Appraisal Institute Green and Energy Efficient Addendum Update

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. 



About adomatis

Real Estate Appraiser and author of "Residential Green Valuation Tools"
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