Green Building - How Can We Know Value?

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Editor’s Note: Are the early adopters to green acting out of principle or business savvy- or a little of both?

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Green Building – How Can We Know Value?
by Fiona Douglas-Hamilton

I entered the world of green building initially not out of principle but out of necessity.

I had been involved in construction, both commercial and residential, since my early twenties and by my early forties my health was in miserable shape. Within moments of entering a home to set up our equipment (I owned a small finishing company at the time), my eyes would be tearing and for the entire time that I was at there, I would be continually sneezing and coughing.

Despite the fact that I consider myself to be an intelligent woman, it took me a while to put two and two together. My conclusion: the house, or rather some invisible element of the house, was making me sick. This started my research and my discovery of ‘green’ issues; of terms such as ‘volatile organic compounds (VOCs),’ ‘formaldehyde,’ ‘best construction practices.’

I also learned that since the 1950s, of the 80,000 plus chemicals introduced into the “built environment” (including furnishings), fewer than five percent have ever received any toxicity testing/rating. Incidentally, of the five percent tested, all were found to be carcinogenic. These are sobering findings.

About six months later, I found myself sitting in an office, now a partner in a design-build custom home firm, presenting to my partners why we should change our practices to become a green builder: that was 2005. Along the way, I understood why green is considered more expensive. In the beginning I said the same due to simple facts: we could buy a gallon of regular primer for nine dollars but a gallon of no-VOC primer was $30. We had to special order no-VOC caulk and a ground source heat pump, which ran our clients around $25,000 installed. Everything on the green certification checklist represented an upgrade, and as every contractor can tell you, upgrades cost more money.

Yet, we had clients who happily paid the extra because green is their lifestyle choice/principle, and in many cases, their necessity due to extreme chemical sensitivities. Then, I was introduced to a green architect who changed my perspective forever on green costing more. She asked whether we were doing integrated design charrettes. I swallowed my pride and admitted I was unfamiliar with the term/concept. And here lies the paradigm shift that every newbie green builder must face: simply greening-up existing practices will not cut it in the long run; you will price yourself out of the market or be limited to seeking wealthier clients. So what is an integrated design charrette?

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An integrated design charrette is a meeting of the client, contractor, architect/designer, major sub-contractors and engineer with a goal of maximizing the environmental performance of the project. My first charrette was a revelation. We eliminated inefficiencies, reducing the square footage of the project while increasing its environmental performance. I witnessed “systems thinking” at work. Here are a couple of examples:

1) by bringing the heating system within the conditioned space, we not only cut down on runs (i.e. less material and labor), but improved the design and delivery of the HVAC system.

2) Related to this, we moved to open web truss joists and realized further savings in labor costs from the electrician and plumber (who no longer had to factor in drilling through joists and beams that weren’t meant to be there).

3) Best construction practices are based in building science with a focus on “building tight and ventilating right,” while providing supplemental heating/cooling needs with relatively inexpensive systems such as ductless heat pumps. We went on to produce better-built, highly resource-efficient, more comfortable homes for about the same (+2-5%) as our competitors. It gave us the edge.

Value Connection
In early 2008 I was forced into retiring from the world of construction due to a worsening health condition. My passion for education led me to found SEEC LLC (Social, Environmental & Economic Consulting) in late 2008, once my health was fully recovered. SEEC concentrates on bringing green building continuing education and market value transformation initiatives to the real estate industry. Our work started initially in the Pacific Northwest but is now spreading as organizations in other states begin addressing the issues around the real estate transaction process for green buildings.

Since 2009, over 900 appraisers and brokers have taken our live and online green continuing education courses. When I have presented the simple facts on population growth, trends and resources, few if any attendees ever argue about the necessity for green building, understanding it is the logical response to the facts, and that these homes are built to best construction practices.

We have conducted green valuation roundtables (yes the charrette in a different guise) in major cities in Washington, Oregon, Idaho, and New Mexico, bringing together representatives from the real estate sales, valuation, lending, certification programs, verifiers, builders/developers and utilities, assisting local communities to identify the issues they face in getting green buildings successfully through the real estate transaction process. What do I mean by this? Builders need to understand how to become effective deliverers of green homes; brokers need to understand the benefits- in particular the health, safety and comfort benefits of what they are selling; lenders/AMCs need to be aware of the property type to assign an appraiser competent in this area; underwriters need to understand that a green home can benefit the buyer/borrower with utilities and maintenance savings; certification programs need to do a better job at publishing market share data; verifiers need to publish the energy performance scores and appraisers must be able to identify the property to determine market reaction.

Highlighting Green Data
The Multiple Listing Services (MLS) are the main gateways for moving past the current invisibility of green buildings and identifying a building’s energy performance, while at the same time providing consumers with information to make an informed choice and appraisers with much needed sales data. Despite a national initiative called The Green MLS Toolkit, some MLS’ have misgivings about providing green input fields due to a concern with a lack of broker education on “green” (read fear of liability here). Yet there are a number of professional resources available to assist them (in most instances free or voluntary) and some simple precautions they can take as they test the market.

One of these precautions should be the requirement for supporting documentation (i.e. the verified checklist or signed test report) when key fields such as a green certification, or an energy performance score are checked. In addition, the most important ingredient for a successful transition to green input fields is for an MLS to work closely with a professional group who can act as a technical resource, not only for accuracy but to inform forms committees of the value proposition of each of the features being considered. The green MLS initiative in Colorado is a fine example of this, as is SEEC’s work with MLSs in the Pacific North West (PNW), including but not limited to the Northwest Multiple Listing Service (NWMLS) and the Regional Multiple Listing Service (RMLS).

Green Data for Appraisers
So outside of sales comparison data, what other types of green data are available to appraisers? There are several other forms that every appraiser and broker should be using when working with these property types. The first is the Appraisal Institute’s Residential Green and Energy Efficient Addendum that can be used to aggregate the information on all the installed green features/systems. Although the addendum should not replace the verified checklist but act as another level of support.

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OREP Appraiser E&O Insurance

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Second, there is NEEA’s (Northwest Energy Efficiency Alliance) and SEEC’s Cost Data Addendum for High Performance Homes V.2, that is completed by the builder/verifier, to provide incremental cost data along with estimated water and energy savings to take a code-built home to a high performance home. Recently launched in the Pacific North West, the gathering of local incremental cost and savings data is expected to be a significant data source for appraisers. For brokers working in MLS areas with no green input fields, a stopgap measure would be to ensure that the certification checklist is recorded along with the title.

With sufficient data the appraiser can determine the market reaction, which is still the primary approach favored by underwriters and the GSEs (Fannie and Freddie). Although, as pointed out by Sandra Adromatis, a green champion within the Appraisal Institute, neither the Uniform Standards of Professional Appraisal Practice (USPAP) nor the GSEs specifically prohibit other approved methodology. In the meantime, the efforts of the National Association of REALTORS, the United States Green Building Council (USGBC), the Appraisal Institute, SEEC LLC, Earth Advantage Institute and the Northwest ENERGY STAR Homes program are doing much to highlight the issues and opportunities and improve the education and awareness of the value of green building to the different sectors.

Are the early adopters to green acting out of principle or business savvy- or a little of both? I changed to green because the status quo was making me sick. Ask the parents of an asthmatic child how they feel about superior indoor air quality and continuous ventilation. Elements within our free market might justifiably be nervous about transparency of information and reporting to the market, since transparency may result in consumers demanding better building practices, a reduction in toxic chemical use and greater energy efficiency as the new standard. Freedom of information, access to that information and the ability to react to that information will help determine value.

In the meantime, do we want to continue to refuse to acknowledge the elements of buildings that clearly impact us and our loved ones now and into the future?

About the Author
Fiona Douglas-Hamilton is the founder of SEEC LLC, a green valuation consulting and education firm located near Olympia, WA. SEEC is a licensed real estate school offering green building continuing education courses to appraisers and real estate brokers OREP Members receive a 15% discount on Webinars and Live CE classes through SEEC, click here for more information. Fiona holds her WA Real Estate Instructor license, as well as being a Certified Distance Education Instructor. She has been instructing on green real estate and valuation since 2006 and served three years as president of the NW EcoBuilding Guild. She is a faculty member for the EMERGE Leadership Project and is a regular contributing author for NAR’s Appraisal Insight blog. Fiona has a background in commercial development and residential green building that spans twenty years. In addition, SEEC partners with regional and national organizations to develop targeted market value transformation initiatives. In 2007, Fiona established the Green Building Value Initiative’s steering committee and speaks regularly at the national level on green valuation and real estate initiatives, most recently for the EPA’s webinar series.

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Comments (2)

  1. Going green is a good thing. Cleaner living. But cost efficient? Please tell me; if it costs as you stated and additional $25,000 or more to build a “green home.” How does an appraiser “justify” the additional cost? Please don’t tell me about energy savings. Why? Because the average buyer rolled that expense into his/her loan at 4.35-6.35% for 15-30 years. That’s $1,087.50 interest alone on the 25k at 4.35%. I know that fuel prices go up, so you might be able to save a “little bit more”, unless of course the borrower has an adjustable rate mortgage. The average homeowner moves every 7-8 years and they will never recoup the investment. Explain the cost benefits to the average homeowner and justification for the additional no return on your investment to me as an appraiser again……….

    - Reply
  2. Kewl.

    Cost still doesn’t equal value in the market, though. And underwriters and GSE policies have basically nothing to do with that. When the buyers are *typically* paying more for *any* feature there’s no banker who’s denying that or telling these borrowers they won’t fund that sale price. That makes your reference to appraisers and lenders being the problem the red herring. That is, unless your intention is that appraisers and lenders should be willing to make the call based on the cost, in which case I direct you back to “cost doesn’t equal value”,

    When the sellers and brokers think the green features are worth more they highlight them in their listings and the buyers make their choices accordingly. We measure the difference in pricing, if and when there is any. If/when it occurs, “inconclusive” or “not discernible among these sales” it is what it is. If I look at 10 such transactions and the buyers are paying more in at least 6 of them then paying more becomes more probable than not paying more. And vice versa.

    It may be your job to tell these buyers and sellers they should be demanding these features and paying more for them, and that’s fine. Everyone needs a world view to which to cling and I respect that. My job is to observe and report how buyers and sellers act in the market segment in which the subject competes.

    In God We Trust. All others bring data.

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