Profitable niche
Selling Green
Environmentally sensitive homes aren’t just for tree huggers any more.

(cont.)

Whether you’re representing a buyer or a seller, understanding how great features can increase buying power and help make an older home more appealing will help you close more deals.

Real estate professionals can become the green educators at the point of sale, says Pattie Glenn, a broker with RE/MAX Professionals in Gainesville, Fla., and president of GreenSmart, a green housing, marketing, and sales consulting firm, is a pioneer in green home sales. “We have to know how to translate efficiency data into money-saving information. That’s how we add value to the process.”

There are several systems for developing energy ratings , but one of the most used is the Home Energy Rating System. The HERS method rates a home on a scale of 0 to 100 by comparing it to a computer model of the same house built to the specifications of the Model Energy Code. A score of 80 indicates that a house meets the Model Code. Scores above and below that number reflect degrees of compliance with the code. An EPA Energy Star home is one that scores 86 or higher on the HERS scale.

You have to know something about energy ratings if you want to sell a home, but don’t try to be a rating expert and risk incurring liability, Glenn cautions sales associates. As you do with home inspections, rely on data from raters and builders to make the case. Many builders will provide fact sheets on a new home’s energy usage, and some will guarantee monthly energy costs. Be sure clients understand that the builder—not you—is making these energy efficiency claims.

The same is true when using the prospect for an energy-efficient renovation to make an older home more salable. Knowing how buyers can use green mortgage financing to upgrade a home can help make or break a sale, says Glenn, but estimates for actual savings should be done by a trained energy professional.

Nor will energy ratings alone close the deal. Although half of the people responding to a 2000 survey by the National Association of Home Builders said they want to live in green homes, only about 14 percent were willing to pay more for such a home. Clearly, there is a marketing challenge here.

Economics are still the driving factor for most buyers,” agrees David Yates, a broker with Ebby Halliday REALTORS in Dallas/Fort Worth. Even in areas with serious air pollution problems, homebuyers, he says, are still interested in the bottom line. A custom builder for many years, Yates coordinated the 2000 AT&T Home of Tomorrow ™, a multidisciplinary research project on energy-efficient “smart” homes sponsored by the University of Texas at Arlington.

Selling and Making the Case for Green

Still, many experts agree that certain types of energy-efficient improvements, such as fixing cracks in walls and foundations, upgrading HVAC systems, and adding more insulation actually save money in the long run, and thus may justify the extra purchase price. The following example from a national energy rating system give a general idea of how to translate energy efficiency into lower operating costs.

A family purchases a 12-year-old home for $160,000. They add $4,200 to their mortgages (at a fixed rate of 7 percent) to finance heating system and insulation upgrades to the home.

With $4,200 in Without
Energy Improvements Improvements
Monthly mortgage $1,335 $1,307
Monthly energy expenses $124 $213
Total monthly cost $1,459 $1,520
Net yearly savings $732 $0

(Source: HERS)

Of course, actual savings will depend on utility costs in your area and the specific improvements made. Again, local utility companies or a certified energy rater can provide more precise savings estimates for each individual home.

Even more important to homebuyers, energy savings can be translated into a more expensive home. Some energy-efficient mortgages let prospective buyers add their future energy savings into their income—qualifying them for a higher loan. This added buying power, often called “the 2 percent stretch” because lenders sometimes allowed homebuyers to increase their income-to-debt ratios by 2 percent, can mean a significant increase in the price a buyer can afford to pay.

For example, under normal underwriting guidelines, assume that a family could spend up to 28 percent of its income for housing. The chart below shows the family’s additional buying power if it buys a home that qualifies for an energy-efficient mortgage. Assume the home is financed with a 30-year mortgage at a fixed rate of 7 percent. Escrow expenses are $200.

Monthly Regular Energy Efficient Increased
Income Mortgage Mortgage Buying Power
$2,000 $75,800 $81,200 $5,400
$2,500 $96,800 $103,800 $7,000
$3,000 $117,800 $126,300 $8,500
$3,500 $139,000 $148,700 $9,700

(Source: HERS)

The numbers are persuasive, but Yates points out that in some cities, like Dallas, the population is more transient, making the long-term savings in energy costs less appealing. Know your market, and don’t oversell the benefits. Nevertheless, it’s clear that handled skillfully, green features can be a productive starting point for negotiations.

“Green homes can appeal to buyers at both ends of the economic spectrum,” says Helen Karsh of RE/MAX Professionals in Gainesville, Fla. “With lower-income buyers you need to emphasize the benefits of an energy mortgage; higher-end families respond to environmental issues such as indoor air quality and environmental conservation. You have to tailor your approach.”

In her seminars, Glenn uses familiar psychographic models to determine what features of green housing appeal to different personality types.

• Thinkers want things quantified. A home’s energy efficiency rating is a big selling point with these buyers.
  
• Drivers want to be recognized as the best. They want others to know what a great home they have, so they are a good source of customer referrals.
  
• Amiables relate to the comfort, health, and safety benefits of a green home.
  
• Expressives will want to use their added purchasing power to buy frills such as nicer kitchen cabinets.