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, a solar water heater, tight building envelope, 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
GBA 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.