I am queen of the “While we’re at it…” project. No project is too small to turn into a full-blown bring-in-the-team-of-professionals kind of job. A few years ago, for example, I wanted to re-landscape my yard, so I hired a landscaper. While in my kitchen she said innocently, “Gee, you wouldn't even know that you had a yard because there are so few windows.” Doh! Before you could say “Extreme Makeover: Home Edition,” we were building an addition with lots of windows. So, while we were at it, I figured it was time for a new kitchen. And the adjacent bathroom was a tad dated – might as well update it, while we’re at it. Oh, by the way, the freshly painted kitchen surely made the rest of the first floor look shabby, so while we were at it I repainted the entire first floor. But how could I not go up the stairs? I mean those walls are all connected … well, you get the picture. It was a full-blown solution to the problem at hand and in the end it was a stunning success: everyone was happier with the new space. Sometimes you just can’t tinker.
At Home Innovation Labs I spend a lot of time thinking about how to get more builders to commit to green certification and how to get more consumers to seek out high performance homes. I am not the only one – there is an army of green housing advocates working toward this goal. We have seen notable success, particularly in advanced building science, improved construction practices, and superior building products. But for substantive change to occur, we need to address the barriers in the real estate transaction – those in home selection, appraisal, and financing. We need what I call the “99% solution” on the back end of the home building process.
I hear builders say, “ Home buyers don’t ask for green, they ask for granite.” And I hear lenders and appraisers say the “market” doesn't value green. Maybe. Or maybe through policies, lending practices, and tradition, we have erected barriers to the market behaving more rationally.
Below is my proposal for a 99% solution to this situation. I admit it won’t solve everything, but I think if we can effectuate change in these four key areas, we will not see merely modest gains, but a stunning result.
Consumers need easy access to credible and structured information about green features and green certifications so they can make informed purchasing decisions. The MLS has been the primary vehicle for the vast majority of real estate transactions over the years. Home buyers rely on their local MLS to provide accurate information in structured categories. The MLS makes it easy and fast for buyers to search thousands of listings for homes that have the features they desire within their price point. Want a 3-bedroom, 2-bath, colonial with central air conditioning in Silver Spring, Maryland? You got it! Looking for a green certified home that exceeds building code minimums? Uh ... good luck. Too few MLS databases collect information about a home’s green certifications, let alone green features. Green advocates must make a concerted effort to have this changed. If we want home buyers to make smart decisions and select high-performance, green certified homes, we need to improve the out-of-date tools we expect them to use. This is an area where there has been a remarkable amount of success in the last few years. You can visit the Greening the MLS website for more information and ongoing updates.
Consumers interested in green need the equivalent of a Best Buy's "Geek Squad" — real estate professionals who can translate the value of high-performance features and green practices into easily understandable benefits that are meaningful to the average consumer. Green certified homes are complex and often include state-of-the-art technology and products. As hard as they try, many builders can’t get VOC, SEER, Low-E, or Solar Heat Gain Co-efficient (my personal favorite) out of their consumer-facing marketing and vocabulary. And we wonder why consumers ask about granite!
Several recent industry surveys demonstrate that consumers are interested in green building features; but at the same time, these consumers don’t have a deep understanding of green building practices. As a rule, home buyers look to their real estate agents to help them navigate the confusing terminology and building science. Unfortunately, too few real estate professionals have a comprehensive understanding of green homes despite the widespread availability of great professional training. Classes on green home building should be a part of every real estate professional’s continuing education plans. The NAR Green and EcoBroker designations are available for licensed real estate agents, but we need to encourage more agents to seek green training.
Nothing dampens the enthusiasm and passion of our builder partners who construct great green homes more than the appraiser who, during the valuation process, rounds up a long list of “comparable” properties built in the 1970s that are leakier than my grandmother’s pasta sieve. A new green certified home is simply not comparable to an inefficient home. In fairness, appraising green and energy efficiency features is not always easy. Insulation is behind the walls and out of sight. And appraisers, like consumers, may not be schooled in terms like VOC, SEER, Low-E, or Solar Heat Gain Co-efficient. Fortunately there have been some great professional training courses developed for appraisers so they can competently appraise green home features. Builders should work with their buyers to ensure that only appraisers trained and/or experienced in how to value a green home be selected to write the appraisal.
Recently, the Appraisal Institute published the Residential Green and Energy Efficiency Addendum (Form 820.03). This addendum was developed to help appraisers analyze market impacts of green or energy-efficient features. Builders of green homes should likewise require that the green addendum be completed by the appraiser. This form can be the linchpin for the 99% Solution if it is used widely and wisely. The data collected in this form can help real estate professionals populate a Green MLS, which helps inform consumers. The data can also enhance the analysis of green and energy-efficient features on the value of real property if it becomes a required part of the Uniform Residential Appraisal Report (URAR) form.
One easy way, at least in theory, to standardize green data and mainstream green housing is to get Fannie, Freddie, and the Federal Housing Administration (FHA) to recognize green and energy features in their policies, procedures, and technology applications. In the past, Fannie Mae offered support of energy- and location-efficient homes with their Energy Efficient and Smart Commute mortgage products. Recently, Fannie Mae seized a leadership role in financing green multifamily properties, and within two years launched Green Refinance Plus, the first multifamily loan product designed to make affordable properties more energy and water efficient. Unfortunately, there have been no similar initiatives for green single-family homes from any of the financing agencies.
The means by which Fannie, Freddie, and FHA could help involves zero risk, no new mortgage products, no loosening of underwriting standards, and little capital investment – but it could be a game-changer for the green home industry. These mortgage industry big boys can set the stage for market acceptance of green features by their sheer dominance – 90 percent of new mortgages are owned or guaranteed by Fannie, Freddie, or the FHA. We need the mortgage industry to revise their appraisal guidelines so that real estate appraisal engagements are required to include an analysis of potential market impacts attributable to energy-efficient or green fixtures or improvements. In other words, lenders should request appraisals of green homes to consider if the home’s green features have an impact on its value.
Surprisingly, neither Fannie, Freddie, nor FHA directly asks appraisers to consider the impact of green features on a home’s value in any systematic way, or provides clear guidelines to lenders and underwriters on acceptable methods in this area. An example of this is circumstances where use of the income capitalization approach may be used in the absence of paired sales data. The Appraisal Institute cited this recommendation in a recent comment letter to the Federal Housing Finance Agency (FHFA) in relation to the Property Assessed Clean Energy (PACE) proposed rule. It should be noted that the Appraisal Institute has developed an entire range of training programs devoted to valuing all forms of sustainable properties, including a new course devoted to the valuation of solar.
Let me be clear – I am not suggesting that the mortgage industry require appraisers to value green certified homes equal with cost or to some predetermined value. Instead, I propose that the appraisal guidelines clarify the expectations and allowances of lenders and underwriters in this important area. Further, these agencies could take an additional step by ensuring the capture of this information by also including requirements for completion of AI’s Residential Green and Energy Efficiency Addendum. Currently Fannie and Freddie (and FHA) require appraisers only to complete the Uniform Residential Appraisal Report (URAR) form, as noted earlier. With regard to green and energy efficiency, the URAR is at best agnostic – there are only two specific areas in which appraisers may comment on green or energy efficiency. In contrast, the Appraisal Institute’s green addendum establishes a framework for appraisers to analyze green and energy efficient features and could be collected by lenders for enhanced risk assessment and analysis. The addendum can also be completed in advance of an appraisal by a home builder or real estate agent, improving communications between the customer, lender, and appraiser. Home builders who have done this have reported positive experiences with a more open and thorough process.
The addendum can enhance risk assessment in the area of green buildings and energy efficiency and more importantly, could enhance considerably the analysis of green and energy-efficient features on the value of real property. If you haven't already, definitely begin to use and recommend the addendum whenever possible.
So what do you think of my while-we're-at-it, all-but-1% solution for a brighter future in green residential? I'd love to hear from you.***