In this issue... Real Estate Valuation of Sustainable Homes
The Eden Project, designed and built by Ezra Builders, is a local high performance home with Net Zero Energy Ready certification
The next three Sustainable Building Program newsletters will focus on financial aspects of sustainable building. We will be looking at affordability strategies for building sustainably, consider the return on investment (ROI) of installing sustainable features, and in this edition, will look at the valuation of sustainable properties by the real estate market.
The Sustainable Building Program recently began an initiative to promote higher valuation of high performance and sustainable buildings within the local real estate market. We have been hearing from some contractors who are certifying their projects through the Program that the added investment in building high performance homes is not being reflected in appraisal values. We have been exploring this issue and potential opportunities for facilitating movement in the local real estate market toward higher price premiums for homes that provide greater resource efficiency, comfort and health benefits to their occupants.
National Research-
If you've bought or sold a home, you know that price is not based on the cost of building the home with an additional percentage for profit. Instead, home prices are based on demand- essentially what prospective buyers are willing to pay. At the national level, there is growing evidence that a
preference forgreenerhomes is adding to the value of high performance and sustainable homes. A 2018 study of homes in Northern California showed that homes with a green label sold on average 2.19% higher in price than similar homes without a green label. Studies in other locations showed similar results: a 2015 study in Washington D.C. recorded a 3.46% price premium for green certifications and a 2017 study in Austin Texas showed results of a 6% increase. As these are averages, and the types of certification and particular sustainable features of the homes varied, it is not possible to determine how closely the added investment in sustainable features came to paying for itself at the time of sale. The study did note, however, that if market barriers to valuation of green improvements were removed, return on investment could be much higher.
Barriers to Appropriate Valuation
Comps-
One of the difficulties in appraising the value of a sustainable home is the shortage of comparable properties, or "comps" that are typically used in the valuation process. Appraisers use homes that are similar in size, condition and location that have sold recently to determine the price buyers are willing to pay for a particular property. Due to the risk-averse nature of the lending
industry, the values they use are necessarilyconservative. If there are no other homes with similar sustainable features, such as Energy Star-certification or strawbale construction, that have sold recently and can be used as comps, it becomes more difficult to justify a higher price for those features as it is unknown if buyers will actually pay more for them.
Even home size can be an issue, making appraisal difficult if information on other comparable small houses can't be found. (Photo: Baderville Small House designed and built by Green Mountain Construction)
Green Information Not Captured in MLS-
In the California study referenced above, the author searched five Multiple Listing Services (MLS) in Northern California for homes with green certifications. Three of the listing services had no data resulting from these queries, so only the other two listings were used. The author noted that Multiple Listing Services often do not have fields for identifying green certifications or features of a property, and when they do, the fields are often either unused or used improperly. The Northern Arizona MLS also does not currently have either of these fields. If green certifications and features are not captured in the MLS they are essentially invisible to the market- realtors and homeowners don't even know the home has the features so can't consider their value.
Photo: Venmar Energy Recovery Ventilator controller at the Aspen House project, designed by Architectural Design Studio and built by Good Oak Construction. Mechanical ventilation and thorough air sealing have been found to reduce asthma incidence in those living in high performance homes.
Monetizing Intangibles- Another difficulty with appropriately valuing high performance homes is how to put a monetary value on intangibles such as increased comfort and health. How much are people willing to pay for a more comfortable and healthy environment? Research has been done on the effect of thermal comfort, daylighting and healthy ventilation on productivity in commercial buildings and the results show significant cost benefits to businesses. Residential impacts are harder to quantify, though researchers are seeking to do so. For that research to be used in justifying higher appraisals is yet another step in the process.
Lack of Understanding and Ability to Communicate Green Features-
Sustainable features have not been commonplace in the housing market for long, so many realtors and appraisers are not aware of the difference these features can make to utility bills, comfort and health. In order for sustainable features to be recognized by the market, their benefits must be understood and communicated to potential buyers. It is a bit of a chicken-and-egg problem; when there are few homes with sustainable features, there is little need to become familiar with them, and when real estate professionals are not familiar with them there is less marketing of the features, lower valuation and thus less incentive to build more.
The Lucky Dragons Ranch, designed by Solar Design and Construction and being built by the owners.
Passive Solar House on Ash, Designed by LightVox Studio and built by Jirsa Construction
Sustainability Comes in Different Shapes and Sizes-
The wide variety of approaches to sustainable building also presents a challenge to the fair assessment of value. If homes have no energy rating (see below), it is hard to know how a sustainable feature or method will impact energy efficiency (and utility bills). Projects that have been certified by the Sustainable Building Program include natural building approaches like strawbale, adobe and passive solar design, as well as others that have implemented building science principles, newer technologies and energy modeling to achieve efficiency goals. Many projects use a combination of approaches and features. Without standardization, it is more difficult for real estate professionals to assess the impact these alternative approaches have on efficiency.
Flagstaff Real Estate Issues- The Flagstaff housing market presents unique challenges in the fair valuation of sustainable and high performance homes. Home prices have been climbing steadily in recent years and most available properties are beyond attainment for many middle class families. With this added financial pressure, it is even more difficult to market homes with features that increase the cost.
The size of the community is also an issue. The Phoenix metropolitan area has numerous communities that have production-built Energy Star and Net Zero Energy Ready Home subdivisions and custom homes with third-party green certifications. Because there are larger numbers of these homes, there is a network in place of real estate professionals that are specialized in and have certifications in green real estate.
Impact on Green Home Construction-
Increased valuation of high performance and sustainable homes at the time of sale is an important factor in incentivizing contractors to build more of this type of home. This is of particular importance in the construction of spec homes that are built without a particular buyer in mind and
are therefore subject exclusively to market forces. Lower valuation is also a problem for financing homes with these kinds of features. If appraisers use standard homes as comparables, those who want to finance the building of a high performance home may have difficulty obtaining the increased amount necessary for the upgrades.
Opportunities for Removing Market Barriers
HERS Rating- The Home Energy Rating System (HERS) is a nationally recognized scoring system for measuring a home's energy performance. Like a miles per gallon sticker on a car, it gives an indication of the energy efficiency of a home. HERS ratings are done by certified Residential Energy Services Network (RESNET) raters who perform an energy analysis of the home that includes review of construction plans, onsite inspections and performance testing. The rating uses a standard home, built to the 2006 International Residential Code specifications, as a reference and compares the anticipated energy use of the home being analyzed to it. The reference home is given a 100 rating, and the numerical rating for the home being rated is the anticipated percentage of the reference home's projected energy use. For example, a home with a rating of 55 is anticipated to use 55% of the energy the reference home is expected to.
The HERS score is a useful tool in marketing efficient homes, because it can be used to compare the energy efficiency of different homes on the market. When home buyers are equipped with this information they can see that a home with a lower HERS score will save them money on their utility bills and will be willing to pay more for it.
The following graphic provided by Ezra Builders LLC shows the relative HERS ratings of the HERS standard home, a typical home in Flagstaff, homes built to the 2009 and 2012 codes and homes with different third-party certifications.
E3 Energy LLC is the local RESNET qualified HERS provider.
Third Party Certifications-
Third-party certifications are another tool that home buyers and real estate professionals can use to identify homes that have been built for energy and water efficiency as well as improved indoor air quality. Certification by a third party assures home buyers that they are getting what they are paying for and not being "greenwashed" by contractors claiming to provide sustainable features but not delivering. There are national certifications like LEED, Energy Star, Zero Energy Ready Home, Indoor airPLUS and others. There are also many regional certifications across the country like those performed by Scottsdale's Green Building Program and the Coconino County Sustainable Building Program.
Greening the MLS-
As was mentioned in the California study, green features of homes are often invisible in the real estate market because information about them is not captured and communicated. The Multiple Listing Service is a great tool for this communication when it is configured to capture this information and is used by knowledgeable professionals. Multiple Listing Services are regional, and the inclusion of green fields in them is variable. The website Greening the MLS offers a toolkit for the process of bringing green certifications like LEED, Energy Star and Zero Energy Ready Homes into a regional MLS as well as fields for including information on specific high performance or sustainable features.
Appraiser Competence-
The Uniform Standards of Professional Appraisal Practice's Competency Rule states that "an appraiser must: 1) be competent to perform the assignment; 2) acquire the necessary competency to perform the assignment; or 3) decline or withdraw from the assignment." This rule can be used by realtors, builders and home owners to require that an appraiser sent to appraise a sustainable or high performance home understands the features of the home and is able to value them fairly. Appraisers are often chosen randomly by lenders when mortgage financing is sought to ensure their impartiality. This often results in appraisers who do not have proper qualifications for appraising a sustainable building. Jan Green, a NAR Green designee, in a recent presentation about marketing sustainable homes, recommended that realtors turn away appraisers who are not competent to perform the appraisal. The Appraisal Institute, the international organization for appraisers, doesn't offer a green certification, but they do have a registry of appraisers who have completed and passed the exams for their Valuation of Sustainable Buildings Professional Development Program. The Appraisal Institute has also created this tip sheet for sustainable home owners and builders to help them navigate the process to obtain the qualified appraisers they need. It includes a letter to fill out and give lenders to help them understand the nature of the home that is being purchased.
Realtor Certification-
As the sustainable and high performance market expands, the demand for realtors that understand sustainable features and can champion them to home buyers and sellers to bring in higher valuations will be in demand. There are several certification programs for green real estate professionals. The most common is the National Association of Realtors (NAR) Green Designation as it is the only designation recognized by NAR. Green designation requires completion of a two-day course on resource-efficient homes and their sale as well as passing the exam. Another program is EcoBroker, the first designation of its kind.
Appraisal Institute Residential Green and Energy Efficient Addendum-
A tool for capturing green and resource efficiency features of a home at the time of sale and sharing them with the financing institution is this addendum that can be included in the appraisal report. The addendum includes sections on: green certifications, energy labeling (such as HERS ratings) with corresponding estimated energy savings, verified energy improvements and specific sustainable features such as insulation, Energy Star appliances, information on renewable energy systems, as well as a section on location including proximity to public transportation and walking score. As this is a form generated by the international association for appraisers, it is a national standard that if utilized more often will become a shared language for communicating sustainable features. At present, we have heard that even when an appraiser takes the time to submit these, they can be rejected by underwriters for loans. This may be due to lack of understanding of the loan underwriters and originators, another hurdle to surmount.
More Informed Buyers-
In a recent presentation, Sam Raskin of the Department of Energy's Net Zero Energy Ready Home Program made the case that the market is ready for these type of homes now, due to an increase in the number of informed buyers. He attributes the increase in buyer awareness to technological
advances that give home buyers new tools for learning about the health, comfort and efficiency of homes on the market. These new technologies include:
thermal imaging that allows home buyers to see insulation defects, thermal bridging, water damage, and other sources of heat loss
home environment monitors that monitor temperature, humidity and other parameters
air quality monitoring
websites like Houzz that allow new home buyers to rate contractors based on their experience in their new home
CCSBP Real Estate Initiative-
The Sustainable Building Program has begun an initiative to work on this important issue. We have identified the following aspects to focus on:
Educational opportunities for real estate professionals
Greening the MLS
Utilizing the county permitting system and GIS capabilities to make it easier for real estate professionals to find comps
Continuing educational opportunities for the community to inform future home buyers
Stay tuned for information on upcoming events related to our initiative!
Announcements
Free Strawbale Workshop
Saturday, June 23rd
9 am - about 3 pm
Participants will learn about straw bale construction through a hands-on experience and presentation by Ed Dunn who has been designing and building since 1992.
Participants should bring gloves, wear work clothes, including a heavy long sleeve shirt. Bring a dust mask if you are sensitive to dust.
Lunch and drinking water will be provided.
The workshop will be at Judith Chaddock’s home:
9580 E Ciervo Trail
Flagstaff AZ
Children 10 and older are welcome. Dogs are not allowed.
May 6-October 21 8am-noon
211 W Aspen Ave
City Hall Parking Lot
June Coffee and Climate
June 16th, 9 am - 11 am
White Dove Coffee, 2211 E. 7th Ave.
Want to talk to City staff about climate change in Flagstaff or the upcoming Climate Plan? Stop by our coffee and climate sessions and bring any questions you have.
Coffee and climate is held in the second week of every month. We will visit a different Flagstaff coffee shop each month.
Coconino Master Gardener Association
Plant Sale & Festival
June 16th, 9 am - 12 pm
Fort Tuthill County Park
Free admission
Get your garden growing with locally adapted plants and seeds, along with tips and tricks from Master Gardeners. Come discover and take home the plants Master Gardeners rely on to keep their yards blooming and their vegetable beds producing. Suited for gardeners of all ages and stages. Kids will enjoy hands-on garden activities while adults shop or attend free workshops and demonstrations. Revive your old garden tools at the Fix-It Clinic and get your clippers sharpened by an onsite tool sharpener.
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