a 2x6 wall into a 2x4 wall. If you pad out the wall to make it a "2x6" then you probably wont meet a lot of traditional building code for clearances. Not to mention cutting down the room sizes.

Personally I don't see this as a huge deterrent to buyers. Thats is buying an older home vs new construction. The price of a new build is going to jump up quit a bit with all these new forced features. Builders aren't just going to cut their profit margins; in fact I bet the raise them. Taking advantage of that this is forced and if a buyer wants new this is the standard. So your average buyer is not going to feel the "need" to pay a premium for things they don't see and can't feel. I'm sure there will be plenty that actually understand what has changed and are willing to pay that price but most wont. At least in today's culture. Over time it will probably change but not soon.

Can your properties compete in the netzero housing market?

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