If we let simple or even net-value payback analysis alone drive the economics of high-performance buildings, we might as well throw in the towel. It is truly crazy to apply just this approach to long-lived durable goods, such as homes.
Yes, it is critical that the lower operational costs are factored into a home’s value. But homes deliver their value over time to a series of owners. The initial owner or renovator needs to know that all those involved in the financial process will recognize their investment in high performance. And they need to be certain it will fully transfer when they eventually sell their green home.
There are three key housing industry sectors that need to step up to the plate to support our green building industry: realtors, appraisers, and lenders.
Realtors have more contact time with homebuyers than any of us. They build a relationship with their clients, and while they do not have to be knowledgeable about green or high-performance attributes of homes, it’s a huge leg up if they are.
The National Association of Realtors has recently developed the Green MLS Toolkit, and it works! And the new white paper available from Ecobroker, Unlocking the Full Value of Green Homes, also provides excellent guidance.
“Educating lenders and appraisers, along with Realtors, is the single most important factor for recognizing the value of green building,” says Dakota Gale, owner of mortgage company Green Mortgage Northwest in Portland, Oregon. “Disclosure of energy performance with a miles-per-gallon measure such as HERS is a close second,” he says.
Dakota, a LEED Accredited Professional, has a background in green building design as a green building engineer along with work as the Sustainable Finance Director for Earth Advantage Institute, a green-building non-profit. I met Dakota at the EEBA conference this year, where he gave the best presentation on green finance I have ever seen.
As realtors learn the way to present the increased value of high performance homes, it leads to higher sale prices, building the database that green appraisers need for their work.
The appraisal industry is by its very nature a steady and conservative lot; appraisers need plenty of hard data and “comps” (homes that have the same features to establish comparable value) to justify any “new” increased value associated with home performance. They, too, now have the tools they need for this. The Appraisal Institute (AI) has a series of green appraisal education tools, including detailed case studies.
And just recently, AI has developed a new appraisal form, Residential Green and Energy Efficient Addendum (PDF). According to Jason LaFleur of the Alliance for Environmental Sustainability, “the new form is intended to be used as an optional addendum to Fannie Mae Form 1004, the appraisal industry’s most widely used form for mortgage lending purposes.”
The work of realtors and appraisers all comes together when a buyer goes to borrow for a higher-value, higher-performance, home. Even in the current very conservative and risk-averse lending environment, there are banks, particularly local and regional ones, who get the green angle on homes and see them as high-quality and sound investments.
According to Dakota Gale, “By creating a financial ecosystem surrounding the purchase or refinance of a green home, the value of the energy efficient features can be translated into language a bank underwriter will understand.”
Dakota’s new green mortgage company offers a variety of benefits including discounted closing costs, preferential insurance rates, a roster of green-educated appraisers, a local version of a high performance home appraisal addendum and paperless transactions. He is working to develop a carbon-free closing for his clients as well as discounted private mortgage insurance for green-certified homes.
Peter Thompson of Laconia Savings in New Hampshire has been a construction loan specialist for 26-plus years. I met him when he came to a two-day NAHB training titled “Advanced Green Building: Building Science.” He is the first professional from the financial sector to attend any of the trainings I do on high-performance homes; what a treat! “I successfully created a green mortgage program and built a network of appraisers who know how to bring added value based on understanding the HERS reports and convince my underwriters to accept,” says Peter. “I am proud to say that I am the first and only lender in all of New England that holds the NAHB Certified Green Professional designation, but at the same time I am ashamed that I am the only one from the banking community.”
Peter feels strongly about the local nature of his work: “Do not look to the large banks for guidance or acceptance of high performance energy-efficient homes. They have their hands full with toxic mortgages. The secondary markets (i.e. Fannie Mae/Freddie Mac) have their own issues. The key to financing lies with the local community banks and credit unions that are primarily portfolio lenders that make their own decisions and do not answer to shareholders.”
Thompson closes by saying: “The demand for high-performance homes is increasing. We have a great opportunity to distinguish ourselves as premiere builders and lenders. The train is leaving the station. Don’t be left in the dust!”
Value transfer, not payback analysis, can build the market
Long-term investments in greener, higher-performance homes are valuable — the homes are less expensive to operate and more comfortable to live in. But any time the value of an investment extends well beyond the current holder’s time frame, the increased value has to be easily transferred to the next investor.
While important, payback analysis alone can never build the market. Value transfer accomplished by green realtors, appraisers, and lenders is the key to that process.