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   ARTICLE   |   From Scotsman Guide Residential Edition   |   September 2017

Is Green Worth the Green?

Appraising energy-efficient homes requires close coordination

Is Green Worth the Green?

Energy costs, advances in technology, environmental concerns or the desire to be on the cutting edge all have driven advances in what are called “green” homes. A growing number of homeowners are interested in purchasing energy-efficient homes or renovating their existing homes to be greener.

Unfortunately, determining valuations for energy-efficient green homes is an area that is still fairly undeveloped. Despite progress in green manufacturing and building — and the creation of new loan products that originators can offer to help borrowers attain their dream green homes — a great deal of learning and discovery is still taking place when it comes to appraising these properties.

Some of the objectives of going green include better indoor air quality, reduced utility expenses and easier maintenance. Also, some owners probably expect their green homes to appreciate more in value over time compared to more conventional homes.

Evaluating the value of green home features and improvements can be difficult, however, which can sometimes make it tough for originators to get loans approved on energy-efficient homes. Green appraisals require close coordination between everyone involved in the lending process, from originators and appraisers to construction professionals.

The Appraisal Institute’s Residential Green and Energy Efficient Addendum is a core document in the valuation process of green homes. Before discussing the valuation process, however, let’s look at what makes a home green and what criteria must be evaluated during an appraisal.

The green home

A green home can encompass everything from a property with outstanding insulation and the latest Energy Star appliances to more expensive homes with specially designed energy-efficiency features, solar panels for electricity generation or geothermal heating and cooling.

Green building is the practice of creating structures and using processes that are environmentally responsible and resource-efficient throughout a building’s life cycle, from siting to design, construction, operation, maintenance, renovation and deconstruction. The terms high-performance building and green building are often used interchangeably. Green-home certifications have been developed to help assess these homes and, likely, encourage their adoption by consumers.

One prominent green certification is the National Green Building Standard, developed by the National Association of Home Builders (NAHB) and the International Code Council (ICC) “to establish a nationally recognized standard definition of green building for homes.” The standard features a comprehensive “nuts and bolts” specifications guide for builders and contractors.

This standard, which also carries American National Standards Institute (ANSI) approval, has four levels of attainment, Bronze, Silver, Gold and Emerald. To earn the Emerald performance level, a building’s energy use must be reduced by 60 percent or more.

Most originators also should be familiar with the LEED (Leadership in Energy and Environmental Design) designation, which was developed by the U.S. Green Building Council (USGBC) and is now in its 4th iteration. A LEED building can earn Certified, Silver, Gold and Platinum rating levels, and the program covers residential homes as well as commercial buildings, portfolios of buildings and campuses. As many as 150,000 housing units worldwide are now LEED-certified green properties, according to USGBC estimates.

Evaluation criteria

Green homes are generally evaluated or graded by looking at six core areas. These are the property’s site, water usage, energy consumption, material types, indoor environmental quality, and the cost of maintenance and operation. Here are some examples of these elements:

  • Site: Home placement and landscaping that shelters the home from wind, sun and inclement weather help to improve a home’s energy efficiency. Smaller lots and being close to public transportation also help.
  • Water: Water-conserving plumbing fixtures, reclaimed-water systems and rain barrels or cisterns used for irrigation help here.
  • Energy: Energy Star appliances; high-efficiency heating, ventilation and air conditioning (HVAC) systems; heat pumps; radiant floor heating; geothermal systems; solar-thermal water heating systems and special insulation all help to improve energy efficiency.
  • Materials: Recycled metal as well as stone or wood from rapidly renewable, responsibly managed forests matter here. Low chemical emission, nontoxic materials and materials that take less energy to harvest or manufacture also help.
  • Indoor environmental quality: Natural ventilation is a plus here, but energy- or heat-recovery ventilators, humidity-monitoring devices and radon systems are great additions.
  • Maintenance and operation: The key is to build with sustainable products and components that cost less to maintain and have better life expectancy.

Appraisal issues

Now that we have a better idea of how green homes are certified and what components must be evaluated on energy-efficient properties to determine their value and efficacy, let’s take a look at some of the issues with appraising green homes.

Green building is the practice of creating structures and using processes that are environmentally responsible and resource-efficient.

Appraisers are becoming more familiar with green homes and the features and certifications mentioned earlier, but this is still a specialty niche, and appraisers will need to rely on the expertise of originators, real estate agents, and the builders or contractors responsible for the green features of the property to fairly evaluate the value of the green components of a property.

Finding suitable comparable homes for valuation purposes is one key challenge that appraisers face when dealing with green homes. Many sustainable features are not listed in public records, including the Multiple Listing Services (MLS). The Realtor community is working to help remedy this situation by incorporating more and better green classification and notes in the MLS, but appraisers may require input from local real estate professionals to recognize and value these green features.

Lenders and mortgage companies also can help with this issue. When originators submit appraisal orders on green or energy-efficient homes, they should list as much information as they can about the green features of the home. Whenever possible, any certifications, such as LEED, National Green Building Standards, Zero Energy Home Ready, ENERGY STAR, etc., should be submitted along with the appraisal order. 

The appraisal community also is responding to this challenge. The Appraisal Institute’s Residential Green and Energy Efficient Addendum was developed to standardize the communication of green and/or high-performing features of properties. For homes with significant green features, this addendum should be made part of the appraisal file.

In most cases, however, the appraiser will not complete the addendum. It should be completed by the person most knowledgeable about the Green features of the home, usually the builder or contractor. That individual is liable for the accuracy of the addendum. This is similar to condominium appraisals, where the condo association fills out an attachment that the appraiser then considers in valuation.

Evolving process

Clearly, green-home features can represent a large expense on the part of a home’s builder or buyer — an expense that originators will want to help their clients cover through loan products. Although no one knows how prevalent green homes will be in the future, appraisers are required to identify relevant characteristics that determine valuation.

Mortgages offered by the U.S. Department of Housing and Urban Development already take into account the energy costs of houses, allowing borrowers to extend their debt-to-income ratios to take into consideration lower energy costs.

This process is still evolving. The Appraisal Institute’s Residential Green and Energy Efficient Addendum states the following: “The energy and water elements are the most measurable elements of green or high-performance housing. Appraisers need savings amounts to develop an income approach to support energy-efficient contributory value.”

We must remember, however, that appraisers must go by what the market determines a property is worth, based on the prices paid for comparable properties. In some locales or communities, enhanced green features in a home may be desirable and add value to a property. In other areas, a green home may be “ahead of the environmental curve,” and that market may not value a green home over those of comparable size, age, location or construction character.

•  •  •

In the end, originators, Realtors and builders all must work together to supply appraisers with all relevant information about any property with special green features. Only then can the appraiser deliver a verifiable appraisal that serves everyone involved in the loan transaction.


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