GREEN: WHAT YOUR LENDER AND APPRAISER NEED TO KNOW About Your Presenter 30 years of Real Estate and Banking Experience Speaker, Writer & Course Developer Bachelor of Arts in Education Holds Five designations from NAHB Serves on the NAHB Built Green Subcommittee Serves on the NAR Green Advisory Group Board Member of the Sustainability Foundation Developer and Visionary of Going Green at the Beach Learning Objectives 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 appraising green buildings Define appraiser competency Outline key differences of EIMs and EEMs List key points for different EEMs: VA, FHA, CONV Establish your action items Dave Porter, PorterWorks, Inc. Quick Check-In We know this but Does an Appraiser know it? Or This? 4 Who s Here? Have you (or your clients) ever been offered an EEM/EIM? Has an appraiser ever asked for more details about energy efficient improvements or green features? 5 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 6 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% 1
Appraiser Competency Ignorance is Not Bliss 8 9 What is seen? What is missed? 170 sq. inches of hole exist between the garage and home! 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 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 Source: Fannie Mae Seller Servicer Guide 7 NW Energy Star Homes AMC s & Underwriters Residential Energy Report Form The 1004 Today 10 11 12 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 Inadequate Source: Fannie Mae 2
Filling in the Gaps Cost Premium Statistics Sales Comparison Approach 13 14 15 Cost premium of green retrofit project relative to a conventional (non-green) retrofit project 25% 37% 38% 5-10% 1-5% Over 10% 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? Source: EPA Source: Delloitte and Lockwood, Dollars and Sense of Green Retrofitting Marshall & Swift Example Cost Guide We Want The BOX!!! 16 17 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 Marshall & Swift Green Cost Guide Brief tutorial on green building New and Retrofit Line item adjustments Recently added 1500 items to the green cost guide Add these to the data fields on the 1004 From Energy Star Certified Home (this is the EPA program) NGBS Built Green; Level (this is the NAHB research center program) LEED; Level (this is the USGBC program) Date of certification: 3 rd Party verified YES NO Documentation attached: YES NO Home Performance score: Type of score: Score: (could be HERS index but might be another scoring tool like EPS energy performance score) Source: Marshall & Swift 3
B4-1.4-13, Appraisal Report Review Green Light Red Light Guarantees: How do you value? 19 Insulation and Energy Efficiency of the Improvements (04/01/2009) Special energy-saving items must be recognized in the appraisal process. The nature of these items and their contribution to value will vary throughout the country because of climactic conditions and differences in utility costs. Appraisers must compare energy-efficient features of the subject property to those of comparable properties in the sales comparison analysis grid to ensure that the overall contribution of these items is reflected in the market value of the subject property. 20 21 The Energy Cost Savings Guarantee is backed by Bayer Material Science. Could/should know the difference? Rethinking Lending - PITIUM 22 24 Induction Stove Tops Grid-tied appliances Photos Compliments: Whirlpool Source: FNMA 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 Institute of Market Transformation 4
25 EEM Programs FHA VA Rural Housing Fannie Mae Freddie Mac 203K closest thing to a true green loan DEMAND THESE PROGRAMS ARE OFFERED DEMAND LENDERS TO KNOW THESE PROGRAMS 26 EEM s & EIM s 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 27 EEM Process Lender offers/ Consumer indicates interest in EEM (purchase or refinance) Work is completed; funds dispersed to contractors HERS or similar home rating is ordered indicating work needed The costs are escrowed; loan closes. Lender completes worksheet to determine amount available to borrower for improvements Borrower selects the Improvements he/she wants to include The Languishing EEM HUD EEM Worksheet, Cont. HUD Challenge 28 29 30 EEMs/EIMs have not been viable mostly because: Lenders, Realtors & Builders are not been aware Those who knew about it simply don t (didn t) care There is a general perception that the process is too complicated Most folks in the industry didn t see the value 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 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. 5
FHA EEM/EIM FHA EEM/EIM HUD Web Site 31 32 33 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. 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. 34 Green Loan? FHA 203K 35 FHA 203K Great way to go green 36 VA Standard Program No reserves are required (except for 3-4 unit properties) 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 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 Any energy efficiency improvement(s) up to $3,000 Energy efficiency improvements more than $3,000, up to $6,000, with cost justification Energy efficiency improvements over $6,000 with cost and value justification 6
Energy Improvements for VA Rural Housing Fannie Mae 37 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 energy efficiency.energy audit improvements to identify to this previously amount windows/doors. to allow buyers to make energy efficiency improvements improvements 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. 38 39 Today 15% of value (not supported by appraisal) EEM fee financeable Works within Delegated Underwriting platform Fixed Rates Savings added to income Tomorrow? Program Details Energy Report And Addendum 40 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. 41 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. 42 7
HOMESTYLE APPROVAL FORM Freddie 44 Mac And in a Flash. 45 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 retro- fitted, 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. 46 PACE (Property Assessed Clean Energy) 47 SAVE Act 48 Smart Commute Program 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 The SAVE (Sensible Accounting to Value Energy) Act, a new proposal supported by energy efficiency advocates and leading U.S. homebuilders, seeks to correct this blind spot in mortgage underwriting and home appraisal. Championed by Sen. Michael Bennet (D-Colo.) The SAVE Act would require federal loan agencies to assess the expected energy costs for mortgage loan applicants. 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 Source: www.solarfinancing.1bog.org http://files.eesi.org/save_act.pdf 8
SmartCommute 07/05 Taking SmartCommute 49 Sacramento, California Denver, Colorado Delaware (state wide) District of Columbia Miami, Florida Illinois (3 counties) Indiana (2 counties) Iowa (1 county) Louisville, Kentucky Duluth & Minneapolis, Minnesota Baltimore & Wash metro, Maryland New Jersey (statewide) Buffalo, Niagara, Rochester, New York Chapel Hill & Charlotte, North Carolina Fargo, North Dakota Portland, Oregon Philadelphia, Pittsburg & State College, Pennsylvania Nashville, Tennessee El Paso, Fort Worth, Houston, Plano & San Antonio, Texas Salt Lake City & Logan, Utah Fairfax, Manassas & Washington Metro, Virginia Green Bay, Madison and Milwaukee Wisconsin 50 51 Taking Smart Commute out for a Test Drive 52 The Green MLS Tool Kit 53 Foundation Work: MISMO 54 Incentives: Don t they impact value? www.greenthemls.org The leading technology standards development body for the residential and commercial real estate finance industries. Dave, The work group has agreed to add a container in improvement which will capture the basic elements of a certification program using the elements that you have suggested. This information would be included in our upcoming version 3.1 release. Copyright PorterWorks, Inc. 2009 9
Education Education Is Key links 55 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) 56 GreenLending Specialist GreenValuation Specialist GreenInsurance Specialist 57 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_mor tgage 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 58 www.goinggreenatthebeach.com 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 60 Action Items Get your MLS to Go Green Local Builder Assoc and Realtor Assoc to Help Have your lenders provide information to the appraisers 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 Demand accountability 10
Thanks For Your Time 61 Dave Porter GREEN, MIRM, CGP, CGA, CAPS, GLS www.porterworks.com davep@porterworks.com 206 304 8228 11