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?