I have a customer who is pre-approved for a $400,000 new home. We have the land and a design that fits my customer’s budget. But the bank’s appraiser says that if we build it as designed (passive solar with solar hot water, radiant floor, spray foam in the roof, high-performance windows and insulation), they won’t appraise it for the cost of construction, and the owners will need to come up with a bigger down payment. They don’t have the cash, so we’ll have to eliminate the solar and spray foam so that they can get the loan.
What’s going on here?
Appraising is an actuarial science and a lousy business. For a $300 to $400 fee, an appraiser chosen at random from an appraisal referral service must find other recent resales in a similar location with similar size and features, called “comps,” and draw a defensible conclusion as to the value of the subject property. If the bank’s underwriter in another state finds any inconsistency in the report, they will “kick it back” and make the appraiser correct it at no charge. Only resales can be used as comps; all custom homes are excluded from the MLS database because they “don’t reflect true arm’s length valuation,” in that we rascally green builders can con our poor customers into investing in unproven technologies like solar that might not hold value in the resale market.
So, solar is valued at 50 cents on the dollar, as is spray foam. And if my $400,000 price includes $8,000 for solar and $4,000 for spray foam, the house will appraise for $394,000 and the buyers will need to add $6,000 to their down payment. They’re still pre-qualified for $400,000, so they can add in a Jacuzzi or a home theater if they want, but they can’t have the solar or spray foam unless they can come up with more cash.
Part of the problem is that the appraisers get their data from an MLS that doesn’t necessarily show them what green features are included in the homes that have been sold. Another part of the problem is that most of the homes that have high-performance green features are built as customs on the owner’s land, and these sales are excluded from the MLS. We need a green-enabled MLS and we need a way to get custom home sales included in the appraisal database.
The Lakesideca Council of our local HBA has been sending speakers to educate Realtors, appraisers, and bankers about green building for quite a while now. It’s a tough crowd, too. But we’ve managed to get a group of the most receptive of them together, and we’ve created a “Green MLS” and implemented it. (Marsha Burger and Michele Myers deserve medals for this.) So now, when homes with green features and certifications are listed in the MLS, those features can be promoted, their effect on the resale price can be noted, and value trends may support lending for green building. The bigger problem of systematically gathering custom home cost data and incorporating it into the MLS for valuation purposes seems much farther away.
NPR recently reported on being done in Portland, Seattle, California, and New Mexico. We need to take this national. The work of our group is attached to this post; steal it, repeat it, make it better, find a way to get custom homes included. Or we can just keep building and remodeling green for the folks who can afford the big down payments.