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Seeing Red on a Green Property Appraisal — Part 3

Freddie Mac and Fannie Mae require appraisers to note any energy-efficiency upgrades on their appraisal forms — but are silent on the question of how these upgrades should be valued

Plenty of south-facing glass. This drawing depicts our superinsulated custom home, which is now under construction in Saco, Maine.
Image Credit: Chris Briley

[Editor’s note: Roger and Lynn Normand are building a [no-glossary]Passivhaus[/no-glossary] in Maine. This is the 17th article in a series that will follow their project from planning through construction.]

Getting an appraisal to value green enhancements requires the appraiser to take two actions: (1) To recognize and list the green enhancements on the appraisal form; and (2) To assign a value to these enhancements.

Appraisers are usually required to note a home’s energy features

The first action is the easiest hurdle; the “big guys” in the mortgage market – Freddie Mac and Fannie Mae, who create the secondary mortgage market – are firmly on your side. Their standard appraisal form includes a data field for energy-efficient upgrades; the appraiser is required to note these upgrades.

Here are more details about this requirement:

  • Property appraisers use the Freddie Mac Universal Residential Appraisal Report Form 70 of March 2005 (and the similarly structured Fannie Mae Form 1004) if the lender has any intention of reselling the loan to the secondary market. The “Sales Comparison Approach” section of Form 70 has a data field for “Energy Efficient Items.”
  • Freddie Mac guidance on page 29 directs appraisers to enter onto Form 70 “any energy efficient items for the subject property and each comparable property. If there are no energy efficient items, enter ‘none.’” So you want to make sure the appraiser is aware of the each energy efficient component you are installing. If it’s not listed, it can’t be valued!
  • These energy efficient items can be more than just hardware. Freddie Mac guidance of October 2010, page 2, states that “an energy efficient property uses cost-efective design, construction, materials, equipment and site orientation to conserve energy, consistent with the climate of the area in which the property is located.”
  • The Appraisal Institute (AI) even offers a Residential Green and Energy Efficient Addendum form (AI Reports Form 820.03, June 2011) to record and value green design features.

How should these features be valued?

While the Freddie Mac Form 70 guidelines require the appraiser to list energy efficiency features, they leave it to local institutions to specify how these items should be valued. Valuing these items is not an impossible task. There is plenty of guidance available to help an appraiser equitably value green property features:

  • The Appraisal Institute offers classes on this topic — for example, “Case Studies in Appraising Green Residential Buildings — Includes Real Case Studies” and “Valuation of Green Residential Properties.
  • The Appraisal Institute offers an online class “Valuation of Green Residential Properties.”
  • The Appraisal Institute offers a textbook (released in June 2010) entitled “An Introduction to Green Homes.”
  • The Appraisal Institute offers a free podcast by the author of the textbook “An Introduction to Green Homes.” The podcast discusses valuing green homes via the three standard approaches: cost, sales, and income. The author suggests that because green building is a relatively new phenomenon, the sales approach may not be the best choice, and suggests the appraiser instead rely more heavily than usual on the cost or perhaps income approach. He says a good alternative method to recognize energy efficient upgrades is to value the monthly energy savings of the green home compared to a conventionally built home. Calculate the net present value of the savings over an extended period of time and apply the total as a real life adjustment to the property value. Aside from what the Appraisal Institute may offer, authoritative data such as that from the U.S. Department of Energy Buildings Energy Data Book is readily available to perform this analysis.
  • Marshall and Swift, an internationally renowned source of residential and commercial cost-to-build data, provides a Green Training Seminar with Green Building Cost Book as a continuing education tool. The green building cost data set is now part of the full residential handbook. (Previously it was a separate book available at extra cost). Course content includes information on site and design, energy, materials, indoor environmental quality, and green appraisal standards. Attendees can earn a National Green Valuation Specialist Designation.
  • Freddie Mac guidance for new home construction (issued September 2011) states on page 6 that the following costs may be included in calculating construction costs: “energy-efficient components, systems and installation” and “architectural, engineering, survey and legal fees.” So even in the absence of sales data from realtors multiple listing service to prepare a sales cost approach to valuation, there is ample guidance and techniques to realistically and equitably value green properties.

A legislative solution is in the offing

So if you’re seeing red on what should have been a green appraisal, as we did, work with the lender to get it revised, or have it reassigned to another more qualified appraiser.

In the future, perhaps getting a fair shake on green properties will be the rule rather than the exception — that is, if Congress adopts and the President signs a bipartisan bill recently introduced into the U.S. Senate to account for energy costs in mortgage underwriting. The Sensible Accounting to Value Energy Act would include the homeowner’s expected energy costs when evaluating a homeowner’s ability to make mortgage payments. In effect, the traditional PITI (principal, interest, taxes, insurance) mortgage lending ratio would become PIETI — with the “E” representing the home’s energy costs.

Just don’t hold your breath that this Congress will do the right thing.

Meanwhile, we await the results of our third attempt an an appraisal for EdgewaterHaus.

The first article in this series was Kicking the Tires on a Passivhaus Project. Roger Normand’s construction blog is called EdgewaterHaus.


  1. GBA Editor
    Martin Holladay | | #1

    A great series of articles
    Let me be the first to thank you for this very useful series of articles. I am particularly impressed by the specificity of your recommendations -- a big improvement over the usual whining on this issue.

    Great job.

  2. user-1140531 | | #2

    Fair Shake

    I don’t see how you can legislate a “fair shake” on green enhancements. The value comes into play for financing or selling, but both depend on what an average buyer will pay.

    For selling, a seller has the freedom to include the value of the enhancements in the selling price, but if that pushes the price above the market value, the house will be hard to sell. But the seller has the freedom to do that, and is free to reject average buyers and hold out for one that personally values the enhancements, and is willing to pay for them.

    But for financing with or without a sale, if the deal requires bank financing, the bank can’t factor the value for just the right buyer who personally values the enhancements. The bank must base the value on the average buyer because that is the market they will have to accept in order to sell the property if they have to recover their loan.

    I think the best that can be hoped for is to require the enhancements to be listed in the appraisal, and wait for the market to catch up to their meaning and decide their value.

    The fact that the enhancements do save energy does have real value. But it pays back an upfront investment over time. It is a benefit that the payback continues after the upfront investment is paid off, but the market has to decide whether the payback over time is worth the full sum invested upfront. Not everybody wants to wait for the payback even if it does eventually return a profit.

    It seems to me that what is needed is to sell to the public, the idea that the upfront investment of energy saving enhancements is worth the upfront investment, and then the market will change in response to the point where the enhancements are in demand and will naturally get valued and sold for their value.

    However, I don’t see how you can force this result by law before it comes about naturally.

  3. JoeW519 | | #3

    reply to Ron Keagle
    In the local area, according to my realtor friends (i.e., anecdotal experience), insulation + air sealing + ES appliances and watersense fixtures add 10-14% to the value of a home when buyers are informed of the upgrades. Solar whatever adds another 5% or so.

    their issue, as agents, is getting banks (and appraisers) to factor in what a known subset of buyers finds appealing.

    So the question can become how to get the banks/appraisers up to speed with the buyers real estate agents are seeing.

    I don't mean to say or imply that this is the entire buying public, or even a majority, but it is enough that agents will advertise houses with reference to "green" features.

  4. user-1140531 | | #4

    Selling a Unique House
    Well for just the issue of selling a house, I would push all of the special features that a buyer might value no matter how an appraiser would value those features. Some buyers will not need financing or a loan based on an appraisal. If the house is unique, you have to look for the unique buyer. All you need is one. There are unique houses that would have tremendous appeal to some small number of buyers. And there are average houses that have average appeal to most buyers.

    With an average house, the spread between the high and low possible selling price will be small. That difference for a $250,000 house that is average might be say $25,000. But if the $250,000 house were appealing but unique, the difference between the high and low price might be $75,000. So with a unique house, you have to be very careful not to take that huge loss with the wrong buyer. You have to find that perfect buyer. That means that you have to sell it yourself because realtors are used to average houses. If your house is not average, they will want you to make it average so they can sell it.

  5. gusfhb | | #5

    As much as we would like to
    As much as we would like to be different, the defining issues in house valuation are in approximate descending order:

    zip code

    number of bedrooms

    square footage of living area

    number of baths

    square footage of land area

    everything else

    barring water view or some other irreplaceable issue, the 'everything else' amounts to maybe 15 percent of value. Odds are a green built home has fewer square feet[look at your appraisal, it will list value per sq ft] and the appraiser will watch that his or her valuation does not stray from the adjusted median too far.

    If I were trying to finance a green home with a difficult valuation, I would look for a local bank[who may choose to carry house loans rather than resell mortgages] and a 'right' minded appraiser.

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