By John Stovall and John BeldockAre we talking about a new sweater here? No, we are talking about green real estate. So what does that have to do with affordability? Lots! Affordability starts with a buyer locating a home that meets his/her needs and is within financial reach. That statement is true whether the home is $100,000 or $800,000. When you talk about affordability, everyone can use some.
However, affordability also includes operating the home after the purchase.
For a first-time buyer stretching to qualify, monthly cash flow is absolutely critical. They need it to pay the mortgage and they need it to live. These buyers frequently fit best with an older existing home with a few miles on it. Suppose you find them a 1970s home with the space the buyers need and a price they can reach. You are already getting a home inspection, so order a home energy audit as well. In some areas, the local utility company will offer a special deal on energy audits. The energy audit and the inspection may point out some cost-effective improvements that will make the home more reliable and less expensive to operate.
Great, now you’re going to ask the seller to fix all this stuff before they can even close, right? No, not right. If the seller has priced the home appropriately, compared with comparables in the neighborhood, the price recognizes these inefficient characteristics common to the other homes as well. There is a great underused loan product that can solve the problem. The FHA 203k, “with energy efficiency,” allows buyers to upgrade the house they are buying, finance the improvements into the loan and save cash-flow dollars each month. The savings even count as additional income for the qualifying ratios.
Step 1: Find a lender familiar with the loan product. The energy audit is the key. It must be an audit by a trained professional acceptable to FHA and the lender. They actually list the improvements they recommend as an energy professional, the likely cost in the local market and the energy cost savings based on local utility rates. The expert lists the facts and the buyer makes the choices.
Step 2: Get bids for the work and establish a firm price with the contractors. The lender will add the cost of the work to the loan amount. The buyer’s qualifying ratios are not changed to do this. The buyer will borrow the additional money, but usually the monthly cost of the added loan principal is less than the utility cash savings. The professional rating shows how this works.
Step 3: Go to closing as usual. The buyer pays the original price, the seller gets paid at closing, and the lender places the extra improvement money into an escrow account to be disbursed directly to the contractors when the work is done and the permits are signed. At this point, the transaction is closed and the real estate professional gets paid. The work will be done within a short period-usually no more than 90 days. Oh, and did we mention they may be able to get federal income tax credits and local government or utility assistance with the cost of the work?
Step 4: Enjoy. The buyers now have the house they selected, but major systems are upgraded. They do not face the prospect of the air conditioning going out next month or the bottom dropping out of the water heater in the middle of next winter. The utility bills are lower because the house and its equipment are more efficient. All this and they have a few extra dollars in their pocket each month. Their monthly house payment is a little higher each month, but the utility bills are enough lower to actually leave some cash in their pockets. RE
© 2008 EcoBroker International
John Stovall, M.S., and John Beldock, Ph.D. are with EcoBroker International and members of the Association of Energy and Environmental Real Estate Professionals.