Appraisers Hinder ROI on Green Retrofits

Improving the energy efficiency of one’s home is beneficial for a variety of reasons but one may not include improving the home’s value.  Most agree that energy retrofits are good for the environment and save homeowners on utility bills but a recent article by CNNMoney indicates that appraisers are not well versed in valuing these features.

This is heady stuff considering cash for caulkers may be coming soon.  Legislation, if passed, would give homeowners up to a $12,000 tax credit for energy retrofits.  According to the article, this legislation will help the environment, increase energy efficiency of homes, and put contractors back to work.

Rather than defining utility savings, the ultimate question may be how does this impact value?  Two Realtors interviewed for the article said some value is added but not much.  This is due, in part, to the fact that most appraisers are not yet adequately trained to appraise these features in homes.  It’s not clear if the Appraisal Institute would agree with the statements in the article but the trade association has been offering training on appraising green features for some time.  You can get more information on the course, which counts as AI continuing education, here.

  1. Appraiser Inactive

    Well good luck with educating appraisers about valuing the “green stuff”. Try to remember that the only appraisers working in the residential field in 2010 have 1-2 years experience at best. Experienced appraisers left the business in 2009 when FNMA gavce 1/2 their income to the banks. Experienced guys may have taken the time to learn this new valuation technique. The new guys could care less..they’re so busy churning out those $150 orders that they have yet to figure out that they’re actually going broke.

    Green Valuation is just another freebie that banks expect appraisers to throw in. Sorry guys…we’re still trying to figure out the insane 1004MC form from last year.

  2. I couldn’t agree more with this article. We appraisers need a lot more training on this matter. I’m beginning to get appraisal requests for homes with solar electric installations and have a heck of a time figuring out what their value is in the market.

    I’d like to see more training providers develop courses, not just the Appraisal Institute. The AI had just one of these classes in my area in the last year and I couldn’t attend.


  3. I find this article odd. You say that two Realtors agreed that some value is added, but not much. Then you claim that it is the appraisers who are hindering value on “green” improvements to the home. The appraiser’s job is to predict what a home would sell for, in this case, with “green” improvements. If the buying public fails to recognize the value of these “green” improvements by paying more for such homes, and the appraiser accurately reports that, aren’t you blaming the messenger? I have taken a thorough and extensive course on green building techniques and I understand the health benefits, benefits to our society, and the operating savings that green building creates. But if the market won’t pay more for these homes, why is that my fault? As you may have noticed, when appraisers report values that aren’t really there, it hurts all of us. When buyers start paying more, I’ll reflect that in my appraised values.

  4. Here we go again! Blame the appraiser when the value doesn’t come in high enough. Hogwash!

    I am a real estate broker and a certified appraiser. I’m getting pretty tired of the garbage put out by NAR. The National Association of Realtors seems to ignore an obvious fact that in a 1004 URAR appraisal report.form …. that the value is driven by sold comps. If Realtors would sell homes at higher prices, appraisers would appraise homes at higher prices! Realtors help buyers and sellers create the market. Appraisals are market driven! Give me three good green sold comps and I’ll give you a good green appraisal!

  5. Jeremy Barrett

    I am an appraiser and I think that the problem is that people are not willing to pay much more $ for the same size house that is super green versus not. It has NOTHING to do with how well the appraiser is trained, if people are unwilling to pay more for a green house, then it has no value so stop trying to blame the appraiser when it is the market that decides the value, not us.

  6. The best way to describe the value associated with “green” improvements is to think about how the market values a pool. Generally speaking, pools cost a lot more than the amount shown on an appraisal. This is because there are a sufficient number of sales in most market for a comparison to similar housing without that feature. The day after a pool is complete, an appraisal value is likely to be 50% or less in the market. However, the one thing that is over looked is there is another value not available to the appraiser for analysis and that is a value in use. This is not a realty value. The referenced article briefly touches on this in it’s discussion of savings in monthly bills and benefits to “the environment” but these are not makret values. If Realtors were to clearly outline the energy saving features in a house at some future time a market derived value may be found but more likely these types of improvements will have a less tangible value in their continued use. Unfortunately, the Appraisal Institute failed to, or it was eliminated in the editing process, discuss market value vs value in use and focused instead on it’s education program and under trained appraisers.
    The best thing to happen is that Realtors become more knowledgable of appraisal valuation techniques and comunicate them to buyers and sellers of real estate.

  7. This is absolutely true. My husband & I have been building Energy Star Homes since 2002 in the Boise Idaho area. I can show you appraisal after appraisal where our home with $5,000 to $8,000 in energy upgrades is valued at the same level with homes built just to code. Even when the appraiser is provided a detailed list of energy upgrades the increased value is not considered.

  8. PJTMC

    While it has been around for a number of years, the “green movement” is in its early stages of popularity.
    It has been my experience that there is a misconception by the public that the Appraiser “creates” value rather than understanding of the truth which is the Appraiser “reports” value. It is easy for someone, who is not aware of how the appraisal process works, to say an Appraiser is not knowledgeable of its contribution to value. It must first be understood that value is market driven and affected by many variables. Cost does not equate into market value. The Appraiser’s function is to investigate and report what the market place is reacting to just as with any other item, i.e. swimming pools, quality of materials, condition etc. If the “general” market is not responding to energy upgrades in a significant way the Appraiser can’t arbitrarily assign a value contribution simply because someone thinks it should. Any Appraiser “worth his salt” is monitoring this issue in their respective market areas and I anticipate in the coming years (as market interest increases) this factor will be taken into consideration as market dynamics change. As for now, the data I have been reviewing does not show a measurable interest that would warrant a significant adjustment for “green” items. My opinion is not personal in nature and relies on what the market place is telling me.

  9. Appraiser Inactive

    Appraisers are now getting around $150 per appraisal (down from $300 in 2009) thanks to HVCC. In addtion they are being forced to complete the new form 1004MC (an extra 30 to 120 minutes per report) free of charge. Not enough? Well consider the fact that they are being given 9.9 seconds to accept a report or lose the order and they’re forced to complete orders within 24 hours. Not enough? Consider that they are being asked to provide 4-6 comparable sales free of charge.

    Experienced appraisers left the business last year. The average appraiser doing work now has 1.2 years of experience. They are slapping values on appraisal forms like pickles on hamburgers. Do you really think they are in a position to address the green value of a home? Think again.

    If real value is a concern…put a halt to HVCC and the AMCs who ruined the appraisal profession…then we can address such meaningless issues as “green”. Give me a break!

  10. Doug Quenzer Cert. Res. App.

    The issue is market value. How does a feature increase market value? If there is no market data to determine market response then it is difficult for an appraiser to make a conclusion. For example if only one sale sells with a ground water heat pump, and there are no other sales nearly identical to that house it becomes very difficult to determine market difference using paired sales analysis. However over time when more homes sell with “green” features it will be more evident what the market reaction is. Also when a signficant number of home buyers show interest in those features it will be more evident. But just to make an adjustment because it “seems” appropriate is guess work.

  11. Tom

    It is not a matter of being well versed. It is a matter of there being no data to support the energy upgrades actually adding value. The upgrades may make a home more marketable, but not more valuable.

  12. Mike in Vegas


    I recommend you read the article again.

    After doing the math on a hypothetical retrofit, the CNNMoney author indicates there could be a purchase price increase of $20,000 for the $100/month savings to the owner. The CNNMoney article then says this:

    “Yet that extra $20,000 does not show up on a home’s appraisal.”

    (followed by the quotes from the Realtors)

    “It sounds good on paper, but it’s just not how the American consumer makes choices,” said Geoghan, the realtor. ‘If you’re buying a house, and you see a furnace has a 95% efficiency rating, are you really going to make your decision based on that?’

    Another realtor agreed.

    ‘How much can you really raise the value, maybe few thousand dollars,” said Laurie Hassey of the Long Reality Company in Tucson, Ariz. “It’s still all based on square footage.'”

    While the quotes may warrant some additional discussion, they both demonstrate that Realtors understand that it is the purchaser that has the power to determine what features do and do not increase the value of a house. While appraisers (licensed or certified) simply measure and report the value.

  13. Henry A. Youngstrom, SRA

    Energy efficient retrofits only have a market value of the dollar amount that an informed buyer would be willing to pay for the improvement. The most logical way to value an energy efficient retrofit is by capitilizing the cost savings in utlitiy bills over the life of the improvements. Typically, it is going to be a small fraction of the cost of the improvement. Insulation, calking around windows and doors, etc. is a good and inexpensive investment. Replacing heating and AC systems might only be economically feasible if existing systems are fully depreciated. The belief that cost equals value is not always true.

  14. Here again is a classic example of the Real Estate community not understanding what the role of the appraiser is. We don’t create value, the market does. It’s not our function to add value because someone adds a feature, whether it is green or some other amenity. Our job is to interpret what the market reaction is to a certain amenity with respect to what market value is, or, in other words, how much is the most probable buyer likely to pay for the amenity. Because this field is in its infancy, there’s not a lot of data to support what that contribution might be. Cost is not necessarily value, although many of my fellow Realtors would like to have us just add up all the improvments made to a property, add it to the acquisition price and voila, you have a value. Well, that’s one more bad practice which could catapault us into another crisis if it became widespread. I’ve been a Realtor for longer than I wish to admit (42 years). Beginning about four years ago, many of us old codgers began to say that we were headed for a huge crash. Our younger peers had a tendency to actually mock us when we mentioned such things. The hue and cry was, we now have safeguards we ddin’t have in place during the 70’s and early 80’s when we had the last big debacle. We were too old and hadn’t kept up with the times. Well, we all know what happened don’t we?. Take it from an old timer, when the green features are accepted in the market place and the buyers are willing to shell out the bucks for those features, they will be included in the opinion of value by knowledgeable appraisers.

    Remember, appraisers are not the creators of value, the market is. When the market is ready to pay for the greening of America, the value will be included in the appraisal. The process will take some time, but I’m confident that these items will have value as the cost becomes justified and begins to clsoe the gap with market value. If government policy is to increase the cost of energy, energy saving features will probably become acceptable to the public. Then the public will shell out the dollars and it will be reflected in contract prices. It’s a little like starting a new development in a remote area, there’s no comparable data for the first homes built, and they are the most difficult to appraise. Once the development gets under way, data becomes more available and appraisals become more reliable and more dependable. The same goes for new technology, whether it’s in new homes or retrofitting existing homes, the green features must be compensated for by the buying public before the appraiser can attribute value. In commercial or multi-family applications it’s easier, if the feature has a positive effect on income, the item can be capitalized into a value. We don’t usually have such a situation in single family appraisal.

    Without stereotyping,we have a problem in the appraisal industry at this time which is a result of the recent real estate bubble. In order to meet the demands of the high degree of activity during the bubble years, the appraisal ranks were expanded substantially. I have no idea, but I’m guessing that a substantial percentage of the practicing appraisers have only a few years of experience. Most of that experience is in the narrow range of mortgage finance appraisal and was gained when there was a plethora of data to work with. Now, with diminished demand, an oversupply of labor (appraisers), a shortage of good comparable sale data, a market reacting to a desperate contingent of appraisers who are willing to work for bargain basement fees, the financial industry has responded by abandoning the quest for quality in favor of cheap appraisals. . In fact, they still charge the full appraisal fee, but by virtue of government regulation, they have been allowed to get into the appraisal business through the acquisition of Appraisal Management Companies. They charge a full appraisal fee with the blessings of government, bottom feed for the cheapest appraiser they can find and keep the difference, often keeping more than half the fee for acting as an “appraisal broker”, thus fattening their own coffers even more. All the while continuing to put our nations economy at risk because they know they are “too big to fail” and the feds will always be there to bail them out with your tax dollars.
    And while such a bailoout took place over the last few years NAR hailed the action as a necessary to save the nation. I wonder.

    Where is the National Assocaition of Realtors while all this is going on? When the banks wanted to get into the real estate brokerage business, the hue and cry was far and wide. National extolled us to send in money to support the fight against such an intrusion into the real estate brokerage business. Well, let me tell you something, most residential appraisers are Realtors too! Where have you been National???

    Beware!! The big banks are sneaking in the back door by simply knocking off the specialy fields first. When they get control of all of those areas, your numbers won’t matter anymore. Because they’ll control the Title Industry, the Insurance Industry, the Appraisal Industry and of course the money supply. They will have virtual control of every facet of the real estate business except brokerage. Then, it won’t be long.

    I’m not contending that this is some type of conspiracy, it’s just the way business moves if there’s no resistance. NAR certainly has not put up any resitance, in fact it may be tacitly supporting the actions for some misguided reason.

    Right now you are big enough to support your little brothers and sisters in the industry, but if you let them fall, you will be all alone.

    I guess, I’ve gone on long enough.

    Ronald Keeler
    Certified General Real Estate Appraiser 30320

  15. I’m in agreement with this article. I approve of the idea for appraisers learning to value properties with recent energy efficient updates. People are and will spend alot of money improving homes and I feel they should be rewarded for their efforts.

  16. Mike B

    Its very simple…the “energy retrofits” are an added amenity. The value would be based on the markets response to the item (how much more or less would the typical buyer pay for the item). In most areas, people generally don’t want to pay much more for these items, so the value isn’t based on a dollar for dollar amount. It differs in each market as well, with some areas seeing a higher market demand for energy saving devices, so they add more value in thses areas. In my market (New Orleans), we are just getting into solar panels and other energy saving devices, so there isn’t much added value, due to the low demand for these items.

  17. Joel Francis, SRA, GAA, GRI

    I have been appraising since 1982. I have observed several energy efficient items, designs and retrofit items that never made it mainstream; at least not in this region. Examples include: solar panels, envelope walls, various active and passive solar applications, and etc. Most appraisers are more knowlegable about this issue than they are given credit for. What appraisers often find is that, when a property is exposed to the market, only a small fraction or none of the costs to install and maintain the green item is recovered. Some green technologies actually create new problems and costs. I get the impression that appraisers are being pressured to create a value where possibly none exists. If the market indicates there is value, great. However, valuations should never be forced and based on someones agenda.

  18. Paul Kressin, CRA

    Building in green features is good homeowner business. The real question that appraisers must answer is ‘what is the buyer willing to pay for these features?” There are home upgrades that make a property more saleable but do not inspire buyers to pay more for them. Does green building and retrofitting add more? It depends on the feature and does it add dollar for dollar value equal to the cost? It can but in most cases, like most remodeling, does not. This is something that realtors should push, but since appraisers do not set the market, we simply study and intrepret the market,. It is up to the sales agents to convince buyers of the utility which they should pay more to aquire in a property. Bottom line, don’t blame the appraiser for a market that will not pay for green.

  19. It’s not that appraisers are not well versed or trained regarding the contributory value of “green components” – it’s more about what the “market” will bear. If the market does not demontrate a value differential. It has been my experience (30 years) that event a more efficient heating system or a solar heating system add very little if any value to real property overall. It is recognized that the user/owner does enjoy cost savings – but the market has not yet converted that to value.

  20. I feel that the very heading of this article “Appraisers Hinder ROI on Green Retrofits” unfairly characterizes the role and function of the appraiser in the valuation process as being adversarial or one of advocacy, which by definition it is not. The appraiser’s role in a real estate transaction is neither to “hinder” nor promote, but to essentially serve as market analysts for the purpose of measuring market value for the benefit of their client. Appraisers, and therefore appraisals, are intended to be an unbiased opinion of value as defined by the intended user of the report. Since most appraisals prepared in connection with a real estate transaction are for lending purposes, most all appraisals that are developed for lending purposes are based upon the definition of market value is used by agencies that regulate federally insured financial institutions in the United States which defines market value as:
    The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

    o Buyer and seller are typically motivated;
    o the buyer and seller each acting prudently and knowledgeably;
    o A reasonable time is allowed for exposure in the open market;
    o Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
    o The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

    (Source: 12 C.F.R. Part 34.42(g); 55 Federal Register 34696, August 24, 1990, as amended at 57 Federal Register 12202, April 9, 1992; 59 Federal Register 29499, June 7, 1994)

    The significance of the definition of market value to the appraisal process is that it clearly defines the applicable conditions for measuring the market impact or value of the various features and amenities that comprise the subject in the appraisal approach. The Uniform Standards of Professional Appraisal Practice (USPAP) defines appraisal approach as “A systematic way of developing a value indication using methods and techniques; examples are cost approach, income capitalization approach, and sales comparison approach.”

    In valuing real estate and the components that comprise it, the applicable definition of market value gives direction to the appraiser with regards to the mechanism for measuring their contributory value. In effect, the appraisal process is a systematic process of replicating the interactions of buyers and sellers in the marketplace based upon the analysis of market information. This information comes in the form of sales, listings, costs data and rental or income data.

    How then does this relate to the valuation of “Green Retrofits” or energy saving items? The answer to the appraiser is clear in the form of the question that they must answer: How does the market react to “Green Retrofits” or energy saving items? Keeping in mind the applicable definition of market value for lending purposes, in the appraisal approach appraisers must evaluate “Green” components as they would any other feature and amenity. The appraisal approach will utilize traditional methods such as sales extraction, cost/benefit analysis or income capitalization.

    In an ideal world, the appraiser would measure the contribution of “Green” items through a market based technique known as “paired sales analysis”. In this sales abstraction technique, the appraiser will attempt to measure the specific market differential for a specific feature by contrasting otherwise similar paired sales which differ only in that one feature or by isolating the remaining differential after making all other adjustments to more dissimilar sales. This method is most reliable and applicable when reasonably comparable sales are available in the market from which the contribution of a given feature or amenity can be isolated. However, in markets where there is a general lack of sales having “Green” features, this approach is of little value.

    While the cost of “Green” items can generally be found, that alone does not necessarily provide a true measure of value since the replacement or reproduction cost new of an item is only one component in the Cost Approach. After the replacement or reproduction cost new of an item or feature is determined, the appraiser is required to deduct from that any depreciation relating to physical wear and deterioration, functional obsolescence (an element of depreciation resulting from deficiencies or superadequacies) and external obsolescence (factors outside the property that may be affecting value). The deficiency of using the Cost Approach as the sole means for measuring the value contribution of unique or innovative amenities such as “Green” items is that in the absence of any sales information from which to measure market acceptance it is very difficult to adequately and accurately measure depreciation, in particular functional obsolescence.

    What then remains for the appraiser to develop an appropriate measure for “Green” items? In my opinion the answer lies in the definition of market value. In that definition, market value assumes that “the buyer and seller each acting prudently and knowledgeably” and the condition that “the buyer and seller each acting prudently and knowledgeably”. In the absence of other reliable market based approaches of market impact such as sales or cost based measures, I believe that the appraiser can arrive at some measure of the contribution of “Green” items of construction by using the Income Approach technique of capitalization. Since the accepted definition of market value for lending purposes implies that buyers and sellers are acting knowledgeably, one would expect an informed, knowledgeable buyer to relate any comparative reduction in the cost of ownership due to a “Green” item of construction and translate that in to a current value by capitalizing that savings to indicate a value impact.

    Appraisers capable of utilizing such an approach will be generally limited to those with adequate training, education and experience to properly apply this technique. Further, its successful utilization will certainly require that clear measures of the specific savings in the ongoing cost of ownership will be necessary. That being said, until there is adequate sales information available, the task of measuring the contribution of certain “Green” features that do not necessarily result in a measurable saving in the ongoing cost of ownership but in the eyes of buyers and sellers are of a more altruistic in the interest of the environment, quantifying such items will remain elusive.

  21. Our experience has been that the purchasers are not willing to offer more for these houses. Whenever the homeowner has listed at a higher price to account for the improvements, there are no offers. It never gets to the appraisal stage. This is one issue we cannot blame on the appraisers in this area.

  22. Verne Hebert

    What an absolutely awful article title. The topic is certainly worthy of discussion. The first thing to clarify is Appraisers do not decide what has value in the market and how much, the market does. The appraiser is merely the messenger, always reflecting the market. If data does not exist in the market to support value, then the value cannot be validated–ever–on any particular item.

    I appraised for over 20 years. I am a designated Master Appraiser. I now have a real estate office, and concidentally I am now creating a new alternative energy company. I carry 11 additional certifications with regard to building inspection, engineering, construction, appraisal.

    There is absolutely no data here in my market to indicate any positive contribution to market value (maybe marketability-but today that does not exist) created by “green construction”.

    Your title is ill-placed, and wrought with a fundamental, technical error–appraisers do not decide the market does-when the market demonstrates they will pay the appraisal community will show it in the reports.

  23. Phil Vance

    Funny. Appraisers are not trained to value these items. I beg to differ, most are. The probem with this is the public is not willing to pay for these items. The appraiser only reflects what the public is doing. He does not create value. I live in a cold climate most purchaser will not pay any more for most of these items. They expect it in most homes.

  24. J. Rodney Holland

    A lot of folks seem to be confused about what an appraiser does, or does NOT do. Appraisers do not SET value. They measure it. By example, having vinyl siding on a home, according to the vinyl siding salesman, saves on utilities. And, of course, it reduces the need for a lot of exterior painting. But, DOES IT ADD VALUE? Value is determined by the buying public, and not by the appraiser. Are buyers willing to pay more for a home that has vinyl siding (or, for that matter, a lot of other wonderful, “green” retrofits?
    There is very little raw data to support a significant difference in what the public will pay for a “green” home vs a “non-green” home. In fact, there is some evidence that being “green” may not be a selling advantage.
    Take the “earth-contact” homes for example…..they are certainly “green” in energy savings. But, they are hard to sell, and frequently bring no more dollars than a similar sized “stick-built” home.

    so, until the PUBLIC is fully convinced of the advantage of a “green” home and reflect their awareness in their buying habits, appraisers can NOT arbitrarily “inflate” value for “green” features, regardless as to how valuable the appraisers deems them to be.

  25. Peter

    Why do you think appraisers are the ones responsible for this? We only report what the market is doing, not make up values for things. If these houses are worth more, then purchasers will pay more for them and the market will dictate that, which will show up in comparable sales that we use. If “green” homes sell for more, because PURCHASERS decide to pay more for them, then demand will go up and thus the value. Not sure where the connection is with appraisers not understanding what they are and that is the reason you can’t sell them for more. Appraisers are not the ones buying them. You would need to be a contortionist to understand your logic. If sales in a market that are a combination of “normal” homes and “green” homes show no difference in selling price, that is what we report, if “green” home are selling for more, the market will make it obvious and that is what we will report. Sounds like you need to educate your PURCHASER on the benefits, not the APPRAISER.

  26. David

    The problem is not that appraisers are not versed in valuing these items. It is that there are very few comparable sales to compare the improvements to in the market. This means that the value cannot be quantified. There is a general misconception that appraisers determine the value of items in an arbitrary manner. The truth is that the value of any item (i.e.: its adjustment on an appraisal) is determined by what the market determines its worth to be. The appraiser uses paired sales in the market to determine what the markets reaction to a particular item is. The market’s reaction is what additional amount a property with a particular feature or influence would sell for compared to an identical property without that feature or influence. However, there have to be previous sales within the comparable market to make this determination. If there have never been any sales, this number cannot be quantified. There is no bank, mortgage company or government sponsored entity (GSE – i.e.: Fannie Mae; Freddie Mac) that will accept an appraisal with adjustments that cannot justify the adjustments made on an appraisal. While a “green” home cost a lot of money and is a great selling point, it is an extremely difficult item to find in a previous sale.

  27. Tere Boyd

    Thanks to Ronald Keeler for one of the clearest, insightful comments on the current market atmosphere that I have have seen- He was kind about the time frame though…..we’ve been trying to warn people for at least ten years- warnings based on the “new” quota and commission driven lending practices and loan products that skewed the market-