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Solving the Appraisal Problem

Appraisers will be better able to value high-performance homes when more builders start documenting those homes' features

Solving the Appraisal Problem

by Sandra K. Adomatis

Fannie Mae and Freddie MAC are in the process of revising the Uniform Residential Appraisal Report (form 1004). Although the draft has yet to be made public, I believe that it will provide a path for more accurately describing and valuing energy efficiency and green features.

The recognition by the mortgage industry that buyers are seeking green features—especially features that lower their monthly energy bills— is a step in the right direction. It should improve the appraised values of these properties as well.

But while better appraisal forms will help, they're useless if the appraiser and real estate agent aren’t provided with the home's high performance details. The appraiser can't value green features unless those features are documented, and that's the builder's job.

The fact that few builders provide adequate documentation is costing everyone. I've seen many high performance homes that were valued the same as similar homes built to a lower standard. Each of these contributes to a wider problem by helping build a database that says high performance homes don't warrant a sales price premium.

A case in point illustrates this. Not long ago I appraised a house that earned ZERH, ENERGY STAR, Indoor airPLUS, WaterSense, Florida Green Building Platinum Certification, and Florida Landscape Certification. The home had a 45 HERS score. The builder did not complete the Appraisal Institute's Residential Green and Energy Efficient Addendum (AIRGEEA), so I completed it.

I made an MLS search of that neighborhood to identify comparable homes. My search turned up 16 sales in the previous 12 months of homes with living areas within 100 square feet of this home. Prices ranged from $170,650 to $226,000, with an average of $188,000.

Upon receiving my appraisal report, the builder confessed that this high-performance house with five labels had been valued by another appraiser at $5,000 less than the 16 sales in the immediate area that were only built to code. The obvious question: Why?

When I investigated further I discovered the following.

1. The builder had verbally given the certification details to the previous appraiser but had not provided written documentation, like the AIRGEEA and the green certificates.

2. There were no labels inside the home documenting the certifications.

3. The appraiser lacked the knowledge and training needed to accurately value high-performance features.

As of today, most publicly available records, like the property appraiser’s records, don't even identify solar photovoltaic systems, which are often visible from the street. Those records certainly don't include behind-the-wall details.

The Environmental Protection Agency doesn't collect or list addresses of ENERGY STAR certified homes on its website. The MLS, the database most appraisers use, needs improvement. Not all MLS's have searchable green fields and for those that do, the fields often aren't populated because the agents lack the documentation needed to verify the features.

Exceptions are RESNET and the Appraisal Institute (AI). RESNET's Appraiser Portal, which is available to Appraisal Institute Members, lists ENERGY STAR Certified homes by address. The organization also has a public database that anyone can search to find homes by address to find their HERS Ratings. AI has a database of confirmed HERS Ratings and ENERGY STAR Certifications.

Of course, you need an appraiser who knows how to use these resources.

Problems at Resale

Lack of documentation isn't just an issue with new construction—it also causes many high-performance homes to be under-valued at resale. Often, the owner no longer has the green certificates, the AIRGREEA, or other documentation.

If the home earned a low HERS score or green certificate when it was built, chances are the paperwork will have been lost by the time the home goes up for resale. If the features that went into earning those certifications are not highlighted when marketing the home for resale, there's little chance that it will sell for more than those code-minimum homes.

Why should a builder care about their homes' resale value? The answer is that homebuyers who enjoy the benefits of high-performance features and see a sales price premium when they sell are more likely to refer that builder to friends and acquaintances. After all, they likely paid a premium over the cost of a code-built home, so they will expect one when they sell.

Paths to Value

This all begs the question of how to document those features and how to make sure they're properly credited during an appraisal.

One step is to place stickers with the HERS rating and any certifications in a place where they won't be disturbed. I recommend placing them on the electrical box because it's something homeowners don't take with them when they move. If the local building code doesn't allow posting in the electrical box, post the information on a nearby wall or on the HVAC equipment.

This isn't a new idea: manufactured home companies have been doing it for years. I have inspected 30-year old manufactured homes’ model names, climate zone data, and insulation factors, all still visible inside the box.

You also need to search out a qualified appraiser. If the lender or the appraisal company assumes the builder used code-minimum construction, they won't go the extra mile to find an appraiser with the training and experience needed to value high performance homes, and you may need to get involved to make sure they do so. (The Appraisal Institute's Residential Green Registry is a good place to find someone with this training.) If you need leverage, remind them that Fannie Mae, Freddie Mac, and FHA all require that the appraiser have requisite knowledge of the property type.

Even with the right appraiser you will still need good documentation. The AIRGREEA lets you base inputs on preliminary or projected ratings. If the home isn't completed yet, the appraiser can make the appraised value subject to completion and confirmation that the final ratings match or exceed the projected ones.

Also make sure to give the appraiser the complete HERS Report based on a projected rating from plans and specifications.

If you want more detail, a good resource is the brochure, “Appraised Value and Energy Efficiency; Getting It Right.” It includes links to the secondary mortgage market guidelines, documentation needed by the lender and appraiser, and a sample lender letter for the borrower to take to the loan application.

Marketing Green

Documented green features make a great addition to your marketing toolbox. This is another area where a lot of builders could be doing better.

As soon as windows are installed on a new home, place the projected HERS Score in the front window. Buyers may not know what the number means but they will ask questions about HERS or look it up on their smartphones.

Encourage REALTORS to make a .jpg of the certification or energy scores to place in the home's online listing along with any photos, renderings, or plans. Potential buyers will review these before they read the listing information, and if they see a certification they will ask questions about its meaning or benefit.

Ask your agent to attach the full AI Residential Green & Energy Efficient Addendum to the home's MLS listing. This will help appraisers and potential buyers understand the behind-the-walls features that make the home high performing.

In the end, the work of documenting and promoting a home's green features benefits all parties. It will be easier for homeowners to borrow the money needed to pay for energy-saving features. Each high-performance home that sells at a premium over a similar home without the features serves as a potential comp for future sales, ultimately making the process easier for everyone.

And if you're a builder, imagine the boost to your reputation if you're known for quality homes that are high performing AND offer a good resale value.


Sandra K. Adomatis, SRA, LEED Green Associate, is the owner of Adomatis Appraisal Service in Punta Gorda, Fla. Her book, Residential Green Valuation Tools, was published by the Appraisal Institute in 2014.

Comments

re: Solving the Appraisal Problem

Tuesday, September 10, 2019 5:44:27 PM

Sandy's skill set and knowledge base can't be beat when it comes to methods to add value for high performing homes.  With her decades of experience, she is the go-to appraiser instructor.  I always know I can count on Sandy  as the source of information for these homes.  We're excited in Arizona to be bringing Sandy back again for another 2 days of course February 20 & 21, 2020 in Flagstaff!