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Putting Value on Green Enhancements

An appraisal trade group develops a 'green addendum' to quantify green-building features and set credible property values

Posted on Mar 29 2013 by Scott Gibson

One potential sore point for homeowners spending lots of money on energy-saving features like extra insulation and solar panels is that any added value for the house can be overlooked or ignored by real estate appraisers, selling agents and mortgage lenders.

In a recent Washington Post column, author Ken Harney characterized this problem as a "chasmal disconnect in the marketplace." Not only do appraisers lack training in how to set accurate values on green homes, Harney said, but a "vast majority" of multiple listing services make no efforts to list a property's green features. So, even as a majority of consumers say they are interested in energy-saving features in the houses they buy, the marketplace doesn't have an effective way of making that information available or factoring it into selling prices.

Against this backdrop, the Appraisal Institute, a professional trade group representing 23,000 appraisers nationwide, has developed a new "Residential Green and Energy Efficient Addendum" to help appraisers quantify green features and energy efficiency upgrades. It's an update to a form originally released in 2011 and was compiled with input from the U.S. Green Building Council and the National Association of Home Builders.

The institute detailed the new addendum in an announcement March 7, and listed a variety of other initiatives it's taken to educate the industry on green building.

The addendum would supplement information appraisers already gather for Fannie Mae Form 1004, the most widely used form by mortgage lenders. The new addendum is a five-page document that asks appraisers to collect a variety of additional data--everything from the type of insulation in walls and roofs to the tilt angle for solar panels on the roof. The information would then be used to help establish a market value for the property.

Appraisers may not know about the form

One obvious question is how many residential appraisers have heard of the forms or incorporated them into their work routines.

"Impossible to know," says Ken Chitester, director of communications for the Appraisal Institute. "I will say that green remains very much a niche within the valuation profession. There are experts in the field, but frankly there is not yet great demand in the marketplace for it. [Green building] is an endlessly fascinating and quickly growing and rapidly developing area of valuation. But it is still a niche."

Chitester says the Appraisal Institute is by far the largest group of its kind in the country. But it represents just 27% of the country's appraisers. Two-thirds of all appraisers do not belong to any professional organization.

That may help explain why even licensed appraisers with years of experience in the field may not have heard about the original addendum or its successor, despite what Chitester called "tremendous" outreach efforts and the hundreds of classes the institute has offered on green-building since 2008.

Education, Harney writes, is a continuing problem. He cites industry critic Sandra K. Adomatis of Punta Gorda, Fla., writing: "Most appraisers have no specific training in valuing high-performance or green features and tend to ignore them or undervalue them in their appraisal reports to lenders. This hurts sellers and buyers alike."

Adding complexity and cost to appraisals

Filling out the addendum will make an appraiser's job more complicated and more time-consuming, and that could prompt them to seek higher fees from the management companies that hire them on behalf of lenders. At the same time, management companies have an incentive to keep payments to appraisers as low as possible because they pocket the difference between the lender's fees and what the the appraiser charges.

"This is another example of scope creep," Chitester says, "which is to say that lenders have been seeking for several years more work but not paying more money to appraisers. Since the economic downturn in the real estate industry, appraisers have typically had to find more comparable sales than in the past and spent more time and do more work, but not get paid more."

Finding comparable sales, which appraisers are required to do in establishing value for a house, can be problematic under the best of circumstances. Lenders require a certain number of comparables, or "comps," of recent sales, and may set parameters that make acceptable comps few and far between.

And when a house has lots of energy-saving or green features, it's even harder to find like properties to compare it to. That will change as more green houses are built. But for now, appraisers in some parts of the country may work years without coming across a single solar panel, wind generator or LEEDLeadership in Energy and Environmental Design. LEED for Homes is the residential green building program from the United States Green Building Council (USGBC). While this program is primarily designed for and applicable to new home projects, major gut rehabs can qualify. certification.

"Bottom line for sellers with significant energy conservation investments," Harney writes: "Make sure your realty agent gets them highlighted in the MLS listing. And make sure that the appraiser who is sent to value your property uses the green addendum and has adequate training to do the job. Othewise the money you spent may not get the fair treatment it deserves in the valuation."

Editor's note: The author's wife is a licensed real estate appraiser in Maine.


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1.
Apr 8, 2013 11:35 PM ET

Valuing Green enhancements
by Michael McKinley

This is a well reasoned article, BUT; an appraiser's job is not "to set accurate values, " the job is to reflect what buyers are willing to pay. if buyers are not paying for green features, appraisers can not make up or reason out a value. Appraisers can only utilize information available to them to justify to the reader of the appraisal (generally a bank underwriter) what the buying public is paying for a given feature. Underwriters, who set the rules, usually want a sale of a similar house with a similar feature. If MLS , realtors and sellers are not telling the public, and appraisers, about the green features, how is the appraiser supposed to gather the data?
In regards to scope creep; if an assignment is specialized in nature, requiring more training. than normal, a specialized appraiser is called for. Likewise, his fee is specialized as well. Buyers can't expect specialized treatment without paying for it.What it really boils down to, there is not enough information available in most locations to allocate a small per cent of value to green features. Without sufficient data, one can not make reasonable estimates of a contribution. It's difficult to show the value of a pool, and there are thousands of sales of houses with pools.


2.
Apr 9, 2013 2:09 PM ET

Pool values
by Mike Collignon

Pools have a negative value in my area, and I would characterize their prevalence as "not out of the ordinary".


3.
Aug 7, 2013 4:05 PM ET

Clarification About Addendum Use
by Jeffrey Gephart

I wouldn't expect appraisers to fill out the Addendum. The AI Addendum states on the bottom of the 1st page:

"The objective of this Addendum is to standardize the communication of the high performing features of residential properties. Identifying the features not found on the 1004 form provides a basis for comparable selection and analysis of the features. Builders, contractors, homeowners, and third party verifiers are encouraged to complete this Addendum and present to appraisers, agents, lenders, and homeowners."

Frankly, these should be filled out by the party most knowledgeable about the home's efficiency and "green" features. Ideally this will eventually be performed by efficiency program sponsors and barring that architects and/or builders.

The provision of the Addendum to the lender at time of application should be a trigger to find the competent appraiser (you have a right to). A second copy should be given to the appraiser at the start of the appraisal.

One would also be wise to question the appraisers qualifications when they call to schedule the appraisal. If you don't object to an unqualified appraiser before they conduct their work you may wind up costing your client more than one appraisal. Sandy Adomatis, mentioned in the article counsels asking how many hours an appraiser has in training about energy efficiency and green building practice. She feels 14 hours is appropriate based on AI's courses. She also says you ask about their actual experiences with green homes or ask the appraiser how many main components there are to green building which the AI Addendum defines "as (1) site, (2) water, (3) energy, (4) materials, (5) indoor air quality, and (6) maintenance and operation. A Green Building will be energy efficient but an energy efficient building is not synonymous with Green Building"


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