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   ARTICLE   |   From Scotsman Guide Residential Edition   |   July 2013

Determining the Value of Green

With the rise in popularity of energy-efficient homes, the need for specialized appraisers grows.

Determining the Value of Green

Energy-efficient homes can provide numerous benefits to homeowners, including lower energy costs, improved comfort and reduced pollution. Mortgage bankers and lenders who issue loans on high-efficiency properties can see great returns, as well.

In fact, a recent study from the University of North Carolina at Chapel Hill and the Institute for Market Transformation found that owners of energy-efficient homes are 32 percent less likely to default on their mortgages. The study also forecasts energy efficiency to become a key factor in underwriting performance and suggests that lenders require energy audits on properties just as they require an appraisal to determine a property’s value. These two items shouldn’t be mutually exclusive, however.

For several years now, mortgage-industry associations have been training appraisers on evaluating high-efficiency properties and making supported adjustments for green and energy-efficient features. A disconnect remains, however, between lenders’ expectations about valuing green features, and the tools, techniques and requirements that appraisers use and adhere to when generating credible, reliable opinions of value for such properties.

Evaluating competency

First and foremost, mortgage professionals should know that residential appraisers working for lenders that make loans per the standards of the government-sponsored enterprises (GSEs) must have competency before accepting an appraisal assignment. This is different from the rule in the Uniform Standards of Professional Appraisal Practice, which allows appraisers to gain competency after accepting the assignment if they take certain steps to disclose that in the report.

With the increasing popularity of energy-efficient features among homeowners, however, it’s likely that a residential appraiser eventually will encounter a high-performance house. According to McGraw Hill’s 2012 “New and Remodeled Green Homes” SmartMarket Report, 29 percent to 38 percent of all new construction will be green by 2016. Will appraisers recognize energy-efficient features or even know a given home is a high-performance house if they are not competent in evaluating this market segment

Even when using an appraisal management company, lenders ultimately take responsibility for their choice of appraiser and the quality of the work conducted, but many mortgage companies currently do not choose their appraisers based on their qualifications and competency. On the other hand, the GSEs often do not hold appraisers accountable until it becomes too late. Take, for example, the litigation beginning in 2011 against 17 banks for allegedly misleading Fannie Mae and Freddie Mac about the soundness of mortgages underlying the securities that the GSEs purchased from the banks

With all of this in mind, it’s imperative for mortgage bankers and lenders to enforce the guidelines before the public pays the price. Contrary to some misconceptions, lenders — as well as builders, borrowers and real estate agents — have a right to demand a competent appraiser. Since June 2008, industry appraisal associations have offered hundreds of individual courses on green and energy-efficient valuation, and nearly thousands of professionals have participated in these courses. Thanks to this, lenders can choose an appraiser from a database of those specialized in this rapidly growing area of valuation.

Analysis and review

Mortgage professionals must know that understanding the difference between a high-performance house and a typical code-built house is crucial to the comparable-sale search. An appraiser who does not understand the differences will have great difficulty in understanding the cost approach and the potential differences in the adjustment process of the sales comparison approach.

On the Web

To learn more about energy-efficient homeowners and green appraisals, visit the following sites:

  • To read the report on energy efficient homeowners conducted by the University of North Carolina at Chapel Hill and the Institute for Market Transformation, visit:
  • To read McGraw-Hill's 2012 "New and Remodeled Green Homes" SmartMarket Report, visit:
  • To access the Appraisal Institute's database of appraisers specializing in energy-efficient valuation, visit:

Appraisers can receive training on how to make supported adjustments for energy efficiency using data and residual valuation techniques such as the income approach in a single-family appraisal. Secondary market guidelines do not prohibit such techniques, and for their part, mortgage bankers and lenders should support these techniques when they’re properly supported in appraisal reports.

Appraisers often come across issues when attempting something different than using comparable sales, like making an income-approach adjustment. Because of the typical appraisal-review process, which usually involves assessment by computer first to check for red flags and then by a loan processor or underwriter for quality-control issues, this can raise skepticism.

Further, underwriters often tell appraisers that if comparable green sales or paired-sales analysis for energy-efficient adjustments aren’t provided, they cannot make an adjustment for these features. Paired-sales analys is not the only valuation tool in the appraiser’s toolbox, however. In such instances, mortgage professionals must realize that insisting that an appraiser find comparable sales instead is not healthy for the market or for the appraisal process.

The addendum

The Appraisal Institute released its Green and Energy Efficient Addendum in September 2011 and updated it this past March. The first form of its kind intended for appraisers’ use, this addendum is offered as an optional addendum to Fannie Mae’s Form 1004, which is the valuation profession’s most widely used form for mortgage-lending purposes. Because Form 1004 devotes limited attention to energy-efficient features, green data usually doesn’t appear in the appraisal report or is included in a lengthy narrative that’s often ignored

The recently updated addendum is intended to be easier for appraisers, lenders and consumers to use and understand. It reflects input from the U.S. Green Building Council and the National Association of Home Builders. The Appraisal Institute has added new energy fields to the form and removed two columns dedicated to solar photovoltaic (PV) energy sources, including a description of solar water heating systems in the columns’ place. New items also include references to assist appraisers in completing the solar section and a glossary to assist appraisers, lenders and consumers.

If mortgage banks and lenders were to provide a copy of this addendum to each appraiser assigned to a green property, it would alert that appraiser to the complex nature of the assignment. If an appraiser does not know how to fill out the form, for instance, this in turn should convey to them that they’re not competent in the assignment’s requirements, and a professional appraiser should then decline the assignment. This also should indicate to the lender that it should consider engaging an appraiser with greater knowledge in this area. Additionally, mortgage companies should provide the addendum to homeowners so that they can fill it out and then return it to the lender, who can then share the form with the appraiser.

Although still relatively new, the growing popularity of energy-efficient improvements necessitates the mortgage and appraisal professions to adopt uniform standards for evaluating these properties. This addendum standardizes green language, and makes it easier for lenders and underwriters to understand the unique features of this property type. Real estate agents also can use the addendum to populate their multiple-listing services and assist the green transaction sale and closing processes.

Future growth

With such a rapid rate of growth in green building projected to occur in the next several years, appraisers cannot afford to be uneducated about this evolving topic. Likewise, mortgage bankers and lenders shouldn’t continue to penalize those who are competent by failing to qualify the appraisers working on these types of assignments. When lenders begin to qualify appraisers by requiring proof of competency and minimum education requirements, appraisers should not only comply, but also will help make this the standard for valuing green and energy efficient homes.


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