Image Credit: Umpqua Bank
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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.
Green realtors
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.
Green appraisers
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.”
Green lenders
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.
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18 Comments
2012 IECC
Peter,
I wonder if the adoption of the 2012 IECC will make the process easier for evaluating new homes at least. It looks to be starting in Illinois first.
http://www.buildingperformanceworkshop.com/gd-blog/archives/tag/2012-iecc-automatic-adoption-international-energy-conservation-code-illinois
Illinois Amendments
I hadn't realized that BPI was posting this. I'm glad they have, the Illinois work should be publicized. However, there are a couple of clarifications that are needed. The new Illinois code, while based on the 2012 IECC has a couple of changes from the model code. 1. The air infiltration requirement will be 5 ACH50 not 3 ACH50. 2. For additions, alteration etc, a blower door test is not required. Either a blower door test or the air infiltration checklist will be allowed. 3. Because the state doesn't adopt the IRC, Section 1507.3 of the IRC (the whole house continuous ventilation requirements) will be imported into the code. Finally, the state energy agency will be running a set of trainings on the new code starting in January.
IL Code
Issac,
Thank you for that information, it sounds like Illinois has ammended the 20122 IECC somewhat for the June 1, 2012 implementation. Is there a grace period on full compliance with the new code with regard to the 3 ACH50 tested infiltration maximum for zones 3 through 8?
SAVE Act
Peter, I'm surprised you haven't made reference to the SAVE Act, which if passed would change underwriting standards to add Energy to the loan to value ratio along with Principal, Interest, Tax, and Insurance. I recently heard that this could be done by Executive Order and does not actually need Congressional action. Does the editorial group at GBA not see this as a potentially major piece of necessary policy?
Grace Period
There isn't a grace period. The code will require 5ACH50 until the state takes it up again; which won't be until the next edition of the model code is published. Also, I'm not clear on the climate zone issue. Illinois only encompasses clliamte zones 4 and 5. As far as any other state is concerned, 3 ACH50 will be required if the state is within the climate zones you specified.
Real Estate Appraisers
If you keep in mind that Real Estate Agents and Appraisers have On-Going Educational Requirements to maintain Licensing in their respective fields. Soon it will become second nature to these Professionals when Green Energy Products become more common place in Design and Construction. The good thing is, for all of us, these are very desireable features with Values that are simple enough to determine. I would think the Public needs to come into more contact with Green concepts, ideas and products in order to make more intelligent decisions about their living and work place lifestyles.
SAVE Act
Hi Kim -
The SAVE Act would absolutely be a big boost. I must admit I don't keep track of pending legislation as well as I should, and this piece was more about what is available for realtors, lenders, and appraisers, rather than what could or will be. And I must admit I have no idea how a lending standard can be accomplished by Executive Order rather than an Act of Congress. But given how grindingly slow and painful our Congress is of late, bring on the Executive Order!
Co2 Reduction value
I think the talk should turn to action. I just had an air/air heat pump and a HRV installed in my 20 year old mini home. The cost was $6400 with taxes included. The payments over 10 years are just about equal to projected savings. ( This computation did not include any increase in electricity rates: That would be gravy). The lowering of Co2 released is staggering. The air quality in my home has improved dramatically. Isn't that a consideration? If I was going to build a new home it would be green, even though I am 66 years old. I want my Grandchildren to be able to breathe. Let's just do it!
too many characters in the title?
I know this is off topic...
maybe it's just my browser....
I think this blog title may have too many characters
see attachment
Response to John Brooks
John,
Thanks for letting us know about this problem...
Misuse of the word
I see a lot of discussion about performance as it relates to energy but little about green building. The recent report from the National Home Performance Council and the Association of Energy and Environmental Real Estate Professionals titled "Unlocking the full value of Green Homes" makes the case for the MLS and appraisers should and can value green homes. However, they too address only energy conservation and efficiency techniques.
It is bad enough that Oak Ridge Labs and Rocky Mountain Institute get any funding at all these days, do you really need to continue to propagate the bastardization of the word green?
Performance, as it relates to leakage tolerances, should be addressed in the codes and rewarded. For sure. Equipment and system design and efficiency should be recognized and rewarded in our assessment of a home's worth. Agreed. But stop calling it green. The building industry apparently believes it can abuse this term simply because of an old agenda and thick skulls that struggle with larger less quantifiable concepts.
Response to Michael Anschel
Michael,
It appears that you are criticizing some people's use of the word “green.” But you don't give us a definition of the word. So, what does this word mean to you?
Obviously, “green” is not a technical word. Unlike words used by mathematicians and physicists — words like “divisor,” “rectangle,” “mass,” or “BTU” — there is no agreed-upon definition of the word.
So, if you criticize others, you need to share your own definition.
Personally, I usually try to avoid using the word.
Are you kidding?
Martin,
You are joking right? Are you really suggesting that green building hasn't been well enough defined by the green building programs internationally that you want to play dumb to support your energy obsession? BREEM, CASBEE, GreenGlobes, Built Green, Green Built, MN GreenStar, LBC, hell even LEED. They all share the same basic core concepts. People, Environment, Resources.
There is a reason that Green building is avoided by the kwh and btu crowd. It is a softer less definite and quantifiable concepts. No doubt. That doesn't give license to partisan surgery. The new home builders in MN adulterated the word and created a green program that was energy star 2.0 in a green leaf logo. They called it a green path. It was their blatant attempt at avoiding water, resource, toxicity, and social issues in addition to avoiding the more paperwork intensive ES 3.0.
When those of us who know better stoop the the level of stripping the green out of green building, it only serves to weaken the overall intent of the the movement: To build better buildings that are less damaging, promote healthy living, and ultimately symbiotic with the natural world. Energy is a political distraction.
My definition? Green building is the application of the key principles of green to the traditional building process for the purpose of improving the lives of the occupants, the community, and our relationship with nature. The key principles of green are: Community Impact. Site Impact. Resource Efficiency. Indoor environment. Water Conservation. and Energy Value.
Does that help?
M
No one is fighting with you, Michael
Michael,
I don't think we have a disagreement. Apparently "green" is defined by the existing programs you listed, including BREEM, CASBEE, GreenGlobes, Built Green, Green Built, MN GreenStar, LBC, and LEED.
So if these existing programs supply an adequate definition, who is guilty of misusing the word "green"? Your post has the headline, "Misuse of the word." But your point still escapes me. Those who use the word green have established definitions and have set up programs to certify homes, and you appear to be deferring to these programs in your definition. So where is the disagreement?
Green is?
I have reread Peter's post and I find it to be one of the best in a while here on GBA.
The main theme is; "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".
You have detailed the sales and finance side, this is part of the equation, we also need builders, architects, suppliers and the buying public to sign on as well. Everyone has an agenda and always it promotes what they sell, be it energy efficient or not.
Michael is not happy with the use of the word "Green" as it relates to the building industry. Greenwashing is a science these days, calling oneself green while conducting business as usual. We are fortunate here in Minnesota as we had the good sense to update our building and energy codes in 2000. We are in a very strong position to implement the new IECC 2012 with just some minor building detail changes, production builders will easily meet the 3 ach50 threshold because they are already doing so.
Martin is right, if you do not like the current use of the word "Green" as it relates to the building industry you must define it. Should "Green" be to the building industry what "Organic" is to agriculture? Maybe so. I strongly support the organic food and materials industry and maybe "Green Building" could follow a similar path.
The word
My issues with how the word is being applied is the very limited sector of energy performance. The value of a green home does not lie in its energy efficiency, but rather in the process with which it was constructed, the overall resource consumption of that process and its operational process. Water, a far more valuable resource than energy, is not part of a HERS report. Indoor Environmental Quality is not part of a HERS report.
Doug, we were lucky in MN to have programs like MN GreenStar developed to guide builders and define green building. We are unlucky to have groups like the Builders Association of the Twin Cities attempt to disrupt those efforts with their own greenwashing program. Even as we talk about adopting the new IRC our builders groups are lobbying to remove sprinkler requirements. A blatant violation of the first rule of green building.
I think it is a dangerous and irresponsible position to associate green mortgages and green appraisals with something as thin, inconsequential, and potentially dangerous as energy performance.
That is my point.
M
Apology
I am sorry that my attempt to focus this article on significant progress that financial sectors have made on quantitatively assessing/recognizing the increased value of "green" or high performance homes has bled into another important issue.
I start off many of my educational sessions and trainings with a module on defining green, looking at it as a spectrum, and making sure that building professionals and their clients start off their work with a recognition of how deep and broad green is, and agreeing on just what aspects of green will be addressed in the project.
I really don't care for the term green - it's full of bias, misconceptions, and even sometimes, political vitriol.
Would I like financial institutions to recognize the depth and breadth of green building in their work and actively explore capture of high performance beyond energy efficiency? Absolutely. Am I glad that after nearly a decade of effort there are real tools for realtors, lenders and appraisers to use in their work? Absolutely.
To-do
Concrete actions to pursue to get this sector up to speed that are being worked on in VT include the following.
HERS agencies & other building certifiers (BPI auditors) need to:
* offer cheap continuing education credits for appraisers & realtors on energy-efficiency & building certifictaions
* work with their local MLS to get HERS scores (in graphic display) & building certifications into the MLS (& follow-up to ensure data is entered accurate)
* use MLS to educate realtors (webinars, self-directed PowerPoints, YouTube,etc.)
* get MLS to track length of time on market & sale price as percent of asking price for rated & certified homes vs. those without (develop proof of value or at least create a baseline to measure progress)
* establish a database of HERS ratings & building certifications that appraisers & realtors can use to find comps (on MLS?)
* work with lending trade associations & state finance agencies to reach their members through newsletters & websites (particularly piggybacking on energy code updates - raising the floor elevates the ceiling) - another thing is to communicate with the Bar Assoc., tell the lawyers & title insurance folks about code updates
* insist that lenders hire an appraiser who is qualified to evaluate efficient homes
* provide NPV to appraiser (home built vs code)
* work with state real estate license regulators - in VT a special dispensation is required to teach about energy-efficiency for recertification (we're working on knocking that barrier down)
* get state's legal definition of appraisal changed (LA added 3 words: including energy-efficiency)
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