A 2016 report by the U.S. Green Building Council anticipates that more than 6 in 10 building projects will be sustainable by 2018, and by 2019, green building materials are expected to be a $234 billion market.
The report, which polled more than 70 countries, indicates that the demand for energy-efficient buildings worldwide continues to rise.
Yet, such homes, which often don’t fit conventional architectural and construction molds, are at a disadvantage when it comes to financing.
The same is true for other “alternative” dwellings, sustainable or not, from mixed-use properties and mobile homes with acreage to straw bale homes and yurts.
“If there isn’t a lot of similar product, the lender can’t determine if it’s saleable in the event of a foreclosure,” said Aaron Sinberg, a mortgage broker with Sinberg Capital Lending. “If someone’s got an Earthship and you don’t see another one within 10 miles, it’s a nonconforming product, and there’s not a market to sell it.”
It’s a catch-22.
Builders and buyers are gravitating toward alternative housing, but monetary hurdles can quash those pursuits. As a result, those markets remain small and are viewed as unorthodox, which makes them an enduring gamble for lenders.
For that reason, a traditional mortgage usually isn’t an option for nontraditional homes. Their best financial avenue is an in-house bank loan from a lender who understands the local market, which comes with its own downsides.
Unlike a conventional mortgage with a 30-year fixed rate, alternative financing typically means an adjustable-rate mortgage, which means the rate will change after about five to 10 years.
“Banks are a risk-based business, but the one risk we try to avoid is putting a long-term, fixed-rate loan on our books,” said Eric Eicher, president of Alpine Bank.
Interest rates for in-house loans are also about one half to three-quarters of a percent higher than those on traditional mortgages. And banks, as collateral for themselves, demand much higher down payments of about 20 percent.
That was a difficult reality last year when a 2,190-square-foot Earthship on Cody Lane was on the market for $272,000, which didn’t sell after 11 months. “I could have sold this house 30 times over to someone with 5 percent down, but lenders don’t like Earthships,” listing agent Heather Erb told Realtor.com at the time.
Erb said the home will be listed again.
“Purchasing homes that are a little different becomes hard for two reasons,” she said. “The people who want them often can’t afford them, and if you can, you have to get a local lender.”
But financing nontraditional houses is not impossible, particularly in markets where they’ve become the norm.
In Taos, a polestar for Earthship communities, the secondary mortgage market has evolved to comp the construction of those types of homes, and in 2010, Arizona-based lenders Nova Home Loans financed its first Earthship there.
Dale Pearcy, founder of Formworks Building, has contributed to the normalization of earth-sheltered homes in Durango. Unlike many Earthships, Formworks homes comply with standard construction methods and building codes, which Pearcy said are the keys to financing.
Since he founded the company in 1979, Formworks has built homes throughout the U.S. and Canada, including 15 to 20 in La Plata County.
“As years go by, it’s getting easier, and Durango has never been a problem,” Pearcy said. “We’ve done some resales that have improved market value. I built my home in town 35 years ago, and it wasn’t treated as unusual. That’s where you see the hit and miss around the country.”
The greatest variable and most difficult aspect of financing new construction, Pearcy said, is getting a fair quote from an appraiser, the gatekeeper between loans and the builder. Appraisers in some markets can’t find a comparable, and therefore don’t establish a fair value, said Pearcy, whose houses are usually appraised at about $115 per square foot.
Jon D’Aleo, a Formworks builder and Pearcy’s son-in-law, lives in a Formworks home on West Third Avenue. He said the biggest obstacle for he and his wife, Amanda, when they built the house in 2012 was the same for any house in the area: It had to meet the cosmetic standards of the neighborhood review board.
But the process took a little longer, given his house is built into a hillside.
“You have to do some more work than with a conventional home when you get into the financing market,” D’Aleo said. “You’d think in the 21st century, a lot more would be taken into consideration (in terms of building nontraditional houses). People are looking for alternatives.”
There are a few loopholes for tiny houses. Sites like tinyhouselending.com can custom-match a buyer to the proper lending program, and if the house is built on a foundation in compliance with building codes, they could be eligible for a construction loan or mortgage.
But too often, they aren’t built big enough to qualify.
As with a standard house, a loan for a unique one still needs a borrower with strong credit. And though the market for some types of unconventional houses is growing, buyers and developers are taking a risk as well when they invest in them, Sinberg said.
“What the client needs to think about is, can I sell this property if I had to?” he said. “Or am I stuck with a $500,000 loan on a piece of property I can’t sell for what it’s worth. What’s the exit strategy?”