Green Builders Must Battle for Fair Market Valuation
Sustainable, energy-saving homes don’t always appraise for what they’re worth.
By: Jennifer Goodman and Shelley D. Hutchins
The decision to offer homes that are high-performance, energy-efficient, non-toxic, sustainable–whatever the preferred term–involves many considerations and builders must weigh expenses and impediments against potential benefits. Of course, green building techniques and products reduce a home’s environmental impact as well as owners’ operational costs, but what do they do for a builder’s bottom line? In this special package, BUILDER presents a cost versus benefit analysis exploring the economics of green home building.
Across the country appraisal companies and lenders have been slow to acknowledge builders, buyers, and owners of high-performance homes. Many builders are fed up with a financing system that doesn’t put enough value on sustainable features and the savings they yield for homeowners. For example, appraisers’ 1004 form provides a mere two lines for information about energy-efficient or other high-performance features. This is despite the fact that owners of energy-efficient homes are less of a default risk than owners of traditionally built homes. A study from the University of North Carolina at Chapel Hill Center for Community Capital and the Institute for Market Transformation (IMT) found that owners of energy-efficient homes—defined as those with Energy Star ratings—are 32 percent less likely to default on their mortgages and the more efficient the home is, the lower the default risk drops. The study, “Home Energy Efficiency and Mortgage Risks,” also found that for each point on the Home Energy Rating System (HERS) index of efficiency, the risk of mortgage default on a home drops.
“It stands to reason that energy-efficient homes should have a lower default rate, because the owners of these homes save money on their utility bills, and they can put that money toward their mortgage payments,” says Cliff Majersik, executive director of IMT. “We long believed this to be the case, and now this study proves it.”
The Payoff: Code Preparedness
When it comes to codes, green builders are ahead of the curve. These early adopters are preparing now for future building requirements such as California’s Title 24, which will require all new residential construction in the state to be net-zero energy. The 2012 IECC codes–mandating tighter envelopes, better insulation, blower door testing, and more–have been adopted by nine states and counting. (Click here for an interactive map of residential building codes across the country.)
Scott Laurie of the Olson Co. admits that California’s current requirements along with tax incentives from the cities where the company builds has pushed it to LEED certification.
“The building codes are going to take us there,” Laurie says, “so it’s best to figure out what needs to be done to create a profitable high-performance house versus what doesn’t before it gets there.”
Besides mandates, there also are financial rewards from federal, state, and regional utility programs for renewable energy as well as resource-conserving construction. Incentives such as the renewable energy tax credit (extended to Dec. 31, 2016) can significantly impact a builder’s return on investment and help customers afford pricey green features.
Builders, developers, and Realtors are working to advocate for a system that gives credit to high-performance houses. Many support a green MLS system and the SAVE Act, which aims to improve federal mortgage underwriting by including a home’s expected energy cost savings when determining the value and affordability of energy-efficient homes.
Recent changes in the way high-performance homes are appraised and financed is helping to make them more affordable. More appraisers are using the Residential Green and Energy Efficient Addendum from the Appraisal Institute to help them identify and describe a home’s green features, from solar panels to energy-saving appliances. This means that the value of these features will be considered when the home is resold. Scottsdale, Ariz.–based Meritage Homes uses the form for all of its houses to help give buyers peace of mind that their green investment is sound, says C.R. Herro, vice president of energy efficiency and sustainability.
As a developer, Austin Trautman of Vali Homes follows financing trends closely and is frustrated with how sluggishly that process is changing to accommodate houses designed to offer owners significant operating cost savings. “The energy efficiency appraisal addendum accounts for some of these features,” he concedes, “but there’s no set dollar amount for it, so appraisers set their own value and they may not really understand the savings for the owner.”
Builder Todd Usher, who also uses the addendum for Addison Homes, has had success working directly with lenders to weed out appraisers who don’t put the proper value on green features. “We’ve put language in our contract to ensure that the lender insists on a properly trained, experienced, and qualified appraiser for high-performance homes, and we’re seeing big improvements,” he says.