Green Appraising and Lending

by Joel Barkman

While official statistics may be lacking, many of the builders who attended the National Association of Home Builders (NAHB) National Green Building Conference last month said that there is definitely more interest in green homes over the more typical homes that can be purchased in today's tough market.

Green builders, however, have little immunity from the tight financial conditions that have been plaguing the housing market and imposing difficulties for both home buyers and sellers. And the widespread problem of low appraisals - driven largely by a glut of foreclosed properties and a slow market - has been doubly frustrating for green builders because the vast majority of appraisers are unable to recognize the value that green features add to the home.

Energy efficiency, according to speakers at the conference, remains the most salient aspect of the industry's move to sustainability, and is the one benefit that's most easily recognized by consumers. Unfortunately, the prospect of sharp reductions in monthly utility bills has not gained much attention from the lending community, and mortgages recognizing those savings remain mostly an idea whose potential has been largely unrealized.

Another ongoing challenge is that the concept of green housing is not well understood by the general public, conference panelists said, and a significant share of prospective buyers are actually turned off by it. Green builders were advised to educate their respective communities about the specific benefits of their homes rather than selling whatever happens to be the "green" sensation at the time.

Several builders were on hand to discuss how they have been successful in moving sustainable construction principles into affordable housing. Those attending the conference also heard how green is being incorporated into the multifamily sector and factory-built housing, the latter profiting from a manufacturing process that inherently provides greater precision and holds construction waste to a minimum.

Industry professionals attending the show seemed to feel fairly optimistic about their business prospects and expected green to give them even more of an edge as this segment of the marketplace becomes further established during the full-scale housing recovery that will emerge in the next couple of years.

But the mortgage market isn't geared up to do an effective job of providing financing for those green homes, they were told, a complaint that hit an especially raw nerve at the conference.

Appraisers and lenders do not understand the true costs of green homes and buyers cannot get the full financing they need. Very few lenders even offer an energy efficient mortgage (EEM) or energy improvement mortgage (EIM) and even fewer potential homebuyers know about such programs.

According to Fannie Mae guidelines, one thing lenders can do to help buyers afford green homes is to make sure the appraiser is competent. If they have not seen or appraised a green home, ask for an appraiser who has appraised one of these homes or has knowledge in energy efficiency.

The Appraisal Institute has initiated a one-day seminar on green building and it is presenting webinars, but only about 25 percent of the nation's roughly 105,000 appraisers are even a member of an organization.

Another key in showing value for these homes is through third-party verification processes - certification offered by the NAHB National Green Building Program, Energy Star for homes, EarthCraft of Virginia or similar residential green building programs provide a detailed report of the homes green and energy efficient features.

Certification usually requires a residential energy report form from the HERS (Home Energy Rating Systems) rater - documentation that the home is qualified for special government incentives or special program through your lender.

Fannie Mae's Uniform Residential Appraisal Form (Form 1004) should have a box at the top for information such as the HERS rating and its certification. In the version of the form that exists today, towards the bottom of the front page there is one line provided for additional green features, such as special energy-efficient items.

To build a better homes and better communities we need to make appraisers and lenders more knowledgeable about the value of green so that green products can be affordable.

The good news in this regard is that Multiple Listing Services have begun to include information on green features, and a Green MLS Tool Kit is now available to educate Realtors about gathering data on green homes so that comparables will be possible.

Also, lenders need to factor in utility and maintenance costs to the calculations they use to qualify buyers for mortgages. What happens to the $400 differential between a house built in the 1960s with an average monthly expenditure of $500 for energy and an Energy Star house that costs $89 a month? Lenders need to look at the full cost of ownership.

Ultimately I think the prevailing issue is more than just green or being able to afford some fancy new gadget. The issue at hand is quality and the question becomes, when it comes to your home is the system affording you quality? Remember, "Just Ask a Builder."

As always e-mail your questions or comments to joel@goldenrulebuilders.com or write to "Ask a Builder" at P.O. box 294, Catlett, VA 20119.

Barkman is past president of the Fauquier Chapter of The Northern Virginia Building Industry Association.

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