Financing an Energy Efficient, New Construction Home
I am planning to build a highly energy efficient home in Michigan. Yesterday, I got the appraisal back from our lender, and the appraised value came back significantly lower than the cost of construction. The appraiser used two approaches: 1) comparable homes and 2) a rudimentary estimate of construction costs. Part of the problem is likely increasing material and labor costs, but I think the biggest problem is that none of my energy efficient materials or construction strategies (high efficiency windows, insulated slab, SIP walls and roof, heat pumps etc.) were valued. If I were to remove all of these things, the appraised value wouldn’t change a bit. Obviously, this creates a big disincentive to build energy efficient homes. Is there a fix other than just bringing significantly more cash to closing? A state or federal program?
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Replies
Daniel,
Construction loan appraisals are about minimizing the lenders risk. The lender understands that most buyers aren't focused on the green features and won't pay for them if it means sacrificing quartz countertops or commercial-sized ranges.
That said, it's possible to build a "pretty good" level of house without going to far beyond the cost of a code minimum house. (Google this site for "pretty good house.") You might not be able to install European windows or zinc siding, but you can end up with an efficient and comfortable home.
That said, construction costs have really shot up over the last couple of years. I've put my own new-build on hold (likely forever) and am renovating an existing home.
Steve,
Thanks for the response. I get it. It is what it is.
Thinking more broadly and without getting into politics too much, this seems a reasonable opportunity to government to address what is obviously a market failure. There is a public goods aspect to the problem that is not currently addressed. We can subsidize solar and wind at the utility scale but without incentivizing people to invest in better quality and more energy efficient home construction and eliminating barriers such as this to do so, our energy problems are only partially addressed.
Daniel,
As Steve said, the purpose of appraisals are really just to see what the the bank can recover if you default. They aren't in the business of educating prospective buyers on the merits of energy efficiency. Until these features are valued by the wider public, and reflected in a differential they see in the sales of the types of homes, then unfortunately I don't think there is going to be any change in how appraisers look at these high performance buildings.
There are plenty of lenders out there. You need to convince one that what you are doing is worth their risk. Appraisers aren't motivated to work on your behalf to do this. They're motivated to minimize the risk for the bankers.
Let's face it: super energy efficient homes aren't the norm. In fact, they're a tiny percentage of the market place, mostly because they're more expensive to build and most people don't care. We of course know they're worth every penny if done sensibly. In fact, they're worth more in the marketplace than the standard house being built just up the block. Just adding solar panels makes a home more attractive to buy these days. We've come along way.
You need to convince a lender by educating them. A presentation or laid out report with the cost/benefit analysis and ROI might go a long way. Show them the Federal Tax Credits available. Show them the State Rebates and Credits. Show them the Utility Rebates. Show them you and your house are worth the risk. Don't leave the convincing to an appraiser who doesn't have any skin in the game.
It's a HUGE investment and it's yours. If I was having trouble, I'd put my business skills to work to show them I knew what I was doing and their money was well lent. Wouldn't be the first time I had to convince people that my ideas were well thought out.
If all that is lost on you, try your financial advisor if you have one. Mine has saved my butt with lending alternatives more than once.
Good luck!
Thanks. That is exactly the approach I will try. In a market with few, if any, such homes, it will be an uphill battle.
You need to convince an appraiser, more than a lender. A lender won't approve a loan amount not supported by an appraisal, because the lender has to conform to the rules imposed by the secondary market. Very few lenders keep loans for their own portfolio. A few small local banks might, but they'll probably charge a higher interest rate.
The incremental cost of building a reasonably energy efficient house is small above a standard build. If your build costs are well above standard construction, your design needs work.
For example, heat pumps are about the same cost as furnace+AC.
I'd like to be convinced of that. HVAC is a relatively small portion of the overall costs. It is my understanding that a home approaching passivhaus standards is far more costly than a traditionally stick framed and insulated home. That accounts for much of the overall costs. Maybe passivhaus standards are not reasonable... to use your phrasing.
Daniel,
A lot will boil down to having a competent "green" builder and subs. If this is all new to them, that will increase your costs. So try to find someone who wants to build this type of structure. A lot can be accomplished with caulk, tape, and conventional materials.
Yup. Passivhaus or Phius levels of insulation are not worth it in North America. Our energy costs (even if you pay extra for green electricity) too low to justify the extra cost. ROI measured in centuries.
There is also too much focus on zero thermal bridging, which adds a lot of labour and cost. What matters is the whole assembly R value and what it costs you to construct that assembly.
SIP construction falls into similar ROI category. About the only time it makes financial sense is if you need to build the shell quickly or only if you are looking to outsource the shell and DIY everything else.
In Zone 5/6, most of your energy savings are had with an R25 assembly. Going above that even for a roof only makes sense if you are using cheap insulation such as blown in cellulose or fiberglass.
Fancy windows also have no ROI but can make a big difference in comfort. If you can find a budget uPVC tilt and turns, they are well worth it for the quality and comfort.
Agree on the thermal bridging.
What is intangible is that a tight house is more comfortable and less drafty. It's easier to control humidity. It's quieter and stays cleaner. Those are intangibles, but consider also that once you get past the point where your plumbing doesn't freeze, the only purpose of HVAC is comfort. And there's only so much comfort you can get with the best HVAC system in a leaky house.
It’s amazing to me how this subject keeps coming up, and apparently no one knows about the Appraisal Institute’s AI-820.06 Residential Green and Energy Efficient Addendum, or Fannie Mae Form 1004 and Freddy Mac Form 70.
This has been in play for years and most Builders, Bankers and, unfortunately by extension, homeowners have no clue, apparently.
This really makes me mad, as I’ve been educating folks about this for at least 20 years. This is about industry education. In fact, just a quick search on this website will show plenty of information. It must be too much of an effort for our industry.
Even if you can’t find a certified Appraiser in your area, just filling this form out and presenting it to the Appraiser can do a lot of good.
One more time, here are the links…
https://www.appraisalinstitute.org/assets/1/7/ResidentialGreenandEnergyEfficientAddendum.pdf
https://www.appraisalinstitute.org/assets/1/29/A_Guide_to_Res_Green_EE_Addendum_%28002%29.pdf
https://www.appraisalinstitute.org/professional-practice/professional-practice-documents/green-energy-efficient-addenda/
One issue is finding an appraiser who is "green" certified and on the lenders list. It seems to be easier to get the appraiser to raise the overall build quality--especially if you are going into a neighborhood with more expensive homes.
Over the years, I worked with several Builders and Homeowners that have filled out the AI Form with great success. You can also learn from the ZERH program Builders about their appraisals. If an appraiser follows through and makes appropriate adjustments, usually there is an additional 5%-10% value, even in affordable homes. Not doing so it’s leaving money on the table.
Just because someone hasn’t try it, it doesn’t meant it can’t be done.
If your plan is to finance more than 40% of a custom passive house build, I think you are have chosen a tuff road.
From my experience with a construction loan the bank will not approve any loan they can not show that you will have no less than 20% equity from the day before ground is broken and every day until the home is completed and the permanent mortgage is in place.
As you found out the bank like most buyer see no value in insulating beyond the code minimum. They see no value in your expensive triple pane windows beyond the cost of the cheapest builder’s grade windows. They so no value in a ground source heat pump or any system that cost more than the code min system.
In short, the bank will compare your plan to 3 production build nearest your home and will finance up to 80% of whatever the last few sold for on a dollars per square foot basis. The truth is any code minimum “custom” home is going to cost 25% more than a production home. The extra cost of everything you want to do beyond code can not be financed you will need to have that money in cash.
You may want to rethink your goals. Seems to me that the passive standard never made finance sense. The whole system is based on thou shall not use more than X BTUs per square foot. The way I see it the flaw is there is no dollar sign in the equation. Consider starting over build a BEopt model of your home and optimize your choices to produce the greatest return on your investment. When you look at the BEopt models the code min house and the passive house generally have similar costs to own, finance and operate but the optimized home often cost 25% less to finance and operate.
You may want to consider giving up on the SIP walls as their cost per square foot is so much higher than other option that will give you the same R value.
I found it is easy to design way more house than I had budgeted for. When I went to cut the costs the only thing that seems to move the numbers was cutting square feet. In the end we decided increasing the budget was the right move for us and five years later I am glad we did but at the time it was a very bitter pill to swallow.
At this point unless you have 60% of the homes price in equity somewhere you have lost your application and appraisal fees.
https://www.nrel.gov/buildings/beopt.html
Walta
In fairness, almost everything you just said is going to be true with almost any kind of custom house. If you're putting the money into monogrammed tile or a dojo or climbing wall the bank's not going to go for that either.