Appraiser competency is often the topic that arises when an appraised value for green features is not equal to or higher than the contract price. It seems some believe the measure of competency is in the appraised value meeting the requirements to “make the deal”. Many would agree the issue of appraiser competency needs to be discussed and simply outlined with appraisal management companies (AMCs) and lenders especially where green features are concerned.
Why have green features brought appraiser competency to the forefront? Simple, building science has changed dramatically over the last 10 years. If appraisers are not attuned to the changes in building science, they will have difficulty identifying the changes and understanding the benefits of the building science or high performance features.
The same problem exists with real estate agents that will have difficulty selling a property for top dollar if they do not know what makes the property different and how to articulate their benefits. REALTORS® have a competency statement in the Code of Ethics and Standards of Practice of the National Association of REALTORS® under Article 11.
Further compounding the high performance market is the lending world that also has limited knowledge of the new building science and their benefits. Appraisers around the country report they are often challenged by underwriters or AMC reviewers when they make adjustments in the sales comparison approach for energy efficiency or solar photovoltaic systems. The push back from these groups is the result of limited high performance knowledge from the underwriters and reviewers, insufficient support for the adjustment, insufficient description of the features in the appraisal report, an adjustment that is not often made raising a red flag, and the lending world’s leaning toward conservative values to avoid another crash.
Did you know that if an appraiser assigns no value or a ZERO to a particular item, that implies it has been analyzed and requires as much support as a $20,000 adjustment? That is a hard fact to address for underwriters, reviewers, and appraisers.
The secondary market guidelines require lenders and those making appraiser decisions for them (AMCs) to choose appraisers that are competent in the property type and geographical location. The links to the secondary mortgage market competency guidelines for lenders are found in a new builder resource brochure, “Appraised Value and Energy Efficiency: Getting it Right”. The brochure was developed to assist builders in understanding their rights in the appraisal and lending process. The brochure addresses the energy efficiency changes in the 2006-2015 International Energy Conservation Code (IECC). The code increased the energy efficiency between 2006 and 2015 some 31%. High performance or green houses will exceed this code if they are truly high performance. This brochure is a new tool the entire real estate community could use in understanding the lending and appraisal process.
The lender or AMC should have some general guidelines on choosing appraisers and once they have made their choice, the appraiser should examine themselves and make the final competency decision. I have yet to have a lender or AMC provide an appraiser application that asks the question regarding appraisal course work in high performance or green properties. Nor have I been asked if I have experience in valuing high performance properties. Lenders and AMCs are required to have appraiser panels with more than one appraiser. They are charged with hiring the appraiser with competency in the property type and geographical area, NOT the next one on the rotation list, NOT the cheapest, NOT the most conservative, and NOT the fastest.
Appraiser competency falls into the following general categories:
- Coursework in property type (Courses are typically 4-8 hours with exams that test the student’s understanding of the material.) addressing the following list that is not all inclusive:
- High performance and green identified
- Valuation of high performance features
- Identifying green features and renewable energy sources
- Understanding the new building science and energy modeling reports and their relevance to value
- Resources and databases available to assist in documenting and supporting appraisal conclusions
- Self-study of the property type
- Reading articles on building science and valuation of high performance
- Working with a builder and energy rater to understand the building science
- Watching quality videos online of construction techniques
- Seminars – (Seminars are 2-8 hours and do not require exams to test the student’s understanding of the material presented.)
- Webinars or presentations on the topic – (May be online or live and often sponsored by appraiser education organizations, Department of Energy, National Association of REALTORS®, or various organizations specializing in the building and valuation industry)
- Experience in valuing high performance properties
- Working with other appraisers that have taken the courses, passed the exams, and have experience in high performance.
If lenders and AMCs implemented items 1, 5, and 6 in the appraiser panel profile or database, they would have a greater chance of hiring the competent appraiser. This is why choosing the lender carefully is important. The borrower should be asking the lender to describe their appraiser panel database and how they make their selection.
It is too late and too costly to wait until the appraisal is completed to realize there is a problem with appraiser competency. Upon completion of the report you may find the appraisal report ignores the high performance features completely (no listing of them and no analysis), the completed AI Residential Green and Energy Efficient Addendum is not included, and the energy modeling reports were not included or discussed. This is the first sign of errors that should be addressed in challenging the appraisal results.
When the report is insufficient in detailing and analyzing the high performance features, the borrower must be their own advocate to challenge the appraisal. Just because you do not like the value is not a reason to challenge or call an appraiser incompetent. Lenders cannot hire a second or third appraiser just because you do not like the value. They must have sufficient reason to believe the appraisal is insufficient and the issues cannot be resolved with the original appraiser. If a second appraiser is hired, it usually means the borrower is paying for two appraisals.
The best advice to a borrower or someone seeking a value of a high performance property is to provide all the information necessary to allow the appraiser to understand what is behind the walls and what makes the house high performance. The list may include, a completed AI Residential Green and Energy Efficient Addendum, full HERS Report, certification from a green or energy organization, plans and specifications, and renewable energy specifics and energy production. Do not expect the appraiser to have x-ray eyes and know what is behind your walls. Existing homes that are energy efficient should have one or two years of utility bills that could be provided to the appraiser to assist them in understanding the efficiency of the structure.
The challenges and methods for valuing these homes is illustrated in the published study, “What is Green Worth? Unveiling High-Performance Home Premiums in Washington, D.C.” A couple case studies in this study had solar photovoltaic systems valued using PV Value®, an income approach and cost approach to value. This tool is used in Appraisal Institute’s “Residential and Commercial Valuation of Solar” course. It is important for appraisers to understand the income approach and cost approach methods and how to properly use the tool to result in a credible value opinion. Simply allowing the defaults to flow into the inputs will not result in a credible value opinion. Appraisers need full details of the system they are appraising. An appraiser driven study of owned-residential solar photovoltaic systems covering six states was published in 2015, “Appraising into the Sun: Six-State Solar Home Paired-Sales Analysis”, and may be helpful in understanding how appraisers use the data to develop value of solar systems.
The issue of appraiser and real estate agent competency is one that can be overcome but will take time. Being aware of the lending process and the “borrower’s bill of rights”, as I call it, is the first step to resolve the issue. If you do not make your lender aware of the property type upon application and do not choose your lender carefully, you may not like the result.