Rick and Joann Sandoval live in a green Ferrari – a souped-up, high-performance home loaded with energy-sipping systems and green-home features. But when it came time to refinance their house and capture value from those items, the Sandovals were going nowhere fast.
Rick works for a green-home builder, and he got a lot of the work on the house at cost. The Sandovals took out a $510,000 construction loan last year to pay for the place, at 4-1/2 percent interest. Early this year, Vectra Bank dispatched an appraiser to re-appraise the property, and that re-appraisal came in at a disappointing $535,000, well below what the Sandovals felt the house was worth.
The Sandovals are hardly real estate newbies, with 40 years’ combined work experience in construction and title insurance between them. They came to us for help in May 2013, and we used a common but under-used tool called a HERS rating to capture a significant bump in their appraisal value.
HERS ratings, “Home Energy Rating Scores,” assign a nifty “miles-per-gallon” number to homes where a “100” is built to code, and lower numbers are better – like in golf. More importantly, HERS ratings measure the energy a home saves, and assign a projected energy cost for the property and savings, holding the house up against comparable ones.
In June, I spent the better part of a day performing a HERS rating in the Sandovals’ 3,600-square-foot home in the hot Berkeley neighborhood of north Denver. The house has everything you’d expect with features the Sandovals love – big, open-concept living areas, beautiful finishes, great location and high-end appliances. Including a monthly solar panel lease payment of $40, their total utility bills are about $90 per month, and this with kids and extended family in and out a LOT.
When I was there, I measured insulation levels, appliance and light efficiencies, windows and overhang depths, and how much air the house leaks. I factored also factored electric output from the solar panels. I spent hours in the office generating the report, and BOOM! – the HERS number came in at an impressive 44. That means that the house uses 56 percent less energy than a code-built home, and even less than most of the houses in their neighborhood.
The rating also showed $2,572 in annual energy savings, resulting in a 20-year savings of $51,440 That is flat, “today’s value” calculation – no fancy stuff like future value of money or fuel escalators thrown in (rising fuel costs over time). Money today. HERS ratings are hard-coded into federal mortgage underwriting guidelines, and that figure can be used to impact the value of a home similar to how energy costs impact commercial property values.
ALL THAT GLITTERS IS NOT GREEN
My partner and the managing broker of our real estate company, Tracye Herrington, met the second appraiser at the house, and walked him through the documentation. He was not a trained and tested “green” appraiser, and his appraisal came in at an underwhelming $580,000.
When we dissected the second appraisal, the appraiser had listed comparable “green” homes, but there was nothing in those homes’ for-sale listings that even mentioned “green” or “energy-efficient” features. Tracye called the three listing agents for the properties, and nope – there wasn’t a green feature in any of them. The appraiser had identified a fourth property (worth $450,000) as green and added a HERS bump for its features similar to the Sandovals’, and that lower number dragged the Sandovals’ appraisal figure down.
We felt the documented value of similar properties alone should’ve lifted the Sandovals’ value to $600,000, and the HERS savings another $50,000. So Tracye appealed to Vectra Bank’s appraisal and underwriting committee, and the bankers agreed that the second appraisal didn’t accurately reflect comparable properties. They adjusted the value on the final appraisal $50,000 up per the HERS rating, resulting in a final valuation of $650,000.
“The appraisal was changed because the bank had never seen that input [HERS calculation], and they’d been in the business 25 years. The bank underwriter appraisal review recognized absolutely that that was not correct,” Rick says of the second appraisal. “When the bank committee audited the appraisal, they changed it based on that input.”
Rick says that to get the results he and Joann got, you have to surround yourself with people skilled in the nuances of both real estate and energy valuation. “Having the right experts in products, financing, real estate advising and energy efficiency adds value when you need that representation. If you don’t have them, you don’t get the value.”
- Melissa Baldridge
We have a “Green Valuation Service” to help homeowners and real estate professionals snap together the pieces for higher property valuation with green, energy-efficient features. CONTACT US TODAY for details.
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 Twenty (20) years is considered the life of the energy-efficiency improvements and upgrades to the house.
 In 1995, the Mortgage Bankers’ Association and several state energy offices developed the HERS rating for these purposes – to standardize energy cost predictions. Around 2002, the Federal National Mortgage Association (“Fannie Mae”) and RESNET (Residential Energy Services Network, the overseeing body for HERS ratings) developed a form for an energy savings calculation and a present value calculation.