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   ARTICLE   |   From Scotsman Guide Residential Edition   |   September 2010

Rev Your Green-Lending Engine

Knowing sustainable principles will help you help clients avoid lazy appraisals

As more consumers show interest in green-built, energy-efficient homes, many homebuilders and developers are changing their building practices to meet increased demand. What's often missing from the process, however, is education for mortgage brokers who wish to offer their clients green-loan options, as well as education in building science and new valuation techniques for home appraisers who value green homes.

As a result, many mortgage brokers are missing a burgeoning opportunity to grow their businesses. By familiarizing themselves with sustainable-building principles and green-finance issues, as well as with appraisal issues that may exist, brokers can help their clients find financing and tap into the wave of growth behind green building.

Appraisal obstacles

Although builders expect building green homes to give them an edge as the market evolves, appraisal roadblocks can dampen supply and limit innovation.

Many home appraisers do not account for many green and sustainable features during the appraisal process. Valuing a home with green features the same as a home that lacks these features often results in below-value appraisals and frustrated homebuyers and builders.

Certified green homes typically offer efficient heating, cooling and water usage, as well as better air filtration, ventilation, and high-performance windows and insulation. A conventional home may not have any of these features. A greener home typically has lower utility costs than a conventional home. It also can offer more-durable construction to protect the home from moisture, excessive heat and cold, and airborne toxins. These factors combine to decrease the lifetime costs of owning the home.

Sustainable building materials sometimes are more expensive. If it costs a builder $15,000 to include certain green features, then it will typically expect to sell the home for at least $15,000 more than a standard home. This may not always be possible if the appraiser is not aware of the green features' value, however.

Overcoming hurdles

Building and selling homes typically is a sequential process with loosely connected segments of professionals. First, a developer builds a home. Then, often with the help of a real estate agent, a buyer sees it and works with a mortgage lender or broker to obtain financing to purchase the home. The financing process includes the appraiser valuing the home.

Although developers and real estate agents often have educated themselves about the tenets of green building as homebuyers express increased interest in living sustainably, the appraisal and lending processes can be a chokepoint. If an appraisal on a green home comes in below value, the bank will not make the loan. And if a bank will not lend them money, then most buyers cannot purchase the home. 

Mortgage brokers can help shepherd the process. Although brokers are separated from appraisers by appraisal-management companies (AMCs), there can be back-and-forth interaction between the lender and appraiser or a request for a green-certified appraiser. As long as the discussion is not a statement of expected value, then the lender could provide extra documentation of the home's value -- e.g., comparable sales or documented costs and benefits of the green features -- to the appraiser prior to the inspection.

Brokers can ask lenders to relay the following questions to the AMC to assist in receiving an accurate valuation:

  • Has the appraiser taken a green-valuation course?
  • If not, does the appraiser have explicit green-building experience?
  • How many green-certified homes has the appraiser inspected?

Finding solutions

Education is available for mortgage brokers that can help them better serve their clients and work with lenders to get them on board with green-lending options. Some training can help educate brokers on the nuances of green building or help them tailor marketing materials for green offerings.

If their market does not have green-certified appraisers, brokers can help bring the appraisal issue to the forefront through state mortgage-professional associations to apply pressure to local appraisers to seek certification. Education courses also can update appraisers on green-building techniques. If appraisers recognize the value in various features, then they can include it directly in their appraisal results.

Legislation also may be a solution. For instance, a government mandate, whether at the state or federal level or through Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA), could dictate that appraisers valuing certified green properties should have basic training in how to value such properties correctly. Lobbying for a mandate in support of improved valuation techniques could push appraisers to gain certification if they want to expand their opportunities.

There is no simple solution for the green-building valuation disconnect. Beyond the measures above, loans such as energy-efficient mortgages and FHA section No. 203(k) rehabilitation loans, which serve to add energy-efficient retrofits, need a streamlined process. Appraisers and mortgage brokers must have additional education so that clients who are interested in purchasing a green home or getting a green loan do not face negative reactions and subsequent pressure to take a conventional loan product.

Mortgage brokers can differentiate themselves from their competitors by educating themselves on green-building valuation and green-loan products. The opportunity to grow loan volume and build a strong referral network of real estate agents looking to connect clients with savvy, green-minded brokers should not be missed. With tools and courses available to grab hold of this growing segment of the market, a small effort can generate a large return.


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