Getting a Grip on Green-Home Appraisals and Insurance
More time, training, and green-construction data will be needed for fairer evaluations in the real estate and insurance markets
One of green residential construction’s growing pains has been the disconnect between what an appraiser might declare a new, energy efficient house is worth and what it actually costs to build.
It’s certainly not a new problem, and, fortunately, it continues to attract attention. Back in December, GBAGreenBuildingAdvisor.com Advisor Michael Chandler, founder Chandler Design-BuildCompany that handles house design and construction. Since both services are provided by the same firm, integrated design can often be more easily achieved. in North Carolina, wrote about his experience with the issue – an appraisal on a $400,000 project whose high-performance foam insulation and solar technology were valued at 50 cents on the dollar – and the need to educate Realtors, appraisers, and bankers about green building, and do it on a nationwide scale.
We also noted that the appraisal problem can be particularly onerous when new or recently upgraded homes are located in rural areas, where MLS listings with comparable green features can be scarce or nonexistent.
Force-fitting for a loan
About two weeks ago, Chandler’s experience with the $400,000 home – and the green-home appraisal issue in general – was reprised in an article published by the Christian Science Monitor.
"We had to go back and strip out some energy features like the solar water heaters and cut back on insulation and add square footage, making it bigger and less (energy-)efficient to get to the $400,000 appraisal," he told the paper. "Houses that are dramatically more efficient than normal, on average cost $15,000 to $20,000 more than houses built to code standard, but that's not being reflected in the appraisals."
Since green-home construction is nowadays one of the few sectors showing signs of life for residential builders, there’s added urgency to the push for education programs that can help appraisers measure the value of green-home features and more quickly build a database of relevant data, conventions, and guidelines.
The CSM story notes that progress in that area might get a boost from some lenders in the banking community, who have begun to offer $1,000 off closing costs for homes that qualify as energy efficient. The Department of Energy points out on its website that there are several green mortgageGreen mortgage Type of mortgage in which the lending institution raises the allowable loan amount for an applicant's earnings level because the applicant's green home has lower monthly operating costs and may even reduce the applicant's transportation costs. See energy efficient mortgage. products on market, but acknowledges that they're not yet widely adopted. However, the DOEUnited States Department of Energy. also notes that programs being developed in Maine, New York, and Colorado are designed to inject capital into mortgage products to "buy down" the interest rate that is charged to borrowers as an incentive to finance energy retrofits.
The fledgling nature of green-product insurance
Another actuarially measured component to green-home ownership, insurance, also has been trying to find its way in the emerging market. In a story published April 7, Insurance Journal presented an overview of the concerns that accompany some of the new insurance products being written to protect green construction components, including wind turbines, fuel cells, and garden roofs.
The basic issue, some insurers say, is that many green-construction products are still too new to have a well-understood risk profile. Documentation on risks associated with vegetation on roofs is starting build, in part from claims pegged to leaking roofs, for example, but the deployment of wind and fuel cell energy sources in green buildings has not been the focus of many claims so far.
David Cohen, senior director of real estate for Commercial Insurance at Fireman's Fund Insurance, told Insurance Journal that insurers also are homing in on green-construction defect issues.
"What everyone always historically or traditionally associates with construction risk is construction defects. Down the road, will there be any construction defect?" Cohen asked.
"I think it really depends on exactly what you're doing in terms of your building," Cohen said. "If you're building to the more basic level of LEEDLeadership in Energy and Environmental Design. LEED for Homes is the residential green building program from the United States Green Building Council (USGBC). While this program is primarily designed for and applicable to new home projects, major gut rehabs can qualify. certification, for example LEED certified or Silver level, you're probably not doing anything exotic in terms of the building's system or technology" and the building would pose no more risk for construction defect than a traditional building. But as builders move up in LEED certification to Gold or Platinum, Cohen added, more unproven technologies are likely to come into play. "Certainly any time you have new technology,” he said, “you've got that unknown potential risk or construction defect risk.”
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