Home Innovation Insights

Nothing works in the appraisal process unless high performance homes are consistently documented.

How to Help Appraisers Fairly Value Home Energy Efficiency Improvements

March 27, 2014

At Elevate Energy, we design and implement efficiency programs that lower costs, protect the environment, and ensure the benefits of energy efficiency reach those who need them most. As a provider of these programs, we understand that future success is dependent upon energy efficiency becoming transparent in the real estate transaction of high performance homes.

Recently, our organization was honored to attend a Green Mortgage Appraisal Roundtable in Washington D.C. where we joined appraisers, lenders, Realtors, federal agencies, and other stakeholders to discuss the challenges of assigning a value to energy savings.

In 2013, we published a blueprint with the National Home Performance Council that outlines a seven-step process to make energy efficiency visible and properly valued in the real estate market. Appraisals are a key part of the process because the appraiser serves as a neutral third party who assesses a high performance home and indicates whether energy efficiency improvements contribute to the value.

We’ve witnessed real progress in the appraisal process, including enhancements to the appraiser’s toolkit to better address high performance home valuations. And in locations that have pioneered the green building and remodeling movement, we’re even seeing a growing demand for qualified “green” appraisers. However, we still have a way to go.

Consistently Document Energy Efficiency Features

Nothing works in the appraisal process unless high performance homes are consistently documented (see Step 1 of the blueprint). Right now, the majority of home appraisers use Fannie Mae’s Uniform Residential Appraisal Report (also referred to as Form 1004) to provide opinions on the market value of a given property. But, this form lacks an adequate section in which to document energy efficiency features.

In response to this, the Appraisal Institute created the Residential Green and Energy Efficiency Addendum to collect the additional information an appraiser needs when forming an Opinion of Value on a high performance home. The addendum has been well received, including a recent announcement that the Residential Energy Services Network will auto-populate the addendum, enabling direct transfer of a home’s potential energy performance data from builder or home owner to the appraiser. While all appraisers have access to the addendum online, the problem is, less than 15 percent of appraisers are members of the Appraisal Institute.

We’d love to see the Residential Green and Energy Efficiency Addendum used as the model for a standard, approved approach to record the details needed to value high performance homes. The approach could be defined in the approved underwriting guidelines used by larger federal or lending organizations, or government sponsored entities like Fannie Mae or Freddie Mac. While limited in reach, we’ve seen firsthand that the industry has embraced the template and the related process. Clarifications from the government sponsored entities would formalize this model.

We’d also like to see more multiple listing services follow the lead of Midwest Real Estate Data Corporation and make energy costs accessible on listings. This provides appraisers with important data to help establish a credible value opinion. Appraisers are also better equipped to do sales comparison and income approach methods when this data is available.

A strong third party is important. For example, the National Green Building Standard™ certification from Home Innovation Research Labs provides independent, third-party verification that a home is designed and built to achieve high performance in various areas. We look forward to continued leadership from third parties and government agencies.

Assign the Right Appraisers to the Right Properties

Next, and logically, the right appraisers need to be assigned to the right properties. Finding a competent appraiser who has experience in valuing energy efficiency features can be difficult.

Various training initiatives are happening with some success, but lenders and appraisal management companies continue to struggle in finding qualified appraisers – or even knowing they need to assign them in the first place. An important first step would be to ensure that the existing requirements for assigning appraisers based on competency are enforced for high performance home assignments. Definitions of this competency are starting to be drafted by the Appraisal Foundation.

But we see progress here, too. The Appraisal Institute is in the process of opening its Appraiser Registry to include all students who successfully complete the required sustainability courses (and consent to have their name listed on the registry), allowing for greater exposure and marketability of their qualifications and services. Before this change, the directory only listed Appraisal Institute members who had first graduated a designation course and then went on to complete sustainability courses and exams.

Education provides a great opportunity to better connect these qualified appraisers to appraisal management companies and lenders. Appraiser Sandra Adomatis suggests that appraisers, lenders, underwriters, and builders take courses together. “When all the different players in the high performance home transaction come together for training and discussion, they better understand how they can work well together toward overlapping processes and common goals,” Adomatis said.

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