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Say you were getting ready to put your home on the market and wanted to make a quick investment to boost the selling price.
Would you be better off buying a granite countertop for your kitchen, or an ultra-efficient furnace that would lower heating bills by hundreds of dollars every year?
The answer in almost every case is going to be the granite countertop.
The reason is that appraisers rarely consider energy use when determining a home’s value. Two homes that are identical except for energy efficiency are likely to be appraised for the same amount.
That makes it difficult for home builders and sellers to recoup the cost of efficiency improvements, even when they would clearly benefit buyers.
A coalition of builders, business groups and efficiency advocates is now lobbying to change federal underwriting guidelines so that energy use becomes a factor.
The legislation would require lenders to consider energy costs as well as the mortgage when determining whether a borrower can afford the monthly payments.
For homes with below-average energy costs, appraisers would be instructed to add the net present value of those savings to the appraised value of the home. Savings would be estimated using a U.S. Department of Energy formula, or calculated in an optional, “qualified, independent” energy audit.
The rules would apply to any loans issued, insured, purchased or securitized by the federal government — about 90 percent of all new loans.
Appraisers are allowed to incorporate energy efficiency into home values, but in practice it rarely happens, says Cliff Majersik, executive director of the Institute for Market Transformation, one of the SAVE Act’s main supporters.
Home appraisers need to churn through a lot of work quickly to make a living, and calculating efficiency is something that normally gets skipped over. Plus, appraisers aren’t trained energy auditors.
When a seller seeks a higher price because of efficiency, the lender’s appraisal often won’t cover that premium, leaving it up to the buyer to come up with the difference in cash.
“That’s a real problem” for buyers, who often can’t afford the extra down payment, says Majersik. And for builders and sellers, it creates a disincentive.
“They don’t want to invest in energy efficiency in their homes because they’re worried when they go to sell it they won’t recoup that investment,” he says.
The SAVE Act aims to eliminate that problem. Builders and sellers could be assured that the value of efficiency would be reflected in appraisals, and buyers will be more easily able to qualify for loans.
Jim Petersen, research and development director for Michigan-based Pulte Homes, the nation’s largest home builder by sales, says the SAVE Act could help resolve some of the opposition among builders to energy code updates.
“As the energy codes increase, new homes are on an unlevel playing field with existing homes,” says Petersen. “We have to put in better furnaces, better windows, better insulations, etc., etc., but the current mortgage process gives no value for all of those items.”
Energy code updates have added costs for builders, but it’s a tough sell for builders to convince buyers or their lenders that the added efficiency justifies the higher price, which is why the SAVE Act is needed, says Petersen.
The law would also allow existing home owners to pay for energy projects through refinancing, making it a potential alternative to property assessed clean energy, or PACE, financing in some cases, says Majersik.
The Institute for Market Transformation and the American Council for an Energy Efficient Economy (ACEEE) estimate the act would create 83,000 jobs and $1.1 billion in energy bill savings by 2020.
Other supporters of the legislation include the U.S. Chamber of Commerce, the Leading Builders of America, the Appraisal Institute, and the U.S. Green Building Council.