It’s State of the Union time, and another union worth looking at is the state of value for high performance homes (HPH). The image below shows how value comes only through a union of some unlikely stakeholders!
So how is this precarious union working anyway? First the good news.
- Step 3 above – Green MLS. Green MLS activity seemed to have peaked in 2010. But there are bright spots ahead. The MLS’s Real Estate Transaction Standard includes a core set of 10 fields. As a result, their data dictionary creates a path for the dozen or MLS software vendors to implement a standard set of green fields. Then, the approximately 600 or so MLS yet to turn on green fields will have a much easier and consistent path to activate them.
- Step 4, Part A – Appraisers. The Appraisal Institute’s Green & Energy Efficiency Addendum was released with many accolades in late 2011. The latest version is expect Q2 of this year. For now, this is THE workaround that holds everything together. This form is packed with the power of information – to bridge what the builder, contractor or homeowner knows about high performance improvements – and allow the appraiser to assess the value.
- Last Step – Fair Value at Closing. As inventory of HPH grows more researchers are able to study premiums. A UCLA study of homes in California found that a green premium does exist. This is consistent with stats and studies from other parts of the country.
And now the obstacles.
- Step 1 – Builders/Contractors/Home Owners. The very folks who can unlock the value for HPH don’t realize they have the power. If a high performance home falls in the woods, and no one is there to know it performs better, it doesn’t have value!!! The process to value starts with builder/contractor/home owner explaining to listing agent, lender and appraiser about the features, technologies and performance that sets their home apart. See why below.
- Step 2 – Real Estate Agents. Programs like NAR Green and EcoBroker are key to educating agents. I estimate that nationally only about 2% of agents and appraisers have received a green designation to date.
- Step 4 B – Appraisal Management Companies. The system today holds back the right appraisers from being assigned to HPH jobs. Most appraisers earn their assignments in a pool that rewards lowest bids and quickest turnaround times with more work. While appraisals are supposed to be assigned based on competency, that doesn’t often happen for HPH today. And, any request for a certain competency has to be known around the time of contract. If you realize the appraiser wasn’t matched on competency for the job until after he/she gets on site it is very often too late!
- Step 4 C – Government-Sponsored Entities. Today, Fannie Mae and Freddie Mac are struggling. FHA loans are the best option for many buyers today. In many ways the underwriting guidelines of these GSE lenders set the stage of all underwriting. And their guidelines either ignore or don’t address HPH. In some cases they restrict the tools appraisers have to value these properties. In many cases, using an approach appraisers believe is a fair way to assess value is actually kicked out for review once it gets to an underwriter. Appraisers are highly restricted in that they must find comparable matches when assessing HPH – otherwise the underwriting guidelines in practice today essentially means no comps and the value disappears!
So as I take the podium, here’s the challenge I put forth to all the professionals who are tied into this unlikely union toward value for High Performance Homes:
- All utility, local, state or non-profit efficiency programs, as well as high performance builders issue a completed Green & Energy Efficiency Addendum when work is complete.
- Real estate professionals addend the Green & Energy Efficiency Addendum to the purchase contract to increase the likelihood that a competent appraiser will be assigned to the job.
- All communities looking to encourage green MLS in their area do so by embracing the standard green fields already defined in the Real Estate Transaction Standard to increase likelihood of implementation, and shorten time to develop.
And the biggest single action the high performance industry can do to impact value - give us more supply of great homes, and report how those numbers are growing!
Note that the common theme in root cause for lack of progress above has to do with lack of supply:
- MLS not adopting green fields – If they upgrade these fields they need to know at least 10% of the market is green, and number is growing. Think about it – only 3-5% of any market comes up for sale in a year. That’s not a big pool to invest in a special set of fields.
- Agent Education – There still is not enough supply of HPH to motivate agents to invest in this education.
- GSE’s – They require comps, and if the comps are not there, neither is the value!
So please share this post and join me in the easy action steps above. And, keep sharing the good news about growing supply. Once that happens, value will be the power for the demand engine!