Ever wonder how appraisers develop value of houses with green or energy efficient features? <a href=”http://appraisalinstitute.org/residential-green-valuation-tools/” title=”Residential Green Valuation Tools”>Residential Green Valuation Tools </a>was published last month by the Appraisal Institute. The 189-page book has 13 chapters that address the most often asked questions about the valuation process and green building. As the author of the book, I found the challenge of writing this book a great learning and networking tool. The topic became a passion for me six years ago. It is difficult to analyze something that you do not understand. My challenge was to discover how the green rating building science compared to the building science of the standard building code. Appraisers must understand this distinction because the typical energy efficient home often must be appraised using sales that are traditional code-built houses that do not possess the same degree of energy efficiency. The book has tables, studies, short stories, and charts that simplify the concepts in a way that is more meaningful to the reader. If we could articulate the benefits of a high performance house (an energy efficient and/or green house) in a simple way that buyers in the market could understand, the demand for them would dramatically increase.
The first chapter starts with the basics of defining green building and the six elements of green building. With all the green wash in the market, the basics of what green building is must start the conversation. This chapter is followed by identifying the challenges appraisers have in valuing green and energy efficient houses. Understanding the challenges of valuing these homes will help the real estate professionals understand how they might assist in overcoming the challenges.
Appraisers have requirements to be competent prior to accepting an assignment for the secondary mortgage market such as Fannie Mae and Freddie Mac. FHA also requires competency prior to accepting an assignment. VA is the only one that does not require competency in the property type prior to accepting the assignment. A chapter discusses the competency requirements with references that support the statements. The lender is held responsible for hiring a competent appraiser even if they use an Appraisal Management Company (AMC). Simply stated, competency is not accomplished using an appraiser rotation list.
A chapter is dedicated to illustrating the tools appraisers have in developing value for energy efficiency or other green features. If the real estate professionals understood the tools appraisers can use and the data required to use the tools, it might give them ideas of how to make data more accessible. Real estate agents and builders should spend some time in this section and consider what they have in their files that may not be reaching the appraiser.
Chapter 6 has an extensive description on how to complete the <a href=”http://www.appraisalinstitute.org/assets/1/7/Interactive820.04-ResidentialGreenandEnergyEffecientAddendum.pdf” title=”AI Residential Green and Energy Efficient Addendum”>Appraisal Institute (AI) Residential Green and Energy Efficient Addendum </a>(ARGEEA). The ARGEEA is a communication tool that enhances the typical appraisal form used by lenders, the 1004, that does not address the green features and only has two references to energy efficiency. The ARGEEA is being more widely used in the market by builders, appraisers, real estate agents, homeowners, and retrofit contractors. Those new to completing the form often have questions on how to complete the ARGEEA and this book will answer their questions by providing resources and illustrations on how to add meaningful statements about the data provided.
Steps to solving the problems many markets experience with this new building technology are identified. Chapter 12 identifies steps to a more efficient transaction for a high performance property. Emphasis on networking with all real estate professionals is key to success. For too long the builders, appraisers, real estate agents, energy raters, and lenders have had little interaction. The public will become more knowledgeable about the energy efficient or high performance house once all the real estate partners have the ability to articulate the benefits. Real estate agents are the best group to move the high performance message to the public.
Last week, I lead two workshops in Oklahoma where builders, real estate agents, appraisers, and energy raters spent seven hours reviewing their market challenges for an energy efficient house. One builder made the comment that he had never attended an event where so many different real estate groups came together. He asked why these groups had never worked together before. Every person in the room could identify something that they have in their files or ability to collect to assist in the data gathering problems appraisers face.
The target audience for the book is appraisers, real estate agents, builders, energy raters, lenders, and home owners. If you are facing difficulties in your market and need a resource to learn how you can make a difference, this book is for you.
March 11th, 2014 proved to be an interesting day at the White House Conference Center. Around 75 industry leaders gathered to discuss the green mortgage appraisal problems and possible solutions. This meeting was a follow up to one held last summer, which I did not attend. The morning started with goals for the meeting and information on accomplishments from the government side to promote the green building industry. I spoke on the advancements made in the appraisal industry to solve the green valuation issues. The list included the development of green valuation courses, webinars, books, articles, and the Appraisal Institute Residential Green and Energy Efficient Addendum. The slides showing the presentation can be viewed at the AI website.
The news that brought the most interest was the recent agreement the Appraisal Institute (AI) made with RESNET to allow the energy raters to auto populate the AI Residential Green and Energy Efficient Addendum. Once RESNET Raters input the property data into the RESNET database, they can auto populate the Addendum with the push of a button. The information should be more accurate and robust than appraisers usually receive when the builder or homeowner completes the Addendum. The raters can provide this data to the homeowner, builder, or real estate agent.
The second most interesting news was the Appraisal Institute’s opening the Green Appraiser Registry to all students that have successfully completed the green valuation courses and passed the exams for the Valuation of Sustainable Buildings Professional Development Program. Previously, AI only allowed designated members of the AI to be listed on the Green Appraiser Registry. The action is retroactive and includes all students meeting the criteria of the program to be listed.
The list of challenges appraisers still face in the green valuation problem include the lack of data, Multiple Listing Services (MLS) that have inadequate green fields, inaccurately populated green fields, or no green fields, no central database to research the certifications for a property, databases that are accessible to appraisers or real estate agents, lack of knowledge of green building and its benefits, guidelines that are not clear on alternative methods for valuing energy efficiency or underwriters that refuse to accept any method other than paired sales, lenders and appraisal management companies that do not properly qualify the appraiser for the assignment, and inadequate appraisal fees for those appraisers that have gained green valuation competency. These challenges are huge and not ones that the appraisal industry can solve without the assistance of the National Association of Realtors, builders, raters, and the secondary market.
Fannie Mae, Freddie Mac, FHA, USDA Rural, and other mortgage representatives were involved in the discussion. Fannie Mae and Freddie Mac are reluctant to accept any method other than paired sales to support an energy efficient adjustment. I agree that if a green property does not sell for more than a competitive non-green property, it should not appraise for more. However, in markets where green sales are not available other methods should be allowed to support adjustments. Those methods would include the income approach and cost approach. More appraiser driven studies in a variety of areas around the US are needed to valid the use of the income and cost approaches in green residential properties. Studies presented by academia using hedonic modeling that most residential appraisers cannot explain are not useful in the valuation process. They are not accepted by the secondary market as support for an adjustment either. The Colorado Solar Photovoltaic Study was given as a prime example of a study that was done by an appraiser and vetted by peers. The study used the cost, gross rent multiplier, paired sales, and PV Value Tool to develop value conclusions on solar photovoltaic systems. The paired sales validated the use of the PV Value Tool (income approach) for valuing solar photovoltaic systems. If the market had more appraiser driven studies using standard recognized appraisal techniques for valuing energy efficiency and other green features, the use of methods other than paired sales would be validated or eliminated. It might be these types of studies that will change Fannie Mae and Freddie Mac’s guidelines. Although their current guidelines do allow for other methods, underwriters are not quick to accept them.
Joan Glickman of the Department of Energy presented the Home Energy Score (HES) rating system for measuring efficiencies in existing homes. Joan presented an overview of how this tool would be used in the market. The HERS Index is primarily for new construction and is more costly than the HES Rating for existing homes. At the RESNET Conference in Atlanta last month, Steve Baden reported there were 218,000 HERS Rating done in 2013 with an average cost of $500. The HES rating system is much less and should provide homeowners with a tool to measure how their home may compete with its competition. The HES rating system will provide some upgrades that might be done to make the home more energy efficient and competitive in the market. The HES rating system uses a 1-10 scale with 10 being the most efficient home while the HERS Index uses a scale of 1-100+ with the lower number being the most energy efficient.
Russ Bergeron, President and CEO of the Midwest Real Estate Data, presented how the MLS is working to standardize the language and implement green fields. Russ presented a U.S. map showing the locations with large numbers of green houses that do have MLSs with green fields. While he admits the MLS has a way to go, they are making progress in many areas. Green The MLS Tool kit provides a list of fields that can be implemented in the MLS to allow agents, buyers, and appraiser to retrieve properties with green features. Russ announced the cooperation of the utility company to link the average monthly utility costs for listings in the MRED system. He provided an example of a listing showing the average utility cost for a house. Many utility companies consider this private information and do not release this data but it would be helpful to follow the Chicagoland lead by releasing this data. Most buyers do seek information on the utility cost of a home. Russ spoke of the continued efforts to educate real estate agents on the benefits of green building and the challenges facing the agents when listing a green property. In a litigious society, agents must be concerned about offering so much information that they are viewed as experts when in fact they are not. For this reason, agents are often reluctant to populate the green fields but instead attach the HERS Reports or Green Certifications. However, an attachment is not searchable and presents roadblocks for appraisers.
Following Russ’ presentation, three groups were formed to address the following topics: Valuing Energy Efficiency, Capturing and Leveraging Energy Efficiency Data, Rules and Responsibilities (from Realtors to Underwriters)
The groups were to discuss the challenges and solutions and report back at the end of the session. After an hour, the groups came back to the conference room and reported their challenges and solutions. It seems all three groups’ challenges and solutions focused around the lack of data. Data is available from many different sources but little is shared with the real estate agent or the appraiser. A solution might be to allow any of the valid databases to populate the AI Res. Green and Energy Efficient Addendum like RESNET will soon be doing. All agreed more education is necessary in all areas and especially the public sector. Real estate agents are key to educating buyers and sellers about energy and green features. Russ Bergeron admitted the MRED focused on educating the Realtor but had not done much to educate the buyers and sellers in the MLS environment. That could be as simple as short You Tube Videos or regular news articles or slide shows accessible in the MLS public domain.
Lenders and AMCs need to be held accountable for choosing competent appraisers and fees must be appropriate for the complexity of the assignment. The secondary mortgage market guidelines already require competency prior to accepting the assignment but seems no one is monitoring the process.
Studies driven by appraisers to support the use of recognized appraisal methods other than paired sales to support an adjustment was brought forward. The use of the HERS Index will not be a measure of a houses energy efficiency beyond a certain point. How long is the HERS Index a reliable measure of the structures efficiency? This is a question that requires study. Will the HES score become a reliable indicator of an existing homes efficiency?
Guidelines need to be updated to allow more clarity in underwriting green features. The current guidelines have little guidance for valuing alternative energy sources. Guidelines do not address the passive house that may not require a furnace but to meet secondary mortgage market guidelines would have to install one if they want a mortgage. Underwriters, AMCs, and lenders need to be educated on the green building industry.
All working in the real estate industry need to take advantage of the education available on green building and energy efficiency. Real Estate agents and appraisers are seeking sponsors to offset the cost of green education, which may encourage more professionals to take advantage of the education.
Last but not least, it is essential that market data clearly show that a green house sells for more than a non green house in order for the appraisal to reflect a higher value. Builders and agents must be able to articulate the benefits of green housing in a way that buyers are convinced the benefits deserve a higher price.
So what was accomplished in this meeting? Time will tell. It is my opinion that government will not solve the valuation of green problem. The private market players in the room have the biggest opportunity for making change. The private market can produce better data, more education, more disclosure of green certifications, appraiser driven studies, better appraisal fees, and demand competent appraisers. The government side can improve the guidelines and monitor the lenders and AMCs more closely. So what are you doing to make a change for the better?
Phoenix, AZ hosted the EEBA Conference September 24th through 26th. On September 23rd, a Summit preceeded the conference for local builders, appraisers, agents, and energy raters. I was invited to be a presenter at the Summit. This was my first time attending the EEBA Conference and it proved to be a good educational and networking experience. “Accuracy + Data = Value” was the topic assigned to me with an emphasis on the necesssity for accuracy in reporting sales data in the MLS. The presentation was part of a panel discussion with Jan Green, a Phoenix EcoBroker; Marlo Newman, a local mortgage broker; and Kirsten Shaw, an energy rater. Thomas Hines, Energy Efficient Program Manager at Arizona Power Service, moderated the panel discussion with enthusiam that encouraged the participants to keep the questions coming.
The lively audience engaged the panelist with numerous questions that applied to all U.S. real estate markets when it comes to high-performance houses. A few of the questions are as follows:
- Who can complete the AI Residential Green and Energy Efficient Addendum?
- How can a real estate agent get the AI Green Addendum to the appraiser?
- Can agents, builders, sellers, or energy raters talk to and provide appraisers with data?
- How can agents and builders assure lenders hire competent appraisers for high-performance houses?
- How can MLS improve the data input?
- What does it take to get an appraiser to acknowledge and include green/energy efficient value?
- Why don’t lenders pay appraisers appropriately for high-performance house appraisals?
- Why don’t lenders choose appraisers based on competency instead of the rotation list?
- Should all houses be required to have a HERS Rating?
These are questions on the minds of real estate participants all around the country. Brainstorming the responses resulted in a morning of good ideas and steps to move forward in the Phoenix market. The industry players not present were the lenders and their underwriters. Marlo Newman provided his perspective from the lending side but many of the problems the particpants experience will not be solved without more lenders and underwriters coming to the table to understand the high-performance market.
Gavin Hastings, Marketing for APS Home Performance for ENERY STAR, is a wealth of knowledge of the energy efficient programs. Gavin held a couple debriefing sessions with Laura Stukel, EcoBroker of Chicago, IL and Consultant with CNT Energy, Kristi Matthews of Advanced Energy, Jan Green, and me. Gavin has great marketing and educational ideas that can move the education of energy efficiency forward in all markets. It is refreshing to see how much energy Gaving puts into creative ideas for marketing and high-performance education.
Following the Summit was the three-day EEBA Conference that included a number of industry champions like Sam Rashkin of the Dept. of Energy, Matt Belcher of St. Louis NAHB, Kevin Morrow of Washington D.C. NAHB, C.R. Hero of Meritage Homes, and Gord Cooke an industry leader in building science to name a few presenters. The sessions included a variety of building science topics and energy efficient product update sessions that were informative for all sectors of the real estate market. As a first time participant at this event, I found this conference well worth the time to learn more about the high-performance building science.
The trade show offered a number of vendors that presented the latest products enhancing energy efficient technology. My take away from the conference was a realization that this is a place appraisers can learn much by networking with the building science industry. Appraisers are not home inspectors, structural engineers, or builders but we do need basic knowledge of the building industry. Builders also need an understanding of the valuation industry to market their product with a quick and uneventful closing. It would be great to see more builders attend the Appraisal Institute courses and National Conference.
A big thanks goes to Karen Thull, Executor Director of EEBA, and Kristi Matthews, Business Manager of Advanced Energy for putting this conference and programing together. It was an honor to be a presenter at the Summit and participant at the Conference. I hope next year more appraisers, lenders, and agents will attend the Conference in St. Louis. See you in St. Louis in September 2014.
Three WWWs to completing the Appraisal Institute’s Residential Green and Energy Efficient Addendum
The Residential Green and Energy Efficient Addendum is a form used to standardize the reporting of high performance house features from green certifications to incentives offered. The Addendum can be downloaded in a PDF format from the Appraisal Institute’s Website. It is seems there is much confusion on who should be completing the Addendum, why they should complete it and what they should do with it once completed. The following will provide some answers to the three “Ws”.
Who should complete the Addendum? Since the Addendum is a checklist or organized documentation of the high-performance house features, it only seems logical that the person with the most knowledge of the features be the one to complete. This list would include the builder, homeowner, third party certifier, agent, or appraiser. The person completing the Addendum should include their name, title, and date completed in the appropriate section. When the appraiser receives the Addendum, the appraiser should review the document and agree or disagree with the information provided based on a property inspection and supporting documents. The appraiser may choose to complete their own Addendum based on additional information they gathered when researching or inspecting the subject property. For instance, if the Addendum shows the property is an ENERGY STAR® Home when it is not but does have ENERGY STAR® appliances and windows, the appraiser would revise the Addendum to remove the ENERGY STAR® Home checkbox.
Why should the Addendum be completed? The Addendum details energy and green description features. It assists the appraiser and sales agent in identifying comparable sales to assist in listing or valuing the property. The current residential appraisal form 1004 used by mortgage lending clients does not address high-performance features. Therefore, they are often omitted or placed in a narrative paragraph in the text addendum that is often overlooked.
The Addendum has numerous uses that include an owner’s list of high-performance features (a brag list), supplement to a listing, communication tool for builders, special alert to the lender or appraisal management company, and appraisal Addendum.
Consider the mortgage underwriter that works with a checklist of items to review on the appraisal form with limited time to review the report. If the high performance features are not standardized, they are often overlooked. When the features are not prominent in the report using standardized language, the underwriter might reject premiums or adjustments for high performance features. Underwriters often work under production quotas and a report that is not concisely written with some degree of standardization results in a rejection of adjustments for high performance features. Alternatively, it might result in a call to the appraiser to provide further documentation to allow the underwriter to understand the features and basis for the support. Think how much easier it is to read and understand a document when it is organized and uses checkboxes to describe features. If the appraiser includes the Addendum with the 1004, it quickly alerts the underwriter that this is not the standard property and deserves a closer review.
What should be done with the Addendum once it is completed? Provide the completed Addendum to the lender, appraiser, owner, and sales agent to be used in the appraisal ordering and appraisal development process or in marketing the property. When the lender or appraisal management company receives the Addendum, they realize it will take an appraiser with competency in this area not the next appraiser on the rotation list. This is important to the lender and ordering department because lenders that fall under the Government Sponsored Enterprises (GSEs) have a higher standard than USPAP. They require appraiser competency prior to accepting the assignment. This means the appraiser chosen to do the assignment should have taken appropriate high-performance valuation educational classes and has experience in this property type prior to accepting an appraisal assignment of a high-performance house. Therefore, this Addendum can be a great tool for them to use in identifying high-performance properties.
Attach the Addendum to the MLS. It becomes a great tool for appraisers and buyers to gain knowledge of what is behind the walls of the house and special construction features that result in a house that performs higher than a code-built house. When the Addendum is attached to the MLS, the appraisers will review the Addendum in selecting comparable sales for the property they are appraising. If an appraiser had a completed Addendum on every high-performance house used as comparable sales, it would leave little question on the comparability of the data. It would also result in a more accurate valuation of the property.
Builders nationwide are using the Addendum to complement their specifications and communicate to the appraiser that this house is high performing. Retrofit contractors are completing the form on existing housing and presenting it to homeowners and the lender when a mortgage is involved. Homeowners living in high performance houses are completing the Addendum and using it for marketing the details of the property and for the appraiser when they refinance. Addendum success stories are being touted everyday.
Download a copy of the “AI Residential Green and Energy Efficient Addendum” and make it a part of your property file. Homeowners should keep a copy of the Addendum with the important papers such as the survey, deed, mortgage instrument, and insurance policy. The Addendum provides a history of the special features that may come in handy for years to come. If you make additions or do a retrofit on an existing home, use the Addendum at the time of the improvements to record the details. You might be glad you did when it comes time to refinance or sell the property.
If you have any questions on the Addendum, you may contact me at email@example.com.
Proactive is how many define the Appraisal Institute and their efforts to provide standardization of residential green description. Appraisal Institute announced the update of the “Residential Green and Energy Efficient Addendum” last week. The Addendum provides a form that appraisers, agents, homebuilders, homeowners, and retrofit specialist can use to document the energy efficient and green features of a home. The best time to complete the Addendum is now! If you are building a house, ask your builder to complete the Addendum for the lender and appraiser. Waiting until you need the Addendum may result in omitting important facts that we so easily forget.
Since the Addendum was first published in 2011, it quickly began to fulfill its goals. One of the main goals was to alert the reader that the house has features that are beyond the conventional home. Comparing the features on the Addendum to the code-built house clearly identifies the energy efficient and green features as superior features that will lower the cost of maintaining the house.
Secondly, since the Addendum was published in 2011 it brought stories from homeowners, agents, and builders that it often assisted appraisers not familiar or competent in valuing properties with these features in making the professional decision to decline the assignment. Competency is required prior to accepting the assignment when engaged by a lender that is selling to a Government Sponsored Enterprise (GSE) such as Fannie Mae or Freddie Mac. The Uniform Standards of Professional Practice (USPAP, the minimum appraisal standards) allows appraisers to gain competency after they accept the assignment but the GSEs have a higher standard.
The homeowner, builder, and agent should be aware that they have a right to expect a competent appraiser. Fannie Mae and Freddie Mac hold the lender responsible for choosing competent appraisers even if they employ an Appraisal Management Company to process the appraisal order. Unfortunately, competency is often ignored in the choices made.
How can a homeowner, builder, agent, or lender make an informed decision on appraiser competency? Let us start with history set by state appraiser boards in licensing appraisers. Prior to receiving a state appraiser license or certification, a minimum number of qualifying educational hours is required prior to taking the state exam and applying for a license. Considering this requirement that has been in place for at least 20 years, it is the first place to start competency in energy efficient or green housing. Asking the appraiser what green or energy efficient classes they have taken in the past 5 years, prior to making the appointment or engaging them for an appraisal of this property type is the number one place to establish competency. Next ask, “Can you explain or name the six elements of green building”? If they have taken a class, these elements are the foundation of green construction. The Addendum provides a standardization of data that falls into these six elements. Appraisal Institute provides an online registry of their members that have completed the “Valuation of Sustainable Buildings Professional Development Program”.
Experience in appraising this type of property in this market is another measure of competency. If green construction is new to your area, experience may be limited. Ideally, an appraiser that has had credible education and experience is the best choice.
Thirdly, the Addendum provides a standardization of data that is not addressed in the standard appraisal form 1004 most widely used for mortgage lending purposes. Fannie Mae and Freddie Mac developed standardization of the fields in the 1004 form to allow them to develop a database to make informed decisions on a variety of mortgage and appraisal issues. However, the form does not have fields for green data and lacks standardization of energy efficient features. The form mentions energy efficient features in two places. It seems that the building codes are moving toward green and/or energy efficient construction but the 1004 form is focused on the conventional -built house.
The Addendum update provides more energy fields, solar water heating description, resources for completion, glossary of terms with links, and a clarification of the limitations of the Addendum. A completed Addendum should be provided to the lender by the borrower to alert the lender that they need to choose a competent appraiser for this complex appraisal assignment. The appraiser that declines the assignment due to lack of competency is to be praised.
The Addendum is not required by the Government Sponsored Enterprises such as Fannie Mae and Freddie Mac. This optional form will enhance the reporting process adding clarity required by the Uniform Standards of Professional Appraisal Practice (USPAP). If the appraiser understands the house features, they will be able to choose comparable sales that more closely reflect a substitute property or understand where adjustments for differences are necessary. Keep in mind that the market data drives the adjustment process. That market data may include cost and income aspects. In market areas where few sales with green or energy efficient features have occurred, appraisers will use conventional-built houses as comparable sales. This may require adjustments using the cost and income approaches to support the adjustment. In most cases, the cost approach is more reliable than the sales comparison approach in markets with limited data. It is incumbent upon the appraiser to develop a credible cost approach. In 2011, the added cost to build a green house was approximately 7% above the conventional-built house according to McGraw Hill Smart Market Report 2012. This figure can be much lower where incentives are available to offset costs. This approach becomes a test of reasonableness for the sales comparison approach.
Transforming the housing market to a more energy efficient and green product that will cost less to maintain requires education of the public as well as the professionals working in the industry. Know your right to expect the lender to choose a competent appraiser. Encourage the use of the “AI Residential Green and Energy Efficient Addendum” to assure the building features of your home are identified and analyzed in the valuation process. Encourage the agent to attach the completed Addendum to the listing sheet. Agents that attach the Addendum to the MLS provide a great service to the industry. Appraisers can upload the Addendum and gain a more accurate comparable decision. Moving the housing market forward takes education and a change to the way things have always been done.