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Residential Department: BackSpace: July 2013



Is it time to go for green?

Green Resources

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Although the green movement has been around for decades, it has yet to encompass a significant part of the residential real estate market. That seems likely to change, however, as many factors — from concerns over energy costs to more eco-conscious consumers—increasingly are making an energy-efficient, sustainable home the choice of the future.

According to a recent report from McGraw-Hill Construction, the new green homes market grew from 8 percent in 2008 to 17 percent in 2011. By 2016, green homes are expected to comprise between 29 percent and 38 percent of the market. In addition, more than 60 percent of homebuilders and remodelers report that homebuyers and owners are willing to pay more for green homes and improvements.

As the housing market continues its journey toward recovery and homebuyers look to purchase energy-efficient and sustainable homes, mortgage bankers and brokers must consider: Is it time to go green? 

What is green?

Terms like “green,” “sustainable” and “energy-efficient” often are tossed about interchangeably, but it’s hard to give a strict definition of what constitutes a green home or a sustainable home. In fact, these phrases can mean different things to different people—and different organizations.

“The terms ‘green’ and ‘energy efficient’ tend to be used almost synonymously,” says Kevin Morrow, director of energy and green building at the National Association of Home Builders (NAHB). “Our association is of the opinion that an energy-efficient home is an energy-efficient home,and a green home is one that has been holistically designed and built to operate and exist in a more sustainable manner, including being energy efficient.”

There are multiple different rating systems that attempt to quantify the “greenness” of a building. NAHB partnered with the International Code Council (ICC) to create the ICC 700 National Green Building Standard, which is the only green-building standard for residential construction and remodeling approved by the American National Standards Institute. This standard incorporates not only energy efficiency, but also water efficiency, indoor environmental quality, efficient use of building materials and more, Morrow says.

In addition, the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED) rating system is one of the more well-known designations that attempt to certify the level of green improvements in a particular building. Although perhaps better known for its use with commercial buildings, the LEED for Homes certification is available for single-family and multifamily dwellings.

Local rating programs are starting to pop up, as well. In California, Build It Green’s GreenPoint Rated Homes program gives houses a score based on a variety of factors — from the use of finishes like sustainable flooring and low-VOC (volatile organic compound) paints to the inclusion of renewable energy sources like solar panels. In the Atlanta area, the EarthCraft House program certifies that homes are designed and built to minimize harmful environmental impacts and to improve energy efficiency.

In truth, however, there is no one common standard of what constitutes green. “What we need is a more universal understanding of what a high-performance home is, what sustainability is, what green means, so we can all speak in the same language,” Morrow says.

A.J. Stones, owner of AJ Stones, Master Green Remodeler, and an NAHB green-certified professional, agrees. “If you use the word ‘green’ or ‘sustainable,’ they’re arbitrary,” he says. “A lot of it is politically driven, and that’s why I try to steer clear of that.”Instead,Stones focuses on home performance, including energy audits, which give homeowners something they can quantify. “It’s easier for me to understand,” Stones says, “and it’s easier for me to sell.”

Valuing green

Making the sale often has been the sticking point of the green movement in real estate, however. It’s no secret that green homes and remodels cost more to build, but it’s been hard to pinpoint exactly how much more those improvements are worth.

There is much anecdotal evidence that says these homes stand above the crowd, however. “A house that has truly sustainable elements will sell for a premium and much quicker,” says Scott Cooper, president of Cal Green Lending, which specializes in green lending for residential and commercial properties.“We’ve seen a tipping point or shift over the past three or four years. Everybody is a lot more conscious.”

That consciousness seems to be reflected in the growing number of systems designed to rate these houses, giving consumers an easy way to assess potential homes. Getting the information about these ratings to consumers still seems to be a challenge, however. According to industry estimates, of the 860 multiple listing services (MLS) in the U.S., only about 210 include green information in their data forms. This not only makes finding a green home harder for the consumer, but also for appraisers to find like sales or“comps.”

“We need to get these tools integrated, so people can find the homes they’re interested in better,” Morrow says. “Ultimately, the appraisers who turn to the MLS to find comparable sales can start using the data to discern whether or not there’s a market premium to be realized for a high- performance home in a given area.” Until that can happen more consistently — and on a national level — the higher prices these homes command can be difficult to justify to lenders.

Financing green

Financing green real estate may be one of the industry’s biggest difficulties — and potentially a constraint to the market

“With respect to financing, it’s a huge challenge,” Morrow says. “It’s very common that any extra costs that are built in to get a home to a higher level aren’t necessarily reflected in the appraisal or the financing of that home.

Consumers who are dedicated to the idea of a green home often end up covering the extra costs themselves. “Almost all of my clients are self-financed,” Stones says. “They’re all people who have enough equity in their homes or money [to finance the project].

Although the energy efficient mortgage (EEM) has been around for years, it can be hard to come by. “[EEMs] are like seeing a unicorn with a funny hat on. They’re not all that common,” Morrow says

According to Cooper, EEMs dried up along with the tightening of the credit markets and the conservatorship of the government-sponsored enterprises (GSEs). “Fannie and Freddie basically abandoned it,” he says. And without the backing of the GSEs, there’s little interest for these loans on the secondary market.

“More often than not, the EEMs that are out there are mortgages that aren’t designed for the secondary market,” Morrow says. “They’re smaller banks, and they’re being held in-house. If we’re going to see this really being a broad portion of the market, there’s going to have to be financing models that are geared more toward the mainstream.”

Although EEMs may be better known while little utilized, Cooper says there are other programs available that just aren’t marketed specifically as green financing. “There’s a couple of different products now that we use that are much better than the energy efficient mortgages,”h esays. The Federal Housing Administration (FHA) offers a Title I Home Improvement loan that can be used for as much as $25,000 in home improvements. The loan takes second position and doesn’t require an appraisal. Cooper also points to the FHA 203(k)as a good resource for buying a home and making improvements

Regardless of what financing vehicle is used, as this market continues to grow, it represents a lot of potential business for mortgage originators and lenders. “This is a huge untapped market,” says Stones. “It’s a huge opportunity.”


Jennifer Garrett was an editor at Scotsman Guide. For questions on this article, call (800) 297-6061 or e-mail

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