Catch up with Part I and Part II in our Financing a BrightBuilt Home blog post series!
You have your team together, and now it’s time to go to bat. So it’s important to know the rules of the game.
This boils down to one document: the appraisal. In evaluating a green home, the appraisal process aims to acknowledge the long-term value of your home. When the value is appropriately recognized by the appraiser, lenders will grant a higher sum to finance a green home’s construction, acknowledging that the long-term safety net of predictable (or no) monthly costs is far superior to that of the average home. Assigning value, though, is complicated by the fact that not all high-performance homes are equal and that few of them exist for setting the standards in this data-driven numbers game.
There are currently three methods for appraising a home.
The first is the Sales Comparison or Market Approach, the method most used and best understood by homebuyers and professionals alike. In this method, area homes (or “comps”) similar to the home under evaluation are used as the basis for determining the subject home’s value. Similarly sized homes with similar features (e.g. 3 bedrooms, 2 baths, hardwood floors, 2-car garages, etc.) each provide a set of data points that come with their associated market value. The data points for high-performance features are woefully few.
The second method is the Cost Approach, which assumes the value of an improvement is the same as the cost to construct or replace the improvement. The cost approach is less common than the sales comparison approach but is useful for appraisers when they have few or no comps to reference.
In the high-performance realm, the Cost Approach is applicable because the amount of inventory required to make a viable “comparable” argument may not be available. How an appraiser might understand what to value in a project, then, relies heavily on the documentation provided to the lender by the homeowner and his or her advocates.
The third method is the Income Capitalization Approach, which generally applies to rental properties only, as it acknowledges the anticipated income stream against which a property owner can borrow. While it is not likely to be used as the singular approach in a high-performance valuation, this method can be employed as an adjustment to the sales comparison approach if it can be clearly demonstrated that energy savings translate to an income stream.
According to Jeff Gephart, President of Vermontwise Energy Services, there are three documents that should be completed prior to applying for a green appraisal: 1) the Appraisal Institute (AI) Addendum (your architect and builder should be able to assist with this), 2) a Home Energy Rating provided by a third-party Energy Rater and 3) a calculation sheet that examines net present value from the utility savings achieved when compared to a similar home built to conventional code standards (the architect or energy rater should be able to help you prepare this). Each of these documents is described in further detail below.
When you submit these documents, request a certified green appraiser be designated for your appraisal. Your proactive approach will not only go a long way toward getting the value of the home appropriately acknowledged, it could also help expedite the process itself.
The Appraisal Institute Addendum
The Appraisal Institute (or “AI”), a membership organization comprised of appraisal professionals, has begun developing the tools for standardizing the green appraisal process, including The Residential Green and Energy Efficient Addendum, which can accompany your submission to your bank. This addendum helps articulate the specific characteristics of the home that contribute to its energy efficiency. It takes a comprehensive snapshot of the home— from the level of insulation and projected or tested airtightness of the structure, to the exact specifications for the mechanical systems—to best realize every opportunity for recognizing added value.
The Home Energy Rating
In addition to the addendum, a Home Energy Rating gives the lender a nationally recognized metric for classifying a home’s efficiency. This third-party submitted value takes some of the subjectivity out of the valuation and helps substantiate claims made in the Addendum.
The Net Present Value & Savings Calculations
These projections assign a dollar value to the savings the home can offer when compared to a home built to your state’s energy code, indicating the long-term financial stability of the home. Unlike their oil-guzzling counterparts, high-performance homes won’t subject their homeowners to sudden substantial bills or the whims of the fuel markets, which for some could spell a quandary between paying for heat or paying the mortgage.
Designing, building and financing a high-performance home may not be path of least resistance, but it offers tremendous rewards. You’re buying into a better future, and at the end of the day, you’ll have a phenomenal home that is durable, healthy, comfortable and offers financial security that will keep your monthly outlay consistent for many years to come. G&HM
