Comfort Zone: Creating a Middle Ground for Green Building and Great Profits
Source: BIG BUILDER Magazine
Publication date: 2002-03-19
By Alison Rice
Pam Sessions has heard the arguments against building green: It's expensive and complicated, and customers aren't interested in energy efficiency.
She isn't buying them anymore.
As president and co-owner of Hedgewood Properties in Cumming, Ga., Sessions has directed the company's transition from conventional builder to one that builds exclusively green, producing 300 energy-efficient homes annually in a resource-efficient manner.
Since Sessions shifted her focus in 1999, she's not only captured more buyers, she has boosted gross profit margins by 2.5 percent.
"People think that [green building] is price-point sensitive, that you have to build very high-end or very affordable to make it work," says Sessions, whose suburban Atlanta homes sell for $250,000 to $850,000. "This works at all price points."
Making the CutBut doing so requires a sharp eye for value, both in the building and, of course, the marketing of these green homes.
At Hedgewood, staffers carefully analyzed everything from ductwork to quieter bathroom fans as they designed their new product. "We asked the same question of everything: How can this approach be economically viable? We looked at what things cost, what the learning curve would be, what it would take to train our labor, and what the environmental impact would be," says Sessions, who estimates the overall cost ran about 1 percent per house.
What made the cut? Housewrap, upgraded cooling systems, site design that preserved trees and reduced erosion, and recycled carpet and floor decking products, just to name a few. Other ideas, such as putting ductwork in conditioned spaces, didn't because of floor system constraints.
Other builders are demonstrating that there's more than one way to profit from building energy-efficient homes.
In Florida, Mercedes Homes recently added a line of homes with solid walls of poured concrete to its Melbourne and Orlando divisions. "There is no waste ? nothing ? and they're much more energy efficient due to the mass of the wall," says Kirk Malone, Mercedes' regional vice president of construction. Gross profit margins (20 to 25 percent) on the solid wall houses remain comparable to Mercedes' concrete block homes, but cycle time runs 10 to 15 days shorter.
In the Southwest, Pulte has been experimenting with energy-efficient product, as well, using advanced framing with 2x6s and "zero tolerance" insulation installation to achieve utility savings of 30 to 50 percent in its new Tucson, Phoenix, Las Vegas, and California communities.
Other ideas, such as solar and other renewable energy sources, proved too expensive for Pulte. "On a national level, we have a way to go [with renewables]," says Randy Folts, vice president of construction for Pulte's Phoenix-based West division. "I'd like to see the cost of that technology come down."
The same goes for other products. "There's definitely a demand-and-supply issue with the cost of goods," Sessions says. "Just look at engineered wood products. They used to be fairly expensive, and now they're mainstream. I believe that can happen with any product ? it just has to prove itself in the marketplace."
How Green to GoSessions says the shift to green building required her to try new ideas and meet different standards. "This is a change in how you do business, not just a marketing program," she says.
The particular requirements vary, depending on the program. While some concentrate on energy efficiency, requiring houses to be at least 30 percent more efficient in heating, cooling, and water heating, others take a broader view.
In Atlanta, for example, builders can earn points toward the "EarthCraft House," a designation developed by the Greater Atlanta Home Builders Association and the Southface Energy Institute, also located in Atlanta. Along with energy efficiency, EarthCraft builders also employ green techniques in site work (no mass grading), waste management (recycling wood and other products), and landscaping (using drought-tolerant plants).
Just as green guidelines differ, so do the price tags. "It can vary widely, from no significant costs to a 5 percent margin on the house, depending on what a builder is doing" says Peter Yost, principal engineer for the Boston-based Building Science Corp., which works with the U.S. DOE's Building America program.
Done well, the investment can pay off in fewer callback, reduced costs for supplies and waste disposal, less risk of mold, and, on the sales side, increased market share and better sales than the competition in multi-builder developments.
Still, green building isn't an alternative to good building. "The market is crying for this right now, but this will not save a house that is poorly designed, with a poor floor plan or a bad location," warns Pattie Glenn, president and CEO of GreenSmart, a Newberry, Fla., consulting firm that advises builders and developers on green issues. "If a builder has not done [his] market research and doesn't know the active price point, [he] can over improve the house. Green building isn't going to correct that error."
Sales Hang UpsGiven the advantages of owning an earth-friendly home ? lower energy costs, a better built house, improved air quality ? selling one to a buyer would seem to be a no-brainer.
That's hardly the case, thanks to faulty assumptions on both sides of the new home relationship. "It's the biggest thing builders need help with," says David Meisegeier, a project manager at ICF Consulting in Fairfax, Va., where he works with home builders and the Environmental Protection Agency's Energy Star program. "It's easy to teach someone how to [build energy-efficient homes], but they're not going to do it if they can't sell it."
Too often, he says, buyers don't ask about energy efficiency, and builders don't tell. "If you were going to buy a new home, you're going to assume it's energy-efficient. "[The buyer doesn't] ask, 'Is this home going to cost me an arm and a leg to heat and cool?'"
As a result, green builders fail to sell prospects on their homes' superior performance, and conventional builders overlook a market niche they could fill.
"Builders are saying, 'Well, it must not be that important to them because they're not asking for it," Meisegeier says. "People care about these things, even if it's not the first thing they mention when they walk in the door."
But caring about energy efficiency doesn't mean buyers understand it, and unfortunately for builders, salespeople often aren't much help.
"What happens is a builder does this for all the right reasons, and the salespeople kind of know he's doing it, but they're not comfortable with it," says Vernon McKown, president of Ideal Homes in Norman, Okla. His well-drilled sales staff closed 300 energy-efficient homes in 2001 with a record gross profit margin of 31 percent. "They're not comfortable with it, so they're not selling it. And if they're not selling it, they're giving it away. You have to make it count."
At Ideal, salespeople reach that level of comfort with Ideal's green features through weekly role playing, energy demonstrations, quiz bowls, and even tests with cash prizes. "If they can't do it in front of me, they can't do it with a customer," says McKown.
For more hands-on buyers, visual displays draw physical distinctions between energy-efficient construction and standard homes. "Where other builders mess up is under the false notion that they have to have their homes merchandised all touchy-feeling and emotional," says McKown, whose model homes feature a sample wall with the sheet rock cut away to reveal its construction. "Everybody can have sofas and art. Trust me, our duct display and sample wall is a memory point."
Run the NumbersWhen buyers compare the total ownership cost of a green home to standard construction, the energy-efficient product will be undeniably more economical. But making that connection takes time. "The trick is getting their attention long enough to have this conversation," says Pulte's Folts.
Green builders can stay competitive by keeping their energy-efficient homes affordable, whether for first-time buyers or second-time moveups. "As the price increases, it makes no difference how green it is because the buyer can't afford it," says Frank Glankler, COO of California-based Forecast Homes. "So he decides to worry about the electric bill later, because the electric company doesn't do pre-qualification, but the mortgage company sure does." (The company recently received the state's first "green builder" designation.)
Then builders must shift their customers' attention from sticker prices to operating costs, where energy-efficient homes can save homeowners hundreds of dollars a year. Most important, they must clearly lay out the savings to buyers. "To a first-time buyer, the total cost is as big a deal as the monthly payment," says Ideal's McKown. "The person in the million-dollar house doesn't care, but if we can save the typical family on a budget 30 percent on their utility bills, it's a selling edge."
Vague promises about green features paying off "someday" won't sell. Those assertions will need to be supported by hard numbers, which builders can obtain from independent energy raters. The raters' approval is required for Fannie Mae's green mortgages.
"It has to be measurable," says Sessions, who provides testing data and encourages buyers to ask competing builders about duct tightness and other details. "In this day and age, just talking about energy efficiency doesn't cut it."
To convince them, figure the numbers. By paying $2,000 more for green features, a buyer's monthly mortgage payment might increase $15, but their utility bill will decrease by $60 ? a monthly net gain of $45. And that extra money in their pocket might just be enough to afford that gourmet kitchen they really want. Green building "is really a hidden profit center," says consultant Glenn.
If buyers remain skeptical, guarantee their energy bills. That's what Pulte does with its "Environment for Living" homes, promising that utility bills will be less than $40 per month.
But builders who are serious about selling green homes must offer more than information. They must also provide financing options, such as green mortgages and other incentives that help buyers bridge the initial price gap between standard and energy-efficient homes. The price gap varies dramatically, based on what energy-efficient features the builder actually implements and the climate in which the home is built. But the builders who are doing this successfully also care about keeping the product competitive, so the price difference for them may be only a few thousand dollars. Otherwise, they price themselves out of the market.
"Builders need to do a fully integrated sales and financing approach that would reward the home buyer for investing up front in the home," says Pierce Jones, director of the Florida Energy Extension Service in Gainesville. "That is the profitability issue in a nutshell."
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Alison Rice is based in Arlington, Va.The Next Niche: Allergy SufferersGreen MortgagesBIG BUILDER Magazine, March 2002
