THE LATEST IN APPRAISING AND LENDING ON GREEN BUILDINGS Dave Porter,
The National Association of Home Builders is a Registered Provider with The American Institute of Architects Continuing Education Systems. Credit earned on completion of this program will be reported to CES Records for AIA members. Certificates of Completion for non-aia members are available on request. This program is registered with the AIA/CES for continuing professional education. As such, it does not include content that may be deemed or construed to be an approval or endorsement by the AIA of any material of construction or any method or manner of handling, using, distributing, or dealing in any material or product. Questions related to specific materials, methods, and services will be addressed at the conclusion of this presentation. 2
Copyright Materials This presentation is protected by US and International Copyright laws. Reproduction, distribution, display and use of the presentation without written permission of the speaker is prohibited. PorterWorks, Inc 2010 3
Learning Objectives 4 AS A RESULT OF ATTENDING THIS SESSION, THE PARTICIPANT WILL BE ABLE TO: Provide an overview of the greening of the MLS List 2 tools for appraising green buildings Define appraiser competency Outline key differences of EIMs and EEMs List key points for different EEMs: VA, FHA, CONV Establish personal action items
Quick Check-In 5 Who s Here? Have you (or your buyers) ever been offered an EEM/EIM? Has an appraiser ever asked for more details about energy efficient improvements or green features? Have you (or your buyers) ever been offered an incentive (lower rate or reduced costs) by the lender because the property is green or energy efficient?
We know this but 6 Buildings Account for 76% of energy produced by coal plants 72% of electricity consumption 39% of energy use 38% of all carbon dioxide (CO 2 ) emissions 40% of raw materials use 30% of waste output (136 million tons annually) 14% of potable water consumption
Does an Appraiser know it? Or This? 7 TYPICAL ENERGY LEAKS Floors, walls, ceilings 31% Ducts 15% Fireplace 14% Plumbing penetrations 13% Doors 11% Windows 10% Fans and vents 4% Electrical penetrations 2%
What is seen? What is Missed? 8 What is seen? What is missed? 170 sq. inches of hole exist between the garage and home!
Competency 9 A lender must not assume that the appraiser is qualified and knowledgeable about a market area aware of the appropriate market data sources for the area able to obtain access to market data sources Source: Fannie Mae Seller Servicer Guide
Ignorance is Not Bliss 10 Appraisers know nothing about this [green building] and it s shocking. ---John O Dwyer, MAI, JSO Valuation Group Don t wait until green building is the prevailing practice before getting familiar with it. Don t wait for all the data to be in before getting up to speed. ----Theddi Wright Chappell, MAI, Cushman & Wakefield
AMC s & Underwriters 11 HVCC has transferred the problem to these appraisal management companies, which are not regulated by anybody. Sometimes underwriters tinker with appraisal In both cases, a lack of training particularly in green building creates havoc
Residential Energy Report Form 12 Source: Fannie Mae
The 1004 Today 13 Inadequate
Filling in the Gaps 14 Source: EPA
Cost Premium Statistics 15 Cost premium of green retrofit project relative to a conventional (non-green) retrofit project 25% 38% 5-10% 1-5% Over 10% 37% Source: Delloitte and Lockwood, Dollars and Sense of Green Retrofitting
Sales Comparison Approach 16 All closed & verified comparable sales to be within 6 months (90 days in this current market) No further in distance than 1 mile Similar comparable sales with matching components as well as all single line-item adjustments not to exceed 10% Net adjustments not to exceed 15% and gross adjustments not to exceed 25%. Macro Comps?
Marshall & Swift 17 Green Building Costs Brief tutorial on green building New and Retrofit Line item adjustments Recently added 1500 items to the green cost guide Source: Marshall & Swift
Marshall & Swift Example 18 Equation for one kind of green component= Dollar/sq ft (e.g. reflective rubberized white roof coating) x number of sq ft x current cost multiplier x local multiplier $.64/sq ft x 5,000 sq ft x 1.0 x 1.05= $3,360 Current cost multiplier and local multiplier are assumed in this examples
The Green MLS Tool Kit 19 www.greenthemls.org
Green Light Red Light 20
Guarantees: How do you value? 21 The Energy Cost Savings Guarantee is backed by Bayer Material Science.
Could/should know the difference? 22 Induction Stove Tops Grid-tied appliances Photos Compliments: Whirlpool
PITIUM: Rethinking Lending 23 OPTION ONE Purchase Price $250,000 Down payment $ 50,000 Loan Amount $200,000 Interest 5.85% Monthly PITI $ 1,757 Average Electric $ 150 Total Expenses $ 1,907 OPTION TWO Purchase Price $253,000 New Appraisal $255,000 Down payment $ 50,600 Loan Amount $202,400 Interest 5.85% Monthly PITI $ 1,778 Average Electric $ 60 Total Expenses $ 1,838 Savings $ 69 Source: FNMA
EEM Programs 24 FHA VA Rural Housing Fannie Mae Freddie Mac DEMAND THESE PROGRAMS ARE OFFERED DEMAND LENDERS KNOW THESE PROGRAMS
EEM s & EIM s 25 EEM s (Energy Efficient Mortgages) provide additional qualifying income credits to help offset the costs of purchasing an energy efficient home. EIM s (Energy Improvement Mortgages) allow for energy improvements to be made to existing homes so that the monthly energy savings pay for the cost of the energy improvements. RICK NEVINS APPRAISAL JOURNAL ARTICLE 1999 $1 IN ANNUAL ENERGY SAVINGS = $20 TO VALUE
EEM Process 26 Lender offers/ Consumer indicates interest in EEM (purchase or refinance) HERS or similar home rating is ordered indicating work needed Lender completes worksheet to determine amount available to borrower for improvements Work is completed; funds dispersed to contractors The costs are escrowed; loan closes. Borrower selects the Improvements he/she wants to include
EEM/EIM Program 27 1. The Builder constructs home that can meet HERS rating requirements or the rater provides a list of recommended energy efficiency actions. The RESNET website can assist with these details: http://www.natresnet.org/ 2. A Certified Energy Rater rates home, then provides a report with estimated monthly energy savings and the energy value of the energy efficient measures. 3. The Lender uses monthly energy savings as a credit toward borrower income during loan underwriting. In addition, the energy value is added to the appraised value of the home. How this credit is used depends on the loan program.
The Languishing EEM 28 EEMs/EIMs have not been viable mostly because: Lenders, Realtors & Builders have not been aware of the program Those who knew about it simply don t (didn t) care There are not enough certified Raters There is a general perception that the process is too complicated Most folks in the industry don t (didn t) see the value However now with the normalization of lending we are seeing a resurgence of interest in the EEM.
FHA EEM Calculator 29
HUD EEM Worksheet, Cont. 30 Step Two: Adding the Cost of Energy Efficient Items to the Mortgage Amount 1.If the borrower is an acceptable credit risk for the mortgage amount requested before adding the cost of the energy efficient items, complete the EE Premium Worksheet (page 3) for each eligible improvement to determine if the cost of the energy efficient improvements may be added to the mortgage amount. Total EE Premium $2269.75(from Page 3) 2. Installed Cost $1881.25 3. Compare EE Premium $2269.75 to Installed Cost $1881.25
HUD Challenge 31 Recovery Reform Act Section 2902 of the new act requires the Secretary of Housing and Urban Development (HUD) to develop recommendations to eliminate the barriers to the use of EEMs The act also calls for HUD to carry out an education and outreach campaign for consumers, home builders, residential lenders, and other real estate professionals on EEMs and on the benefits of energy efficiency in housing.
FHA EEM/EIM 32 1. Energy improvement help homebuyers or homeowners save money on utility bills 2. Cost of energy improvements and estimate of energy savings must be determined by home energy rating system (HERS ) or energy consultant 3. HERS report & FHA EEM/EIM worksheet calculates dollar $$ amount of cost effective energy package that may be added to base loan.
FHA EEM/EIM 33 1. Cost effective =total cost of the improvements + maintenance < total present value of the energy saved 2. The cost of the energy efficient improvements that may be eligible for financing into the mortgage 3. The appraisal does not need to reflect the value of the energy added package for either new or existing construction. 4. Stretched ratios to 33/45.
HUD Web Site 34
Green Loan? FHA 203K 35 Standard Program No reserves are required (except for 3-4 unit properties) 203K closest thing to a true green loan Financing contributions are allowed up to 6% of the property's sales price toward the buyer's actual closing costs, prepaid expenses, or discount points No minimum credit score (borrower's overall pattern of payment is considered) Non-Occupant co-borrowers are allowed 203(k) loans are assumable DTI generally 31/43% (up to allowed 33/45% with Energy Efficient mortgages) Full/Alt doc
FHA 203K 36 Standard Program, cont. 6 month rehabilitation period (work must begin within 30 days of funding) UFMIP and monthly mortgage insurance are required Premium pricing is allowed Streamline Program 1.5% additional fee on the improvement 35,000 cap on cost of improvements As is appraisal and contractors bid on the work Streamline Up to $35,000 Faster escrow and approval process Purchase and Refinance Great way to go green
VA 37 Energy efficiency improvements up to $3,000 Energy efficiency improvements more than $3,000, up to $6,000 Energy efficiency improvements over $6,000 A VA Certificate of Commitment issued before the decision to make energy efficiency improvements over $6,000 must be returned to VA for a determination that the applicant still qualifies.
Energy Improvements for VA 38 THE CONDITIONS/REQUIREMENTS CHECKED BELOW APPLY TO THIS PROPERTY: Lenders may increase the loan 1. ENERGY CONSERVATION IMPROVEMENTS. You may amount [for] energy efficiency wish Solar to contact or conventional the utility heating/cooling company or a reputable firm for a home improvements energy systems, audit water to identify heaters, insulation, needed weatherstripping/caulking occupied and storm property. Lenders needed may increase energy efficiency the loan amount windows/doors. to allow buyers to make energy efficiency improvements improvements energy efficiency.energy audit improvements to identify to this previously such as: Solar or conventional heating/cooling systems, water heaters, insulation, weather-stripping/caulking and storm windows/doors. Other energy-related improvements may also be considered. The mortgage may be increased by up to $3,000 based solely on documented costs; or up to $6,000 provided the increase in monthly mortgage payment does not exceed the likely reduction in monthly utility costs; or more than $6,000 subject to a value determination by VA.
Rural Housing 39
Fannie Mae 40 Today 15% of value (not supported by appraisal) EEM fee financeable Works within Delegated Underwriting platform Fixed Rates Savings added to income Tomorrow?
News Worthy? 41 On Fannie Mae, from NY Times Fannie Mae [ ] said that by this summer it would unveil incentives for those who use part of their mortgages for energyrelated improvements Amy Bonitanibus, a spokeswoman for Fannie Mae, said the company would introduce a program before the summer offering incentives to borrowers Ms. Bonitanibus declined to disclose details about the program.
Fannie Mae EEM 42 One-unit SFR, Condo and PUDs with qualifying Energy Rating. Owner-occupied primary residence, purchase or rate & term refinance. Used with fixed-rate only programs. Income must be input in the "Other Income" field with a description of Energy Efficient Mortgage No first-time home buyer education requirement, specifically related to EEM, or restrictions on borrower s maximum income Home buyer assistance programs that assist with down payment and closing costs can be used in conjunction with the EEM program.
Energy Report And Addendum 43
Freddie Mac 44 No maximum amount the income to expense ratios may be extended due to energy efficiency Permits the purchase of a property that is to be retrofitted, refurbished or improved with energy efficient components. The cost of the energy efficient improvements may be included in the mortgage delivered to Freddie Mac prior to completion of the improvements. Energy efficient items should be noted on the appraisal in the comments section and included in the value as appropriate for the property and location.
45 PACE (Property Assessed Clean Energy) System for financing home solar energy systems and energy efficiency improvements Partners with a city or municipality Adds cost of solar systems or improvements onto the homeowner s property tax bill Amortized over twenty years Source: www.solarfinancing.1bog.org
Smart Commute Program 46 The Smart Commute Initiative assumes that borrowers will be more likely to use public transit if their homes are located near it. $200.00 per month where only one borrower's income is used to qualify for the mortgage. $250.00 per month where the income of more than one borrower is used to qualify for the mortgage. Requires that the borrower submit an affidavit Use the GeoCoder on the Fannie website http://www.efanniemae.com This program is not available in all metro areas. The future? Tied with www.walkscore.com
Incentives: Don t they impact value? 47
Education 48 The key to recognizing and accurately valuing energy efficient, sustainable homes lies in educating consumers, real estate brokers, and the appraiser and lending communities. --Dan Weldon, LEED AP, Vice President and Eco-banking Manager, Umpqua Bank (Emphasis added)
Education Is Key 49 GreenLending Specialist GreenValuation Specialist GreenInsurance Specialist GreenRealEstate Specialist Green Specialist: CA, OR, WA, AZ, NV, CO, TX, NY, LA, WI Approved in: WA, OR, CA, NV, AZ, LA, PA, DC, NC
links 50 http://www.hud.gov/offices/hsg/sfh/eem/eem_prog.cfm http://www.energy.gov/applianceselectronics.htm http://www.energystar.gov/ http://www.energystar.gov/index.cfm?c=bldrs_lenders_raters.energy_efficient_mortgage http://www.dsireusa.org/ http://www.natresnet.org/lende http://www.nls.gov/offices/hsg/sfh/203k/faqs203k.cfm http://www.toolbase.org/ http://www1.eere.energy.gov/consumer/tips/windows.html http://hesw1.lbl.gov/input3.taf?f=upgradereport&session_id=1381218 http://money.cnn.com/2010/03/10/real_estate/green_homes_redlight/?hpt=p1#comments
www.goinggreenatthebeach.com 51
Action Items 52 Get Financing Form on all HERS Ratings Get your MLS to Go Green Local Builder Assoc and Realtor Assoc to Help Have your lenders provide information to the appraisers by way of the Underwriter and Appraisal Management Company (AMC) Have your lenders present to you details on EEMs (this will force them to learn about it) Prepare detailed information packages for appraisers Support legislation
Thanks For Your Time 53 This presentation: This concludes The American Institute of Architects Continuing Education Systems Program Dave Porter MIRM, CGP, CGA, CAPS, GLS www.porterworks.com davep@porterworks.com 206 304 8228