by Shawn P. Mullins
Every so often I am reminded of the story of the monkey who reaches into a jar for a shiny object. The monkey picks up this object and in doing so makes a fist with his hand. The only problem is that the monkey cannot get his hand out of the jar when making a fist. Now in the mind of the monkey, the only solution to the problem is to let go of the shiny object and thereby forfeit his reward in exchange for getting his hand out of the jar. Although there is a better solution – turn the jar over and let the shiny object fall out – all he knows is that the shiny object is in his hand and he isn't going to let go of it, regardless of what other options exist. In the end, he gets neither his desired reward, nor any lessons learned.
So it is with this concept in mind that I wonder, are we perhaps forcing our buyers into a similar mindset and no-win scenario? Most buyers have a budget for what to spend on their home and this budget is partly a result of what they can qualify for on the loan. Sounds like a reasonable enough scenario. Where it gets difficult however, is when the buyer's list of options exceeds their qualification criteria. The result is a buyer who feels forced to choose between the flash, bells and whistles of granite countertops, tile floor or other décor amenities vs. nuts and bolts options such as 2x6 walls, higher grade insulation, better windows, high efficiency HVAC, etc.
Our reality is that most customers, when they can't see, touch, feel and become visually aroused over a product, are much more willing to exchange that product for one that does excite them visually. It is this mentality that creates scenarios where customers buy inferior performing products simply on the bases of the flash and sparkle these products display on the outside. As a retailer, are you so anxious to get the contract signed that you miss the opportunities to show your customer how they can have both the flash and the substance? Consider yourselves for a minute. If I were to show you how you could buy a $100,000 home with the exact same down payment, loan ratio qualifications and net PITI + operating expenses as say a $90,000 home, wouldn't you want to know how? Wouldn't you want to take advantage of what that extra $10,000 could buy you in upgrades?
This is possible through an instrument commonly referred to as an Energy Mortgage (http://www.resnet.us/mortgages). There are basically two types of Energy Mortgages, Energy Efficiency Mortgage (EEM) for new construction and Energy Improvement Mortgage (EIM) for existing properties needing energy efficiency upgrades. Most major lending and underwriting institutions offer these types of mortgages, including: HUD, VA, Freddie Mac and Fannie Mae. These mortgages take advantage of a process that does the following:
Because of this detailed process and third-party certification, lenders offering EEMs and EIMs will waive the effect of any additional down payment or qualifying ratio that would normally be imposed by adding these options into the price of a home. Therefore, while it is true that a homeowner's monthly payment will increase because of the higher principal balance, their total house payment plus energy use costs will be equal to or less than if they had not installed the energy upgrades. In my experience, it is almost always a "less than" scenario, which means the buyer is actually making money on the deal.
Part of the qualification process does involve a third-party HERS rater (Home Efficiency Rating Systems rater) in order to qualify the improvements. Depending on your region, the size of the home and how competitive your market is, the cost for this rating will typically fall between $300 and $600. I would expect most manufactured housing product ratings would easily fall below the $500 mark. This is especially true if you can develop a relationship with a particular HERS rater and thereby get some preferred pricing. It is important to know that the cost for the HERS rating can also be rolled into the mortgage. Being a HERS rater myself and having worked with several such EIM transactions, I can tell you that they are a very under-utilized product. Most people aren't even aware of them. Once they see how easy it can be to "have their cake and eat it, too," they are easy converts.
From a practical perspective, I see these loans as a significant retail opportunity. There is no reason that a retailer could not take any new home, of any specification and any price point and separate out the basic home from the upgraded home. With this approach, the retailer now has the tiered pricing and options necessary for the HERS rater to model the energy efficient upgrades. Over time you may very well find a model of home that sells well and consistently qualifies for the EEM with a given set of upgrades. Now how easy would that be to turn?
So the next time a potential buyer walks into your store, you can hold back these costs from their loan pre-approval amount and let the buyer spend this money on granite countertops, wood floors, upgraded lighting, furniture packages or even just to upgrade to a bigger home. The 2x6 walls, upgraded insulation, upgraded HVAC, upgraded Energy Star appliances, etc. are now tacked on top of everything else in a sort of VIP package.
I'm sure any other HERS raters out there will be quick to point out that what I have described herein is a very simplified perspective of the process. That is exactly the point. From a consumer or retailer point of view, this is not all that cumbersome. The rating itself is a technical and involved process, but that is specifically what the rater is getting paid for. A good rater will know what is a reasonable cost for a specific energy efficiency upgrade and what the likelihood is that such an upgrade will result in a positive impact on the rating. If for some reason the rating doesn't calculate out the first time, the rater can combine different elements until it does. If you need help finding a rater in your area, go to http://www.resnet.us/trade/find-raters-auditors.
As to my final point of today's discussion – start this process early! As soon as your buyer is confident on their model selection and specifications, and you have some type of a pre-approval, you want to get your HERS rater involved. He or she can do a preliminary rating off of floor plans and building specifications, thus allowing time to tweak the home's configuration if necessary. If you wait until the end of the process when the home is about to be delivered, you very well may have turned an opportunity into a liability. With just a little forethought we can all be green and make some green in the process – legitimately!