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Green Home Appraisal Woes

Without realistic “comps” that properly value energy-saving features, obtaining a home loan may be difficult

Posted on Sep 7 2010 by Scott Gibson

Passive solar designs that include generous amounts of insulation can save homeowners a great deal of money in operating costs over the life of the house. But getting banks to approve loans that reflect somewhat higher construction costs can be a struggle, sometimes forcing builders to dial back their plans and deliver a less efficient house.

This dilemma was at the heart of a question from a green builder and the topic of this week's Q&A Spotlight.

Danny Kelly was trying to build a house that would qualify for a Gold or Emerald rating from the National Green Building Standard. It included upgraded insulation, high performance HVAC(Heating, ventilation, and air conditioning). Collectively, the mechanical systems that heat, ventilate, and cool a building., a solar water heater, tight building envelopeExterior components of a house that provide protection from colder (and warmer) outdoor temperatures and precipitation; includes the house foundation, framed exterior walls, roof or ceiling, and insulation, and air sealing materials., and passive solar design — in other words, all the features you'd like to see in a house.

The rub was the appraiser who valued the house for loan purposes. "The appraiser and the bank said they do not give any extra 'credit' for green features," Kelly wrote. "One of the comps they used was over 25 years old, so not even on par with a code house from an energy code perspective... [The] bank does not seem interested in helping much either."

The trouble with finding 'comps'
In setting the value of a house for loan purposes, real estate appraisers conduct field inspections and also must find sales of similar houses in the same area. Those are called comparables, or comps.

Appraisers make adjustments in value based on the age, size, and condition of houses in the same area that have sold recently. It's part number-crunching and part intuition.

"Despite my strong personal feelings, most appraisers' hands are tied by comparable sales in your area," writes GreenCountryHomes, a licensed appraiser. "No green comps, no chance for a realistic appraisal."

GreenCountry says an "educated appraiser" gave him a $25,000 green adjustment on a $340,000 property last year, only to have it disallowed by the bank review appraiser.

Because comps in the community were so limited, GreenCountry's $315,000 appraisal was cut to $285,000 by the bank review appraiser and the buyers walked because they thought they were overpaying by $55,000.

"Green building, in many markets, is like the $1,000 bath faucet," GreenCountry says. "The appraiser gives you no extra value for the more expensive faucet that does the same job as the $75 faucet. They have no comparables to justify the market paying more."

Lower appraisal, lower standards
GBAGreenBuildingAdvisor.com advisor and builder Michael Chandler detailed the shortcomings of this system in a GBA post last year.

In his case, a customer was approved for a $400,000 home. Despite having a suitable lot and a design that fit his customer's budget, the bank appraiser would not approve the actual cost of construction.

Because the owners couldn't come up with any more cash, they had to drop the passive solar and solar hot water features, along with the spray foam insulation that Chandler had recommended. The owners could add a Jacuzzi or a home theater, Chandler complained, but not features that would improve energy efficiency.

"Part of the problem is that the appraisers get their data from a [Multiple Listing Service] that doesn’t necessarily show them what green features are included in the homes that have been sold," Chandler wrote.

In a GBA column earlier this year, Richard Defendorf said that rules on finding comparables for appraisals can be a real problem.

"In some markets, a dearth of appraisers familiar with green construction — or perhaps even more critically, a scarcity of nearby listings with comparable green features — can frustrate prospective homebuyers and homeowners who wish to refinance," Defendorf wrote.

So how does this problem get fixed?
"Find another bank," says Robert Riversong. "Often local savings & loan institutions are both more in tune with the community and more open to different approaches."

Riversong says he had a client who successfully won a construction loan and a mortgage from an S&L for a super-insulated house even though it was built of rough-sawn lumber with a frost-protected foundation, no central heat and no flush toilet.

That's the power of a local bank that isn't hamstrung by rigid national policy.

David Meiland suggested consulting RESNET, the Residential Energy Services Network, and two offices in the U.S. Department of Housing and Urban Development.

In the long term, it will take more than the understanding of local banks to fix this problem. Changing appraisal rules to allow more realistic adjustments for utility savings, and educating real estate agents on the value of green buildings also would help.

That won't happen overnight.



Image Credits:

  1. Marsha Burger, EcoBroker

1.
Sep 7, 2010 8:57 AM ET

Ain't that the truth!
by nan

This is so frustrating! A couple of years ago, a spec house we had listed was state-of-the-art efficient - super insulation, passive solar, PV, solar hot water - a lot of expense. When it sold, it was appraised as a regular 3 bed/2 bath home on .5 acre. The extra money spent was not even taken into consideration, and neither was the benefit of lower utility bills.

Appraisers and banks are going to have to change soon, though, because energy efficiency is being written into building codes. Once that happens in more communities, the rest of the industry will have to follow suit.

I think when the economy and the real estate market pick back up, green features will be very popular and low utility bills will be desirable and more valuable.


2.
Sep 7, 2010 10:50 AM ET

Green Home Appraisal Woes
by greencountryhomes

I'll continue to bring up the building industry's concerns , as I take my 28 hours mandatory continuing education for my Appraisers License , but lack of Comparable Sales (Comps) is still the sticking point ! We just got another home Certified Gold under NAHB Green Building Guidelines , but it was a Ca$h home , on the owners lot , so it can't be used as a comparable sale !


3.
Sep 8, 2010 10:29 AM ET

a spec house we had listed
by David Meiland

a spec house we had listed was state-of-the-art efficient - super insulation, passive solar, PV, solar hot water - a lot of expense. When it sold, it was appraised as a regular 3 bed/2 bath home on .5 acre. The extra money spent was not even taken into consideration, and neither was the benefit of lower utility bills

Did this house appraise at 80% LTV or better? If you sold it on the open market at a price that covered the EE features then the venture was a success.

My opinion is that we won't see a lot of change in the appraisal picture until there are energy ratings on homes for sale in a significant chunk of the market.


4.
Sep 8, 2010 3:18 PM ET

No Good Deed goes Unpunished
by Anonymous

Let's lobby to pay higher property taxes because we incorporate green features in our family homes.


5.
Sep 8, 2010 5:12 PM ET

Green Valuation
by Dave Porter / PorterWorks, Inc

The issue is appraiser competency. Lenders - builders - Realtors and consumers have the right to require appraiser competence. The appraiser should have taken classes on green and energy efficient buildings as well as experience in appraising these homes. There are tools such as the Marshall & Swift Green Cost Guide as calculations such as the Nevins value add for energy savings. Both lenders and appraisers can find a nationally offered class, visit www.porterworks.com/designations


6.
Sep 8, 2010 6:03 PM ET

2 more cents
by Dave Porter / PorterWorks, Inc

1. Be sure to point all industry professionals to www.greenthemls.org - if we can get the MLS groups to list green, then the appraisers can get the comps they so desperately seek. (PS – who made comps the holy grail – comps have gotten us into a lot of this mess, if we weighted with cost to build – there would also be some balance, we are on a pendulum (see you on the other side).
2. As I stated before we need lender and appraiser competence BUT we also need lenders required to offer EEM/EIMs AND we need to change the appraisal form (1004) to include a data box - not just comment area – that specifies the certification, level, date, 3rd party verification.


7.
Sep 9, 2010 9:14 AM ET

Don't blaim the appraiser.
by James Morgan

"I think when the economy and the real estate market pick back up, green features will be very popular and low utility bills will be desirable and more valuable."
In your dreams. Sorry, but we already have extremely low utility bills even in the most inefficient of homes because the retail cost of energy in the US is maintained at an unsustainably low level. As long as the social and environmental costs of energy production are met by the community as a whole, not by the consumer, energy-efficient homes will continued to be undervalued in the marketplace.

"who made comps the holy grail?"
Mortgage lenders, that's who. And quite rightly so: if the homeowner defaults the mortgage lender will have to sell the home in an existing market, not a fantasy one, and comps are their window into that market. If they have overvalued the home in terms of that market other mortgage borrowers will ultimately have to pick up the tab in increased rates and fees. I am already paying for my wealthier neighbor's PV system and ground source heat pump, which have no appreciable economic payback (see 'low cost of energy' above), via the substantial tax credits afforded the 'green consumer'. Please tell me why I should also do so through my mortgage. Cost to build should have no weight in the appraisal process.

I say this in spite of the fact that two of our major projects in the last year or so and many of the smaller ones have been substantially impacted by appraisal issues. Realistically though these problems are much more to do with the precipitous general tumble in the real estate market and fire-sale pricing on foreclosures and builder-bankruptcies than the modest additional costs of good environmentally-responsible design and construction.


8.
Sep 9, 2010 9:40 AM ET

Response to James
by Martin Holladay

James,
Good post! Thanks for taking the time to write.


9.
Sep 9, 2010 11:17 AM ET

Less of a problem in the NW
by Drew

I know a company called Earth Advantage Institute in Portland, OR offers a Sustainability Training course for Brokers and a Green Aprraisal course. I believe they have certifed nearly 700 brokers in OR and SW WA and also offer both courses in Seattle and Southern California. I found out about this on their website, www.earthadvantage.org.


10.
Sep 10, 2010 2:59 AM ET

Reality Check
by Interested Onlooker

Considerable disappointment has been expressed in this thread that the appraisals process does not reflect the worth and value of green features in housing. This is, of course, not what the process is for. An appraisal for lending purposes is to inform the lender what is the expected price which will be paid for the property in the event of foreclosure. That price currently takes no account of green features because average (the only sort that matter financially) current buyers are not willing to pay for them.

Let’s be clear. Irrespective of their personal motives, people buying green housing are (in purely finacial terms) buying energy futures. They are spending money now to save money in the future. The faster energy costs rise the sooner they will break even. It is a simple speculation based on an expectation that energy costs will rise at a rate greater than the best return that can be made by investing the capital elsewhere. After the sub-prime debâcle, it is unlikely that a mortgage lender will be willing to finance such a speculation and optimistic to think that they should. Since appraisals are for the benefit of the mortgage companies they will reflect this reality.

Green building companies should be marketing to those who have excess capital, fixed (i.e. declining) income and some interest in the future of the planet. A suitable target would be downsizing, pension-age boomers with grandchildren. Not a mass market, perhaps, but not negligible either.


11.
Sep 11, 2010 12:37 PM ET

sales
by Kevin

I have just completed a LEED Platinum certified house and now know all too well the difficulty getting an appraisal that reflects the expense or value. There is info from both the National Appraisal Institute and Earth Advantage showing that green certified properties are in fact selling faster and up to 18% more per sqft. In areas where the the green build movement is more mature, comps are available. If you are a trail blazer in your area be prepared to do some work. I would propose a repository of homes that have sold and that have meet one of several 3rd party verifications, ie LEED, NAHB Green Build, Net Zero, Passive House etc. I am considering taking this task on myself as I am currently contacting various sources to come by such hard data. It then could be used by others as a source for comps, even if not in there area, to help demonstrate that these homes are valued by the market, which is what the art of appraisal is all about.


12.
Sep 13, 2010 6:56 AM ET

It should also be about common sense
by Dirk - BPI certified

I'm confused. Appraisers do comps -- comparisons to other "similar homes in the vicinity". OK. There are almost never identical homes. So they immediately begin adjusting for it: The home has/or doesn't have a swimming pool. The home does/doesn't have another bedroom. The furnace is new, The roof is old. They have upscale appliances. Landscaping is mature and professionally done. The basement leaks badly. Ad nauseam.
So, why in heavens name wouldn't they include: Home doesn't leak like a sieve, reducing energy bills and improving homeowner comfort thereby *reducing bank's foreclosure exposure". Home is tight and has outside air supply reducing chance of air-borne nasties thereby keeping homeowner from abandoning due to future air-quality (mold?) issues, which "reduces bank's exposure to foreclosure"; home has properly designed super insulation preventing moisture problems (unlike all the comps) and so reduces "bank's exposure to foreclosure"; etc., etc., etc.
They'd DOWNGRADE the home for moisture problems and for NO insulation or mold. (Or if they don't their doing everyone a great disservice). Why only the downside and not the upside? Green building is not only reducing energy bills, it's also preventing air and moisture problems.
But, hey, who said banks aren't foolish and even downright dangerous? Wasn't it they who sunk our nation's economy for years (with no end in sight) and CAUSED millions of foreclosures? Yup. And haven't hundreds of THEM gone bankrupt in the past few years? Yup.


13.
Sep 13, 2010 7:44 AM ET

Exposure to Foreclosure
by Interested Onlooker

A bank's exposure to foreclosure is independent of the nature of the house that it lends against. The only concern that it has is that the value of that house should be higher than the outstanding loan. If that value drops to below the value of the loan then the bank will (or should) foreclose. If the bank is paying attention then it will foreclose when it predicts that the value will drop below the loan in a timescale somehat longer than the house will take to sell. The condition and the nature of the house merely set the amount that the bank will lend.

If Kevin's news about higher market values for certified-green houses is confirmed then there is light at the end of the tunnel. Particularly for those peddling certification programs of questionable value. I say questionable only because of the incessant questioning of them on the GBA forum.


14.
Sep 13, 2010 8:16 AM ET

Appraisal Woes
by Bill

What I have noticed as a builder, is you need to sometimes point the appraiser in the correct direction. If you do not have any comps nearby, you will need to steer them in the correct direction of a home with the same type of features if the appraisal is not coming in where you need it to. Now this does not apply to all appraiser's, so all the appraiser's reading this, please do not take offense.

The other factor stated in previous post is banks are gun shy right now due to the falling prices of home sales and foreclosures. In the meantime, the builder's customers will need to be made aware up front that there is the possibilty that they will need to bring money to the table in order to have all the green features they want in a home at this point.


15.
Sep 13, 2010 8:20 AM ET

"Market Value" VS "Construction Cost"
by Licensed Appraiser

The entire issue with this article is that most people do not realize what appraisers do. Good appraisers will research the market through many avenues of research. I am a very active appraiser in education classes about green technologies and have talked to contractors on countless occasions. I would say that I have above average education on the appraisal and green technologies. The issue is that appraisers estimate "Market Value" In our area green technology in most peoples minds include above average insulation techniques and geothermal heat pumps. Other than that most people do not trust the technology. In this comes the problem if a person constructs a new house with solar panels or wind turbines and the market does not trust the technology the appraiser is not at fault for not making an adjustment. We do not make the market we just report our research of the market.


16.
Sep 13, 2010 8:55 AM ET

Maybe it's not so inexpensive
by Charles Shade

Seems like the cost of "Green" costs some green. Have we kidded ourselves into believing that building green is really net zero costs? I believe in good holes; i.e. Windows and Doors AND air-sealing the exterior envelope of the building but I would not kid my client that the Andersen window package is only a little more than the MW Clad window (And don't even go down the Vinyl window path. If you do this is not a serious discussion for you.). Costs can be offset by potentially less HVAC equipment but you do need to include that ventilation system.

Can you weigh a payoff in upfront money over utilities for the time you live in the home? Sure. But don't make your decision about doing so based solely on this.

And as for appraising: Many clients will ask how much my Kitchen remodel will be per square foot. I don't know. Are you gong to buy a $10,000 Wolf range or a a $1000 Kenmore? I would think your cost per square foot will be 10 times more if you choose the Wolf. They both do the same thing (well sort of). But why should the appraiser choose to make you home more valuable?


17.
Sep 13, 2010 9:09 AM ET

Turn the equation around
by BuilderBob

As one who has built green homes in Central Texas I can say that the problem isn't that the green project costs more, it's that the energy-inefficient homes aren't penalized for not being retrofitted (yes, I know I'm using green and efficiency interchangeably).

Austin recently passed a city ordinance requiring all homes being sold over 10 years old to have an energy audit. The original ordinance would have required that energy upgrades be made based on the audit but the local Board of Realtors sqealed so loudly that the repair/upgrade requirement was dropped. All that is required now is to get the audit, to which most buyers shrug.

It's the old carrot vs stick approach. As long as there isn't a penalty for driving that old V8 gas guzzler with vinyl seats belching white smoke and sending hubcaps spinning into oncoming traffic, the system is stacked against the Prius.


18.
Sep 13, 2010 9:12 AM ET

Speling error :-)
by BuilderBob

Damn I need to have my contacts in and coffee slurped before I send out responses. Squealed not sqealed. Probably more but I can't see 'em and won't care until the coffeee kicks in.


19.
Sep 13, 2010 9:25 AM ET

Energy Costs
by Interested Onlooker

Appraisers assess market value. Until the cost of energy rises a lot there will be no real pain for those living in a 'gas-guzzler' home. Until there is real pain the market value of a 'gas guzzler' will not differ much from a similar-looking retrofitted energy-efficient home. Until the market value does differ then those wanting to build super-efficient homes will have to pony up the extra cost themselves.


20.
Sep 13, 2010 9:44 AM ET

Green homes don't bring green at auction
by Rayzer

Folks, James' "Don't blame the appraiser" and Interested Onlooker's "Reality check" have got the right answer. The bottom line is that the bank wants to know if it can get its money bank under a worst case scenario- a foreclosure auction. At foreclosure, bidders often don't even know the exact square footage of a house or the internal cosmetic condition, much less whether it's "green" or assign any value to it. Appraisers are just conveying this reality- don't kill the messenger.

Unfortunately, green falls in the category of individual homeowner "perks," such as taj majal spa/bathrooms and olympic sized pools in the back yard. If you go green, like with everything else, do it with restraint and you can probably swing the financing. Otherwise, go ahead and splurge on the horrifically expensive sprayed-in foam that has a thousand year half life and will line the landfills for hundreds of years(green?), but don't expect to get costs back upon resale or the bank to finance it.


21.
Sep 13, 2010 10:39 AM ET

Solution needed.
by BuilderBob

So Rayzner by your logic we should all do nothing...kinda sounds like the frog in slowly heating water analogy.

Pay me now or we all pay later. One way or another we (or our children) have to pay the bill.

Btw, sprayed foam isn't that much more expensive than standard batt insulation when looking at an overall project budget. And I don't know that fiberglass batts have any less of a half life than icynene in a landfill.

Before I was a builder I was a banker, so I do understand that point of view.


22.
Sep 13, 2010 11:07 AM ET

appraisals and loans on homes with green features
by Anonymous

We just built a home with geothermal heating/cooling, ICF walls, and a 3 K solar system. Our local bank lent us the money for construction. We had our problems getting the mortgage. They disallowed our energy efficient features and there were no comps. We had to come up with a goodly chunk of change to cover the difference. Would like to think the money became equity but until they recognize efficiency as a plus the difference was just that. In the future it eventually will repay.


23.
Sep 13, 2010 11:40 AM ET

Green will bring Green - but it will take some time
by Anonymous

As a Realtor in a small ski town in British Columbia, I am starting to see more and more green and energy efficient building (and renos) but have only seen EnerGuide ratings and green features advertised as features in a handful of homes (and always buried in the limited length comments section). Of course appraisers work off of comps and make adjustments to value the subject property but if they have not personally been in the comparable houses and spoken to the Realtors about the houses, their info is only as good as the data available to them. If the green / energy efficient benefits aren't included in the listing data, they may overlook houses that are actually comparables. I'd like to see Realtor Boards lobbied to include green / energy efficient features in their listing data which would not only put those houses on the map for appraisers, but would also make those features part of the searchable criteria for Buyers.

At this point there are many factors which affect Buyers' decisions - ability to finance is certainly paramount these days with lenders tightening the criteria (which isn't a bad thing) and lenders protecting themselves by refusing to allow prospective purchasers to buy high in a declining or uncertain market.
My Buyers ask for heating & power costs but I always caution them that usage varies greatly from family to family so it's not very reliable. A large increase in energy costs will see efficiency become much more important to buyers and their lenders (note that heating costs are included in the mortgage qualification process but the mortgage broker that I spoke to uses a generic (and low) $50 for every house when calculation PITH (Principal, Interest, Taxes and Heat).


24.
Sep 13, 2010 12:12 PM ET

"Green" Homes.
by Curt

Lots of interesting comments concerning the problem with appraisals. I am an appraiser with 40 years experience.

The industry has a number of problems with green appraisals. #1 they are complex assignements and as such the appraiser must have a certification status on his or her license.

#2. The appraiser must become competent to appraise a complex property. This means that they must have demonstratable experience or they must get it. If not they are in violation of state and federal standards as outlined in the Uniform Standards of Appraisal Practice (USPAP). Its the law in all states.

#3 The user of the appraisers service must be willing to pay for the report. A big problem in todays screwed system of appraisal work, Complex appraisals take time and cost $.

#4 The "lack of comps" is a poor excuse, one that should land the appraiser in front of the appraisal regulators.

#5 Comparable sales do not need to fit the FNMA/FHLMC guidlines, at least not all of them. Comparable sales can include contract to build if the data is provided and verifiable (copies of contracts, cost sheets etc) It is useable data. Many appraisers are FNMA trained and not comptent appraisers. They can only think FNMA guidlines which do not fit with complex assignments.

#5a comparable sales with only partial energy efficiency may also provide some market indications that people are willing to pay more for the benifit. This can be shown using additional paired sales to show the amount or % premium. It is used as market data and may not be a comparable used as a true comparable under FNMA guidlines, but only to show an additional amount was paid to support the overall analysis.

#5b Rental property that was built with extra energy efficiency, or a green rated rental unit, apartment, house etc. can be analyized to see what the added rents for this benifit over a non green apartment. This % can be used to support an adjustment for comps that are not "green". This may be located in a totally different neighborhood, even out of state. It becomes market support, not necessarily a comparable.

6 Older sales of green homes vs non green homes can be used as a market indication to support an adjustment. FNMA and many banks want fresh comps, but this data may not be used as a "comp" but simply market support for an adjustment to non green homes.

7. A little used method is to poll the industry, the real estate agents to test the markets treatment of green homes vs non green. This will take some time and education by the appraiser, perhaps even some expert assistance. If done properly, it can be used to support some adjustments and value conclusions when more specific sales or information is lacking. I have used it in legal based appaisals to good effect.

8. The other fact is that the market may not be willing to pay for it. I have seen a number of attempts at energy efficiency over the years, the earth burm homes, the full solar home, envelope solar home (what a joke), the solar preheaters for hot water etc. all had high initial costs, and all failed to show added value on resale. In fact many sold for less per SF than the typical home in the neighborhood.

Just to give you some idea of the appraisal fee when these methods of analysis is applied. In my area a typical bank appraisal will run about $400 to $450 and the appraiser will try to do it in one day or less. I would expect to take 1 to 2 weeks. I would estimate a fee in the area of 5 to 8 times the typical house appraisal and I get it up front.

The report will likely contain 8 to 12 comprables with many others analyised for support in addedums.

The appraiser should have a conference with the lender and underwriters to be sure all this effort is acceptable, I am sorry to say, many are so tied to the FNMA standard that it may not be.

Most of my work is for litagation these days, with some long established lender clients. My semi retired status lets me be selective and I feel for the builders frustrations these days.

I hope these comments will be of some assistance.

Curt


25.
Sep 13, 2010 12:50 PM ET

Won't happen overnight
by Skye

Sure, find another bank - or move to another state where incentives to build green are offered. I still believe in the dream - and we will build green no matter what it costs us (or how long it takes). It's the right thing to do. We won't wake up to a new world tomorrow, but at least we'll sleep well.


26.
Sep 13, 2010 1:41 PM ET

Curt In regards to #5 if you
by Robert Hronek

Curt

In regards to #5 if you look at the contract price you are only looking at cost and not market value. Market value requires exposure to the market, in other words it must be listed for sale. A custom home that was never listed is not a comparable sale.

The problem is who is going to buy a loan when the value of the propety can not be supported. Appraised vale should be based on market data that shows what market participants are willing to pay for features. You may be able to find some cost data in your area for what people have spent to make the home more energy efficient but that is not market value. In some areas there may be enough data to support an adjustment but in most areas the data is not available.

Local S&L's and small banks might make a portfolio loan and not have to follow secondary market standards. The funds available is very small.

In the short term it may be that homes are appraised based on the value the appraiser can support. Let the appraiser do what he can with the resources available. If a typical house would sell for $250,000 this is the value it is appraised at - assuming the appraiser can not support energy efficifiient adjustments. If the home has $50,000 of upgrades then the lender looks at energ saving and can adjust the loan accordingly. Notice I didnt say value.

Another option may be that a home has 2 loans. One based on the base structure and a second based on energy efficient features.

Until such a time as there are a sufficient number of homes that have sold with energy efficient features there will not be support for market value. You can not ask an appraiser to give value to something he can not support. You can not expect lenders to lend when there is not proof of market demand. The lender should always view that they may have to foreclose and have to resell the property. The lender should be able to resell the home for close to its appraised value.


27.
Sep 13, 2010 4:40 PM ET

appraisers
by M. Madsen

The "appraisers" that I have seen in action have always been one thing without exception, and that is utterly useless. Does it really surprise anyone that banks are not interested in funding anything which may harm their corporate partners? I could dress this up, but why bother.


28.
Sep 13, 2010 5:37 PM ET

Energy Efficiency & Appraisals
by Scott Kruse

Neither appraisers nor real estate agents know or care about energy efficiency. I've even had both go to far to tell me "no one cares about energy." Even when I took the time to point out the energy positive features of our house, include a easy to understand "Energy Efficiency Index," had a major article run in the local newspaper with photographs, etc. - because there is no "standard" for comparison, everyone blew it off. I have 21 years of monthly electricity and natural gas bills, pointed out the triple pane windows, showed the R-100 insulation in the ceiling, demonstrated the air lock on the front door, showed the fully insulated garage - no one "got it." People would respond to what I would show them with "that's impossible." The one thing they do notice is how quiet the house is.

At lease HERS is beginning to make inroads into the comparison process. There are no comparisons because based on all the information I can provide, the appraiser and bank are not educated about the subject or process. An appraiser would have to gather similar information and even then the lender would not understand or appreciate the information. They cannot relate except the limited utility bill they receive and pay each month. Even when shown a monthly and annual cost comparison they do not get it. Title Companies do not understand this.

The only common goal is to turn the property over. All short term thinking and action. As fearful as lenders are, you would think a HERS audit should be standard protocol.


29.
Sep 13, 2010 6:40 PM ET

Market Value of Energy Efficiency
by Superinsulation Guy

Picture this: A 3000 square foot, superinsulated and active solar, with no backup, in upstate NY. That worked! The added super and solar cost about 25k, which would have been made up in about 8 years of oil or propane (no natural gas around). Yet appraisers just saw a 3 BR, 2.5 bath house. Buyers just saw a 3 BR, 2.5 bath house. I had to sell (divorce) and got just about what any badly built, poorly insulated, very different piece of garbage in the area would go for. Sorry guys, but I will never make that mistake again. Which is a darn shame, because if more houses were built like that, we'd be importing a whole lot less trouble from the Mideast!


30.
Sep 13, 2010 10:04 PM ET

Everyone please reread Curt's
by James Morgan

Everyone please reread Curt's post, at least twice. Unlike many of us posting here (who may be experts in construction but have only a passing acquaintance with what appraisers actually do for a living) the man really knows what he's talking about. However much we may believe in the value of what we do, the market has its own reality. Note the distinction he draws between straight comps and legitimate market adjustments to those comps; the distinction between the average market appraisal and the complex appraisal that can make the case for those adjustments; the major additional cost of that complex appraisal (with no guarantee that the bank will accept the adjustment) and finally take note of this sentence: "I have seen a number of attempts at energy efficiency over the years, the earth burm homes, the full solar home, envelope solar home (what a joke), the solar preheaters for hot water etc. all had high initial costs, and all failed to show added value on resale. In fact many sold for less per SF than the typical home in the neighborhood." Yes, we may actually be wrong about that added value we so ardently want to create. A little humility, folks.


31.
Sep 14, 2010 2:01 AM ET

Utility bills
by Randell

superinsulation guy and Curt both make good points.

One way that could be used, with market research to show if it actually holds up in sales (cue superinsulation guy's divorce sale), is to solely look at utility costs and how they influence sale prices (which is in theory what's being appraised). Utility costs often are part of MLS data (I think). You can calculate a theoretical value based on utility costs (a paper from the board of realtors (I think) showed a 20:1 theoretical difference in value based on the future value of utility savings.) When I was getting an appraisal for a refinance right right after replacing a 20+ year old heat pump and a wing of baseboard electric with modern 2-stage heat pumps, I pointed this paper out to the appraiser (because I was looking to show enough value increase in a year that we could drop the piggyback loan). He was totally uninterested in any savings in utilities.

In retrospect, the theoretical paper may be right, but only in terms of value, not in terms of appraisal. If market sales back up homes with lower utilities selling for more, then they can (and should) apply that. However, that requires that information to be part of the standard MLS data buyers see before they're likely to take it into consideration, and perhaps Realtors actually educating their clients about it. It may take another energy shock like we had a few years ago before people will really look at utility costs - but the data needs to be available, which needs to be done now.

Some of the other things Curt mentions go beyond dollars-and-cents paybacks to the owner (lowered utilities), and go to how much someone will pay for features "Just Because". With market data that shows that people will pay $xxx over the future value of utility savings for YYY feature, they can at least look at adjusting for it. In practice, until these become common enough that they run into it on at least a monthly basis it's not likely.


32.
Sep 14, 2010 2:38 AM ET

Green and Appraisal
by Anonymous

I recently rebuilt a 1974,900 sf house to 1850 sf with sustainability and energy efficiency as key component goals including new energy efficient windows, high R walls with foam wrap, R50 ceilings, ceiling fans, furnace, water heater etc. The re-finance appraisal noted standard construction and used sales of nearby 1974 era homes as comps. Today, value is based on square footage and number of rooms/baths. There is no value given to higer quality construction or energy efficeiency. Energy efficeincy does not even get consideration in mortgage qualification calculations. The lack of recognition of higher quality construction was dissapointing but the best part of the new appraisal was the cost/value of land at roughly 50% of what the cheapest lot sells for in the area. The mortgage broker appealed the appraisal but with no success. I just got to pay $500 for a valueless "appraisal" and a ding on the credit report for an inquiry. And don't think that you can get a "green educated" appraiser as it's all by luck of the draw so there is no collusion. Energy efficiency died in the 80's with "cheap" energy. In 2010, the banks are killing it.


33.
Sep 14, 2010 3:29 AM ET

Banks and Energy Efficiency
by Interested Onlooker

The banks are not killing energy efficiency. Buyers are simply not interested in it because energy costs are still low. When energy costs in North America reach European levels then we may see a more informed and engaged customer base for green housing. As for realtors educating potential buyers - not very likely. The general public's disinclination to be told what's good for them is almost limitless. The combination of low energy costs with widespread and wilful ignorance will keep green building as a minority sport comparable with underwater lacrosse. I do hope I'm wrong on this...


34.
Sep 14, 2010 8:45 AM ET

"Green washing"
by davars

Saying a home is "green" is like saying that a car is 'fuel-efficient'. Its a meaningless term unless you can verify and quantify it. I think most people would agree that there is less confusion and trepidation when you shop for a car when you know it gets 35 mpg than when you only know that it is 'effiecient'. You therefore need a HERS rating for a home so that you know HOW energy efficient a home is... and therefore, how much the 'green' and energy efficient features of the home are likely to save the owner in utility costs. Lower utility bills... more income available for a higher mortgage...the buyer qualifies for a higher loan amount. Thats how the EEM/EIM concept is supposed to work. Granted that this education will take some time to work its way into the lending and real estate circles, but real energy efficiency number will give the lenders and appraisers more confidence that the green features in a house will actually mean something.


35.
Sep 14, 2010 10:32 AM ET

Energy Efficient Homes Appraisals
by TT in Canada

Market Value is determined by the MARKET. Appraisers measure MARKET VALUE. If buyers start PAYING more for the energy efficiencies built into a home, they WILL start showing up as enhancements to value over homes that DON'T have these additional costs of construction.

Stop worrying about educating Appraisers and Banks. Educate the BUYERS. TT


36.
Sep 15, 2010 1:23 AM ET

Measuring appraisal value???
by davars

I don't know a single appraiser who would truthfully claim they could MEASURE appraisal value. Appraisals are ESTIMATES based on the previous sales of similar homes in the area. That said... it seems like a 'chicken-egg' situation. Maybe there will be more closings with buyers of energy efficient houses when the lenders understand that the buyers will be able to afford a more expensive house if it costs less for that buyer to live in it. Perhaps this will lead to more sales of energy efficient homes.. and hence, more 'comps' to help appraisers estimate a more accurate 'Market Value' for an energy efficient home. The process has to start somewhere.... it seems to make sense to loosen the money held by banks by convincing them that an energy efficient home is a better risk than a home that is not efficient.


37.
Sep 15, 2010 5:41 AM ET

Lending Realities
by Interested Onlooker

"Lower utility bills... more income available for a higher mortgage...the buyer qualifies for a higher loan amount."

No, the buyer qualifies for a loan based on the market value of the property. Period.

No lender can risk lending extra money on the basis of a higher disposable income. TT has it dead right - until the market value of green houses is greater than for similarly sized, sited and specified 'built-to-code' houses there will be no extra money forthcoming to fund green projects. This is not the fault of appraisers, realtors or lenders. It is a direct consequence of banks discovering (at vast cost to all concerned) that it is imprudent to lend money to people whose recoverable assets are less than their debts. My sympathies in all this mess lie with those who did not borrow to finance their new car, vacation etc. because they knew they couldn't afford it and who are now (through bank bail-outs and austerity measures) paying for the new car, vacation etc. of someone else who didn't give a damn whether they could afford it or not but simply wanted it NOW. Remember when people saved for stuff?


38.
Sep 15, 2010 4:53 PM ET

Too Early
by Kyoko

I think green initiative is still in the infancy and there are things that the government or individuals don't currently care much about. Once there are incentives from the government, it'll start to have more impact in the way information being spread out.


39.
Sep 15, 2010 8:35 PM ET

overton window
by 30 years

Every on on this post understands the value and benefit of green / energy efficient building. The point is many do not. As a group we belong to many different organizations and interact with many people. If we were to do studies publish reports and get the word out would it make a difference? You bet it would. I live in St. George Utah, my cost of power is one of the lowest in the nation, I buy from a co-op. I have just replaced the windows and exterior doors of my home with inexpensive vinyl windows from home-depot, and inexpensive french patio doors. While they were inexpensive all are energy efficient and have the tax credit available.

Here is the point - my already low power bill has been cut in half during the hot months of summer, but even better my home is more comfortable.

When buyers are buying a home whether it is 1400 sqft or 24,000 sqft if they KNOW that one has utility bills that will be half of an identical home, which home are they going to buy? If the energy efficient home is more comfortable, which will they buy?

We all need to be part of the good news and we all need to make sure the green guys who sell nothing for lots of money are known for what they are vs the the true energy/green guy who knows what they are doing and and can show the true value, comfort and savings.

Education some of those on this post have known and understood energy efficient and green concepts for 30 years but until we change the overton window it won't happen.


40.
Sep 16, 2010 7:55 AM ET

What's so green about this house?
by Chris

How in the world can a 3600 SF tract home (McMansion) be green?


41.
Sep 16, 2010 9:18 PM ET

appraisal vs market
by uncleD

Until there are savvy buyers there will not be appreciable demand. Until people are willing to pay more there will not be comps nor will the adjustments for energy savings be considered legitimate. Appraisal training is about the current market value--currently people don't know enough about the value of energy savings. Thrift is a fairly new trend--the 3500 SF tract house or "conspicuous consumption" won't die easily.


42.
Sep 22, 2010 4:09 AM ET

Daring Radical Solution for Existing Homeowners
by Interested Onlooker

Let's just assume for the sake of this argument that you own your own home (or a significant chunk of it at least) and can actually manage to sell it. The crux of the financial problem discussed in this thread seems to be that energy-efficient homes cost more per square foot than built-to-code homes and that this is not reflected in the lending process. Warning! Crazy Idea Coming Up!
Step One
Find out what your lender will lend per sf. Add in the equity available from the sale of your home. Based on the cost per sf of an energy-efficient home work out what square footage you can afford. Plan to build a house of that size.
Step Two
Get hold of a copy of "How Buildings Learn". Read it. Read it again and again until you understand it at the subconcious level. Spend the money where it matters, secure in the knowledge that you will live in a house that can be improved and will be over time and which is comfortable, energy-efficient and societally responsible meantime. Of course your peers may not appreciate its subtleties and compare it unfavorably to larger, lesser buildings - but so what?


43.
Oct 2, 2010 6:28 PM ET

Work from the OTHER end- Don't shoot the messenger!
by Farm_Gal

I am both an appraiser and someone who built one of the FIRST Energy-Star rated homes in my Prairie State, in 1994!

The banks didn't give a hoot but we were making a personal expereiment in green building,a dn they didn't give the homeowners any kind of a break on thier loan... Sadly when one of the homeowners defaulted on her loan - the foreclosure sale, LIKE the orginal sale went for 'market rate.

Now if you folks wanna try and FIX this issue intead of uselessly whining why don't you beat the regulatory agencies (five of em - ask if you want me to give you the addresses....) into supporting the SAME FORM that was being used just after the 1976-8 energy crisis: it allowed an appraiser to make a concrete determination that the property owner would SAVE MONEY, and woulD therfore have an easier timepaying thier mortgage - freeing up some of their funds for making those all important (bankig view) monthly payments!!

It wasn't brain surgury then and isn't brain surgury now... except the ding dang energy companys now REFUSE to allow appraisers access to the information needed... so SOMEONE would have to get those companies on track also!

But there you go folks - there is a solution. But me myslef my hubby and I can't beat a national set of regs into submission all by ourselves.

Wanna for a coallition?

Bring me bodies and interested individuals and this could work (all over again).


44.
Oct 2, 2010 6:29 PM ET

I can't spell either<
by Farm_Gal

I can't spell either< redface>


45.
Oct 24, 2010 9:35 PM ET

focus on local
by Dan

We can't solve the big problems here, but maybe we have a chance by working locally:. Your local credit union, your local bank.


46.
Dec 16, 2010 4:48 PM ET

Green building given no recognition
by Stephen Sivonda

We recently had a new home built in Virginia and were shocked to find out that our closed loop Geothermal system, 6" walls ( not req'd. by state code) and low-E thermal windows the appraisers do not give any additional VALUE . This is our retirement home, and fortunately we have enough cash to get these features- which will be paid back in savings in about 8 years. For all the talk of energy savings -and getting out from under the thumb of foreign oil, our leaders(?) do not have a clue as to how to connect the dots as to making sure there are no roadblocks to achieving energy independence.


47.
Dec 21, 2010 9:29 AM ET

The issue is the carrot
by John

You hang the carrot where you want the industry to go. If our government is so concerned about our landfills, energy consumption, health and the environment (which they should be), then the government entities that are pushing regulations and even coming up with incentives to go energy efficient (dare I say green), HAVE TO put a mechanism in place that guides the appraisal process (The Carrot). Unless you have a complete program that works, you will not effectively alter behavior.....
We have effectively shut down our green program and don't offer spray foam insulation anymore unless our buyer pays for those upgrades in cash up front.
I believe in high performance homes. We invested hundreds of hours to put together our Green/HP offering. We built the first Gold level certified (NAHB Green Build Program home in Central Texas.... However, I DON'T believe in including all the high performance upgrades at no cost. We have had to reduce several of our home prices just before closing based on the inability of the appraiser to include anything related to energy efficiency etc. I suggest at least giving value based on HERS rating achieved... that would be a start
Disgruntled Green Builder


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