Carbon Zero Home Renovation: Planning and Financing

Why Did I Decide to Retrofit My Home to Net Zero? 

Even before interest rates were low and home prices rose significantly, back in 2019, I was ready to start my project. I had been planning this for some time because I work in this industry and thought I should put my money where my mouth is. Unfortunately, it was derailed by a local water quality issue that I will discuss in a later article.

What Were the Initial Challenges of Financing a Net Zero Carbon Retrofit?

When we approached the first lender about this opportunity, we started going down the path of using a construction loan. It sounds a little intimidating, but all it is is taking two mortgages. One of them is the very short term to pay contractors immediately. It then gets paid off, and the traditional mortgage starts. However, we were required to hire someone with a builder's license to be involved in the project to use that type of loan. This step did not make sense for my project because the bulk of the work would need to be done by a licensed HVAC, electrical, plumber, and solar installer. I was planning to be the general contractor as I had done this already on a previous home project and did not need a builder. We tried to negotiate this by offering instead to have a certified Home Energy Rater (HERS) as getting the rating done to determine how much energy I would save and how much more I could borrow in my loan to do the work that was key to the project. This application was rejected as it did not match corporate banking policy, not an easy thing to change! 

How New Green Financing Programs Helped Us Proceed

Around this same time, the Freddie Mac Green Choice Mortgage program was launching, and this gave lenders the ability to give out funds near construction loan levels. Still, instead of the builder license, it did require the certified energy rater and a green appraiser. Something much more necessary and relevant to my project. The idea is that as energy costs decrease, lenders should be more confident in giving out more money to fund more significant energy efficiency and renewable projects. The lendee has fewer utility bills and can then direct those funds to the mortgage. The total cost of homeownership perhaps remains unchanged or is lower. But you then have a more valuable home with newer systems. The green appraisal is critical because lenders cannot loan much above the value of a home due to lending laws. So a green appraiser, in theory, should recognize increased value for energy efficiency and solar power, thus giving more borrowing power to the lender to complete the project.

Still, taking on Freddie mac required a significant commitment from the bank, and they were not convinced there was a great demand for this in the market.  So we moved on to work with the United Bank of Michigan. Despite the lack of clarity as to whether it would be in demand immediately, they decided to take on Freddie Mac Green Choice.

The next big challenge was that this required a pool of certified green appraisers, or at least that is the ideal goal to make the program work. We lucked out because the nation's leading green appraiser and trainer, Sandra Adomatis, planned to come to Lansing, Michigan (in 2019) to host a training for appraisers. With this timely training, United Bank got a few appraisers to go. So, we now have a larger pool of these certified appraisers in Michigan and could utilize one in our mortgage and fulfill the loan's requirement.

What Setbacks Did My Zero Carbon Retrofit Project Encounter?

As mentioned, I was ready to move forward under the Freddie Mac Green Choice Program until I hit a snag with water quality. After spending more than half a year researching rainwater catchments, I decided to use more traditional systems to fix my issue. By that time, I added a few more items to my green home improvement wish list. With the addition of the unplanned water system, the Freddie Mac Green Choice did not give me enough borrowing power. So we went back to United Bank with a request to look back at the construction loan but avoid the builder's license requirement and use an energy rater instead with a green appraiser. United bank of Michigan explained that my interest rate would be a little higher by not using a builder, but it didn't matter since interest rates were going down.

Getting Started on My Zero Carbon Renovation 

At that point, we submitted all the contractor bids, energy rating, and solar projections to the appraiser. I was also very fortunate to be working with Casey Murphy at Pearl, who was gracious enough to work with me on my home to see how it fit in their rating system. Once we gave Casey all our improvement scopes of work, they could generate a projected Pearl rating that included the ideal goal of hitting Platinum. More importantly, it generated a green appraisal addendum and pre-filled it out for the appraiser. This paperwork is significant because I recently learned that the appraisers only review and consider the green appraisal addendums. They do not generate them themselves based on their review, so it is up to someone to fill it out. The appraiser was kind enough to give me a little peek behind the curtain into their thinking on how they evaluated my home.

Now clearly, my home value bumped up way beyond 3% for me to get enough funds for the work we did. The bulk of this increase is attributed to the skyrocketing home values and having brand new HVAC and plumbing systems. It was very disappointing to learn the appraiser found zero additional value in either of the certifications or the home energy score. Also, they found no added value in improved the water system, the all-electric heat pumps, ventilation, or any other system. Their sole reason was that none of these are reported on the MLS for comparable local transactions! A familiar story we hear time and time again, of course.

How Can Zero Carbon Retrofits Become Widespread?

To scale and be successful, we need to work with and educate realtors, lenders, appraisers, underwriters, tax assessors, and legislators at large. 

Lenders and Regulation

Lenders and underwriters need to know what these new types of energy-efficient, zero energy mortgages provide their clients. They also need to learn how they can offer them to their current clients as a package. 

Lenders and regulators should remove more barriers, such as reducing or removing private mortgage insurance (PMI) for homes that certify or do solar. Also, they need to overcome issues regarding low appraisal value when appraisers don't understand or consider green and solar. 

Appraisers

Appraisers need to receive training on evaluating homes like this through the green appraiser training credential and developing a system to find value still when there are no comparables. 

Realtors

Realtors will be responsible for informing their clients of these things when buying homes. On what homes need upgrades and unique ways to pay for them. Also, they can help clients selling homes documents these green features that likely exist in all homes so that appraisers have more comparable listings.

We need all these professions to work together to move sustainable home renovations forward. This movement will benefit them, will increase their client base, and, ideally, income when upselling green.