Unlocking the Added Value of Zero that Hides in Plain Sight

Most buyers and sellers in the housing market will agree that a high level of energy performance makes homes more comfortable. And after some investigation, most would accept these homes as being healthier, too. Most would admit that these homes cost less to own and might see them as a good long-term financial investment. There is a growing awareness that energy-saving features pay for themselves when the proper financing is available. Unfortunately, there are two closely related obstacles to the widespread adoption of energy efficient homes including zero energy and positive energy homes – the real estate appraisal and lending practices.

The appraisal industry stubbornly clings to notions of value and uses appraisal methods that lead to a widely-adopted false narrative: high-performance homes have no greater value than similar sized run-of-the-mill homes. Despite a series of research reports supporting the extra market value, appraisers in the field find excuses to ignore a huge source of value.

A new report adds to the weight of the evidence for higher valuations. Freddie Mac recently published Energy Efficiency: Value Added to Properties and Loan Performance. The study compared conventional homes to those that had received energy efficiency ratings, such as a HERS Index, and reaches these conclusions:

  • From the property value analysis, rated homes are sold for, on average, 2.7% more than comparable unrated homes.
  • Better-rated homes are sold for 3-5% more than lesser-rated homes.
  • Once borrower and underwriting characteristics are considered, loans in the high debt-to-income (DTI) bucket (45% and above) that have ratings appear to have a lower delinquency rate than unrated homes.

These findings support the conclusions of the earlier studies. Energy-efficient homes sell for more than conventional homes. The occupants of energy-efficient homes have lower operational expenses leading to more discretionary income. Energy-efficient homes have higher collateral value and impose less financial stress on their owners. These findings should justify consideration in the underwriting process.

Lenders gain something from energy efficient homes, too. These loans are more stable and profitable. A huge study of 71,000 mortgages in 2013 demonstrated that borrowers living in energy efficient homes are 32% less likely to default on their mortgages. It would seem that lenders would find additional value in these mortgages for two reasons. First, mortgage default is a substantial loss of ongoing revenue. Second, higher quality loans should have greater value in the secondary market and should bring a higher price when loans are bundled into securities. With hundreds of thousands of certified energy efficient homes already in the market, it’s surprising that smart investors haven’t already found a way to filter these higher value properties into higher value investment instruments. What would stop someone from assembling an ENERGY STAR tranche or a zero energy tranche. The same principles are also at work in the commercial real estate sector. Lower operating costs and greater financial stability translate into higher market value, shifting the perception of energy efficiency from that of a side benefit to an important business advantage that affects the bottom line.

In many ways, efficient homes and businesses have been flying under the radar. Multiple listing services (MLSs) and appraisal databases often don’t have a systematic way of capturing energy-saving features, ratings, or certifications. If data fields exist, they are unreliable because energy ratings and certifications are missing or erroneous. Some cities are addressing this issue by creating mandatory energy ratings. For example, Portland, Oregon’s Home Energy Score report is required for each home at the time of sale and the rating value is automatically entered into the home’s MLS listing. Several other cities in the US, such as Austin, Texas have developed energy disclosure policies, too.

While waiting for cities to take action and for the lending industry to catch up, homeowners and business owners, and their real estate agents, can take the lead by making sure the value of the energy saving features of their buildings being sold is properly appraised. There are now appraisers trained in valuing energy efficient features who can more accurately appraise the value of an energy efficient home or building. Ask your lender if they have an appraiser on their list who is qualified to evaluate energy efficient buildings. If you cannot locate one, be sure to document the energy saving features and equipment in the energy efficiency appraisal addendum and be sure that it is added to the appraiser’s report.While there is ample reason to acknowledge that everyone wins with zero energy homes, there is a persistent myth in the housing industry that high-performance homes aren’t worth more in the market. It’s clear that the added value is there, the lending and appraisal industries just aren’t looking. In the meantime, you and your real estate agent can do a lot to make sure that the energy efficiency benefits are added to the value of your building.

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