ENERGY EFFICENT MORTGAGES PART #1

One of the major issues we have run into with homes built “green” (e.g. LEED for Homes or Minnesota Green Standards) is that the appraisal industry is not trained to recognize and value the green aspects of “green” building. In recent years with price deflation caused by nearby foreclosed homes, it is nearly impossible at times get a fair hearing on the differentiation of a “green” home.
 
After the mortgage bubble and scams, appraisers, underwriters and the mortgage industry in general has little sympathy for a “green” builder trying to obtain a market appraisal taking into consideration the “green” aspects of the home. Building “green” absolutely does cost more, are better quality homes and have shown to demand higher resale pricing around the country, but none of that seems to matter when the appraisal comes in below the construction cost.
 
The required third-party certification and testing alone costs $3,000-5,000. There is a major disconnect between the folks making up the “green” certification programs and the appraisal and mortgage industry. If the buyer is putting down a significant down payment, the problem does not necessarily go away either. The lender may be satisfied because the down payment solves the problem for them; however the builder has to explain why he is charging more for the home than the appraisal amount. No one wants to over pay and a low appraisal is a red flag that becomes an issue that the builder has to sell through. In situations where the buyer is putting down a small down payment, then the transaction is lost.
 
Yes, there is a product out there called Energy Efficient Mortgage, but I have yet to find a mortgage lender, underwriter or appraiser who understands them and has experience with them. From a macro perspective, the mortgage industry is not trained on energy efficient mortgages and much work needs to be done to address the gap between “green” certification programs and appraisal standards. To the best of my knowledge, there is no official guidance for appraisers with regards to LEED for Homes or any other Green certified home program and there are no special forms or consideration required by FHA for appraisers.
 
In the meantime, we do our best to overcome this by providing the appraiser and lender with detailed documentation. We provide detailed “green” specifications outlining the complete details of the green building process. Our average, our “green” specification for a residential home is approximately 40 pages. These specifications alerts the appraiser and lender that something different is going on. Second, we provide a sworn construction statement outlining the energy efficient upgrades to make it easy for the appraiser and lender to identify those costs. Finally, while I don’t expect that vast majority of appraisers to grasp the detail of construction drawings, our drawings carry a fair amount of detail that coincide with the “green” specifications.
 
Does providing the detail matter? I know appraisers will all tell you they do their work objectively. To some degree that is true and some degree not true. I believe an appraiser may look at the data objectively but as they do, they develop a “number” in their head and work towards that number. Our supporting data is our effort to help an appraiser decide on the “number”.