23 July 2009 – Chicago finally has its first net zero home. Simply stated, a net zero home produces as much energy as it uses. Chicago resident Michael Yannel has built a 2,695 square foot showcase for emerging green technology at 4895 N Ravenswood. The home?s green features include 48 photovoltaic roof panels, a rain water collection system, geothermal heating and cooling machines, and a gray water system that converts water from the home?s washing machine for use in the toilets. While costs of building a net zero home today likely run well above the average home owner?s budget, this home makes a powerful statement about the future of green construction in residential buildings. For more details on this and other net zero homes, read Blair Kamin?s piece in the July 22 Chicago Tribune.

Chicago's Row Houses Are a Favorite Rehab Target

Over the past few months, I have noticed more and more home insurance activity:

• People picking up houses in foreclosure to fix it up to rent out;
• Buying foreclosures to move in to eventually;
• Renovating homes to flip them;
• People who can?t sell their homes either (1) renting out their homes or (2 ) even walking away from their homes.

Whatever the reason is, please understand something very important: A standard homeowners insurance policy does not provide coverage for vacant homes, homes under construction, being renovated, or rented to others. A standard homeowners insurance policy is designed and rated for the insured who plans on moving into the home permanently. If there is any variation of this, the policy becomes null and void?immediately.

What should you do if you or a client find themselves in one of the above mentioned situations? Call you friendly neighborhood insurance agent and explain the change in risk. By doing so, you will have the appropriate coverage to protect your biggest asset?even if that asset is not working for you at this time.

An Example of When Standard Homeowners Insurance Won’t Work

A client is buying a foreclosed home in Chicago because it was such a great price. The client does not have any immediate plans on what to do with the home.

• Option 1 Keep the home as is, vacant, and maybe sell it in a year or two.
• Option 2 Rehab the home: update the kitchens, bathrooms, windows, paint, and possibly rent out.
• Option 3 Rent out the home as is, until the market gets better and then re-evaluates the options.

Most times, clients call and tell me that they are buying this home and it will be “owner-occupied” because that is what the loan requirements state. Most insurance agents will write an “owner-occupied,” standard home insurance policy because (1) the client doesn?t disclose the truth or (2) the agent isn?t providing the level of professionalism that the client needs. A good insurance agent will ask the right questions to get to the truth because it is the agent’s job to protect you in the event of a loss.

The Possible Solutions

• Solution 1 The client purchases a Vacant Building policy that not only protects the mortgagee’s interest but it also protects the client’s interest because he just spent $340,000 on a home and if it burns down, the client would want the home rebuilt. A $ 340,000 Vacant Building policy will cost $1396 per six months. The client can lower the amount of coverage to fit their risk tolerance and budget. At $200,000, the six month premium drops down to $842.
• Solution 2 The client needs to purchase a Builders Risk policy, again, to protect the mortgagee and their selves. The Builders Risk policy covers not only the existing structure, but all of the money you will invest into the home. The client is planning on spending $260,000 on the full, gut rehab of the home. A $600,000 ($340,000 existing structure + $240,000 renovations) will cost only $1,200 per year.
• Solution 3 The client needs to buy a Dwelling Fire policy, again, to protect the mortgagee and their selves. The Dwelling Fire policy will provide coverage for the existing structure, and more?very similar to a standard home policy. It will als, recognize the fact that the home is being rented out and in the event of a loss, the policy will reimburse the loss of rent you will experience. A Dwelling Fire policy will also provide the client with Liability and Medical Payments to Other coverage. This is important for the client to protect their financial exposure, in case your tenants have a party and someone gets hurt. Here is the kicker: A $340,000 Dwelling Fire policy will only cost $921 per year.

As you can see, a good insurance agent will make sure the client is protected, and the costs of doing so are minimal when compared to the worse case scenario?of having no coverage.

Less South Loop Construction Means Reduced Supply...Eventually

I think there is light at the end of the tunnel. We can certainly see it in our showing activity and in the market. It’s still not an easy market or necessarily a fair market for all involved, but it is changing for the better. Statistics from Illinois Association of Realtors (IAR) definitely back up the these feelings.

Chicago-area sales in May had the smallest drop so far this year at -18.7%. 5,634 single-family homes and condominiums were sold in May in the nine-county Chicago region, compared with 4,747 in April 2008, the IAR said. The association is reporting the following Year-on-Year Declines:

Monthly Year-on-Year Comparison of Home Sales (Single-Family and Condo) in the Nine-County Chicago Area:

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Month-on Month Home Sales Up In Chicago Area

Month-on-month total home sales (which include both single-family and condominiums) were up 19.3% in May 2009 with 8,945 homes sold compared to 7,501 homes sold in April 2009. This is showing the market picking up some speed and buyers feeling more confident in purchasing. Now take this compared to a year ago, when month-on-month home sales were down 21.0% from May 2008 with a home sales number of 11,326 for 2007. We are not back to 2008 numbers yet, but are working on it. The activity is growing and there is an air of growing confidence as well. This is what the market needs right now. There is still a plethora of inventory available, but I think by fall it will start to thin out and come back to more a stable market. Everyone is looking for a good deal right now. Prices are still dropping to meet consumer demands, but are stabilizing just a bit and not falling so drastically. If you have an aggressively priced listing in this market, odds are it will sell.

“We are seeing more activity in the housing market with increased listings, more activity at showings, a surge in interest from first-time buyers as well as some improvement in time on market,” said REALTOR® Pat Callan, president of the Illinois Association of REALTORS®. “First-time home buyers who want to take advantage of the $8,000 tax credit need to be aware that the purchase has to close no later than November 30, 2009 given the December 1 cut-off under current guidelines by the federal government. That means being under contract by early fall.”

Dr. Geoffery J.D. Hewings, director of the Regional Economics Applications Laboratory (REAL) of the University of Illinois said, “Month-to-month sales have recorded increases for the months of March, April and May and this is expected to continue into June. The modest recovery in housing prices and sales has been constrained by the job losses in the economy as a whole. A sustained housing recovery is still not within sight and much will depend on the degree to which federal stimulus funds and the resolution of the state?s budget generate a much needed boost to employment.”

Chicago Home Sales Up 11.5% in May

In the city of Chicago, month-on-month May total home sales (single-family and condominiums) were up 11.5 percent to 1,537 sales compared to April 2009 sales of 1,378; year-on-year sales were down 27.5 percent from 2,119 homes sold in May 2008.

“We?re encouraged to see the bank-owned inventory moving in the marketplace, indicating buyers are finding good bargains, especially in single family homes and flats,” said David Hanna, president of the Chicago Association of REALTORS®. “The city of Chicago condominium sales numbers continue to reflect a critical need for governmental agencies to review the growing disparity in the ability to finance a condominium purchase in the city. This affordable housing will become unaffordable and unattainable to many qualified first-time home buyers in the city of Chicago unless existing federal guidelines, which do not take into account nuances of the local market, are modified.”

Buyers Will Come Out in the Fall

To David Hanna’s quote I say, I think that the feds are addressing this…not quickly enough, but it is being addressed. The FHA guidelines that make it nearly impossible to get financing on a condo in the city are being removed as of October 2009. Some of these guidelines include right-of-first-refusal, liens against the association, and association controlled by the owners (not the developer). Come fall I think we will begin to see a larger number of FHA condo buyers enter the market and also use the $8,000 first-time home buyer tax credit. Watch out lenders…take your vacations now!

We’d like to thank Payton Chung for sharing today’s photo via the Creative Commons License.

Drop After Drop Adds Up

In the first articles I showed how you can save energy and money and have a positive impact on the environment by going green and I showed how important an energy audit is for providing a road map to going green in your own home.

Now that I?ve laid some of the groundwork, most people want to know how to pay for it. My basic tenet is that there is a shade of green for every project and every budget?. Finding the right shade for your individual lifestyle and budget will mean some compromises along the way. But making the most of your energy audit is important. You only have the mental and physical fortitude to undergo disruption to your daily life so many times. So making the most of the time you devote to any home renovation project, green or otherwise, is critical.

In the US, the bulk of the homes that are currently being occupied were built during the housing boom of the 1970?s and 1980?s. These homes are nearing architectural and mechanical obsolescence. Also, these structures account for over 40% of energy consumption and 75% of electricity consumption annually. Can you imagine the impact to our economy if we could reduce those numbers by 10%? The way to do that is to renovate existing buildings, starting with residences.

Let’s Assume You Aren’t Rich and Want to Go Green

I’m going to assume that the family interested in going green does not have the cash available to pay for all the costs of an energy efficiency renovation all at once. You don?t want to use a credit card to finance the purchase, as the interest that you would pay makes the entire process much more costly than needed. So where can you turn?

There are federal and state programs available to help offset the costs of going green. There are local incentives, grants, and rebate programs available to help people achieve energy efficiency improvements, and there are various types of lending programs, from home equity loans to personal lines of credit available form many different sources that are specifically geared to the energy efficiency market. I will give you the ?get started? information to help you find the right program for you.

Federal Resources for Helping to Pay for Going Green

At the federal level, the American Recovery and Revitalization Act (ARRA) passed on February 17, 2009 included billions of dollars in stimulus funds for energy efficiency improvements. Chief among these are the federal tax credits that are available to take for energy efficiency upgrades to your own home for 2009 and 2010 tax years. In summary, the federal government will repay you up to $1500 (previously limited to $750) of the costs of energy efficiency improvements for windows and doors, roofing material, water heaters, insulation, and biomass stoves. In addition, the federal government will pay for 30% of the installed costs of renewable energy upgrades like solar power, geothermal heating and cooling, solar hot water heating, small wind energy systems, and fuel cell technology. Previously the allowable tax credit was capped at $2000. Now, it is uncapped, so they will pay for a full 30% of the costs!

Builders, developers, and commercial property owners can take advantage of these credits as well, but in this care they are based on square footage, not on costs. See the IRS website or the above link for the details.

State-based Resources for Going Green

In addition to the rebates available from the federal government, there are programs from the state that are available to offset costs of energy efficiency improvements. If you visit DSIRE (Database of State Initiatives for Renewables and Efficiency), you can click on any state and find out what rebates and incentives are available. For the Chicago area, the state will rebate up to 30% of the costs of solar power installations. The program is administered through the Illinois Department of Commerce and funded through the Illinois Renewable Energy Trust Fund. The current plan expired on May 1, 2009, but the next round of funding will begin July 1, 2009. The city of Chicago also encourages green building and will fast-track permits and waive up to $25,000 in fees for green certified projects.

For those of you in Wisconsin, you hit the jackpot! There is a fantastic program available for renewable energy and efficiency upgrades called Focus on Energy. This program will offset costs for a host of renewable energy products up to 25% of costs or a maximum of $35,000. Its current funding expires June 30, 2009, but will renew.

Energy Companies Help You Go Green

Grants and rebates are available from the utility companies as well. People’s Gas and NorthShore Gas both have rebate programs that they have extended until October 31, 2009. This program will cover costs of insulation up to $750, clothes washers up to $100, water heaters up to $75 – $400, gas furnaces up to $450, and gas boilers up to $600. It requires professional installation of everything, and you can apply for the rebate online.

ComEd does not have as much of a program available. They will sell you discounted CFL bulbs, can help arrange a home energy audit, and can set up electricity cycling programs for you. Also, they will pay you $25 to recycle that old refrigerator that you plan on replacing with a new, EnergyStar® model.

For those of you in southern Illinois or some of the western suburbs, Ameren has a different set of programs, much better than ComEd. They will help with heating, air-conditioning, lighting, and with the home energy audit, as well as refrigerator recycling.

How About Weatherization Help?

Now, for funding of weatherization improvements, the Illinois Home Weatherization Assistance Program is the place to start. On their web site you will be able to locate local programs. This is geared to low income families, but the information available is good, and at the very least, you can get a good contractor to help with your project. This is funded through the Department of Energy and the money is given to each state to distribute through its weatherization programs. This program will also cover the cost of the home energy audit in some cases.

Can I Get a Loan To Go Green?

The last topic I want to cover is funding though loans. The Department of Housing and Urban Development administers a huge number of programs that are designed to help average Americans finance, refinance, or improve their homes. There are a few income and home value limits, but a vast majority of Americans will fit into its broad criteria.

First, there is the Energy Efficiency Mortgage (EEM) which is a stand-alone product available to help cover the costs of home efficiency improvements. The maximum amount is 5% of the home?s value not to exceed $8000. Now, this may not seem like much, but the beauty of this program is that it can be added to any other FHA/HUD program without penalizing the owner/purchaser on the percentage of loan to value. So, say you want to borrow $250,000 to buy and renovate a home (or refinance an existing home). Though this program you can borrow $258,000 even if that additional $8000 would push your loan over the maximum loan to value. It?s a ?free? $8000 to use for energy efficiency upgrades.

Where this really works out is with the 203k loan program which is designed to encourage purchasers to either renovate their existing home or renovate a home they intend to purchase and live in. (See this previous The Chicago 77 post for more details.) The beauty of this program is that it looks at the value of the home as completed after the renovation, not the value at the time of purchase. The program will help pay for design, inspection, and the energy audit, as well as all the construction. Click here to see a visual overview of this program. There is also a limited repair program that provides $35,000 for home improvements to a home purchased. This additional $35,000 becomes part of the mortgage, allowing the buyer to do significant work to a home before moving in and paying for it over the life of the mortgage.

Fannie Mae also has innovative programs for renovation/purchase of single family homes.  This is called a HomePath® program. There is another program called HomeStyle®

Freddie Mac has a similar array of programs. The best bet is to contact an FHA/HUD approved lender to determine the best program for your situation.

In the more commercial market, Wells Fargo Bank has a variety of loan programs available that are geared toward energy efficiency and green living. There are others, but Wells Fargo seems to have the most developed program. The idea for all of these programs is that the lenders know that you will be saving significant amounts of money in utility costs and reward you with either a larger amount available to borrow based on your credit score, or a discount on the rate you are borrowing at.

That about covers what I know regarding funding, financing, rebates, and rewards for energy efficiency improvements.

For those who are immediately interested in upgrading their home, purchasing a new home, or renovating an existing home, make sure to read by bio below for ways I can help.

My thanks to Brad Walbrun for providing some background material on the 203k-mortgage program.

Going Green Series

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A modern Chicago brick condo...what's its ITV?

Over the past few months, the economic downturn has caused many of us to reevaluate our household budgets and seriously reconsider our spending. Along with this comes the direct insurance companies inundating our mailboxes with ?promises? to save you hundreds of dollars on your home insurance. If it sounds too good to be true…they generally don’t really detail the important coverages and benefits that you will lose when you “save” all that money. And the devil is in the details.

My Home Value Dropped…Should My Insurance Coverage Drop?

In an attempt to save money, more and more of my clients have called to let me know that their property values have dropped so they expect their insurance premiums to do the same. My response to these comments usually doesn’t sit well with many since, being an insurance agent, my job to provide comprehensive coverage and sound risk management.

It’s About Rebuilding Costs, Not Market Value

Reputable insurance carriers utilize a third party source such as Marshall & Swift, to calculate the actual building replacement cost of a given property. This concept is called Insurance-To-Value (ITV) which focuses on a building’s unique features, (number of baths, number of bedrooms, construction type, size of decks, and many other interior and exterior upgrades) not solely the square footage. This method gives insurance agents a better sense of what it will really cost to send a contractor out to rebuild your house, if need be. Based on a few total losses I have been involved with over the years, when having to rebuild your home is not a good time to come up short by a few tens of thousands of dollars.

An Example of Over Insuring

For example, a homeowner spends $1,000,000 to purchase a 2.5 story frame home. It has three bedrooms, three bathrooms and is in Lincoln Park. Of course it has generous upgrades. After consulting with the homeowner, the ITV is calculated to be $650,000. Often in this situation homeowners feels slighted because they just spent $1 million on the house, but I only want to have them insure it for $650,000? After explaining the calculation and pointing out that they won’t have to purchase the land again, they understand the calculation better and are more comfortable. However, some homeowners remain skeptical, so then I suggest they look at a policy that has TRUE Guaranteed Replacement Cost coverage. This gives the homeowner the peace of mind by insuring the home at $650,000 ( which is 100% of ITV). However, in the event of a total loss and the rebuild cost somehow is actually $1 million, the insurance carrier will pay the $350,000 difference.

But…It Works the Other Way Around Too

Let’s look at an example on the other extreme. A person finds a great brick three-flat in perfect condition in Logan Square. It is a foreclosure and they pick it up for $300,000. However, the ITV of this building is likely to be calculated at somewhere around $600,000. Just because they got a great deal, doesn’t mean they can rebuild the building for what they paid for it! So, it must be insured at the ITV level to obtain the best rates and the true guaranteed replacement cost.

Of course, the person is going to only want to insure the building for the purchase price. A good insurance agent will still push to have the house covered at $600,000 because if the house is insured at $300,000, a ?coinsurance penalty? can be imposed in the event of a loss. The coinsurance penalty clause, which is built into most property insurance policies, states that you must insure the dwelling for at least 80% of the ITV. By insuring the building for anything less will cost you a lot of money in the long run. Here’s how it works. Let’s say you didn’t insure to 80% of ITV. And, let’s say you have a kitchen fire and there is $50,000 of damage to your home. When the insurance company pays you, they will divide the amount of insurance that you purchased ($300,000) by the amount you should have purchased (80% ITV is $480,000). The insurance carrier will then only pay 62.5% of the claim, or $31,250. That’s right…you have to pay $18,750 out of your own pocket.

Hopefully you now see the problem with those “Save Thousands On Your Insurance” flyers you get in the mail. It’s about more than your premium?you have to keep your ITV in mind. So, please speak to an independent insurance agent who focuses more on coverage and protection rather than simply price. You will be happy you did.

Today’s photo was generously shared by Sectionz via the Creative Common’s License. Thank you!

A very, very common building block in modern Chicago homes: the split face block

Split face blocks are manufactured by combining two or more blocks together as one larger unit. After a curing period, the units are put through a machine that cuts the stone in half to expose it’s interior aggregates. The amount of  aggregate varies from block to block. There are many different sizes and colors available.

Advantages of Split Faced Block

Split face block is easily combined with many exterior finishes. The initial costs can be higher than other exterior finishes, however the longevity makes the block a good value. Insurance companies often offer policy discounts on properties due to the lower risk of fires and termite infestation.

Disadvantages of Split Faced Block

Split faced block is a very porous material, so if not properly installed and maintained, it tends to lead to costly repairs. The durability of split faced block often causes the homeowner to over look the preventative maintenance needed to help prevent the block from absorbing water which can lead to interior wall damage and mold. The installation of the block is also important. Due to the permeability of the block and poor installation methods such as lack of wicks and weep holes to allow the water to exit  from behind the block, damage to the interior can often occur.

Should I Purchase a Property with Split Faced Block?

Like all exterior finishes, proper installation and maintenance are needed. Split faced block is an attractive, long lasting finish that given preventative maintenance and proper installation can last for many years. I recommend that a proper water repellent is applied approximately every 3-7 years.

I would not hesitate to purchase a property with split faced block.