Summary: Lack of time, information, and resource has made it difficult for appraisers to factor green building into their valuations. Now, the Northwest Energy Efficiency Alliance has released a means for appraisers to gatherincremental green cost data locally. The National Association of Appraisers calls NEEA’s Cost Data Addendum as “a significant step forward in providing data to residential appraisers about local incremental costs to install energy-efficiency and green features.”
While residential appraising still relies heavily on the market or sales comparison approach, green building and particularly energy efficiency is now recognized in some areas as a new market influencer. With this, appraisers need verifiable and credible secondary evidence to support an adjustment to the primary approach. Where can appraisers go for this secondary evidence?
In March, a joint study by the University of North Carolina at Chapel Hill Center for Community Capital and the Institute for Market Transformation (IMT) found that owners of ENERGY STAR-rated homes are one-third less likely to default on a mortgage than the average borrower. Home Energy Efficiency and Mortgage Risks used a sample of 71,000 home loans from 38 states and the District of Columbia, all derived from CoreLogic’s mortgage database. The sample was restricted to single-family, owner-occupied houses whose loans originated during 2002–2012 and were used for purchase only. The focus of the study was on owner likelihood to default or prepay and not on the contributory value of energy efficiency features.
“We were quite surprised by the numbers,” said Nikhil Kaza, assistant professor of city and regional planning at the University of North Carolina at Chapel Hill and one of the study’s authors. “We thought there would be some association between energy efficiency and mortgage risk, but we did not expect such a large association.”
More research is needed to determine causation, though a recent article from NBC’s Today Show, offers a telling anecdote. The Today Show profiles an Olympia, Wash., couple who paid a premium to make their 2,000-square-foot home energy efficient but were enjoying greatly reduced carrying costs as a result. “They pay a measly $70 a year to heat and cool the place,” the show’s Web site says.
The survey’s finding of a strong link between energy efficient homes and loan performance puts attention on underwriting practices that today don’t account for efficiency, said Center director Roberto G. Quercia, a co-author. “Consumer and industry acceptance of energy efficiency is high. But the lack of broad consideration of potential energy savings in the mortgage underwriting process still prevents many moderate- and middle-income home buyers from fully enjoying the cost savings,” said Quercia. “Since our study findings now show that energy efficiency is strongly and consistently associated with lower mortgage lending risk, lenders and policymakers have one more reason to promote it.”
IMT has been working for several years on the Sensible Accounting to Value Energy (SAVE) Act. The bill is an attempt to develop standards for valuing energy efficiency in the appraisal and mortgage underwriting processes. On June 6, 2013, Senators Bennet (D-CO) and Isakson (R-GA) introduced SAVE in the Senate as S. 1106. The GovTrack website summarizes SAVE as “a bill to improve the accuracy of mortgage underwriting used by federal mortgage agencies by ensuring that energy costs are included in the underwriting process, to reduce the amount of energy consumed by homes, to facilitate the creation of energy efficiency retrofit and construction jobs, and for other purposes.”
The NATIONAL ASSOCIATION OF REALTORS® has worked with IMT over several years to minimize the impact on older homes and worked to ensure that the proposed legislation did not stigmatize or disadvantage older homes in any way. On June 5, NAR send a letter to Senators Bennet and Isakson, applauding their efforts on the bill.
In 2011 the Appraisal Institute released one work-around to address three major sticking points that have made it difficult to appraise high-performance or “green” homes.
The first problem has been that the most important features of these homes are often invisible during a typical appraisal — either packed into the attic or programmed into appliances and other systems. The second problem has been that the standard Form 1004 includes one small box for “energy efficiency features” which is far too small to capture any important points about either the subject property or the comparables. Finally, while the appraisal industry has been providing a growing number of courses and certifications for appraisers working with high-performance homes, there has been no simple way to match these competent appraisers to assignments for high-performance homes.
That all changed 18 months ago when the Appraisal Institute introduced the Residential Green & Energy Efficiency Addendum. Things got better once again with their release of v 2.0 of the Addendum last week.
The first version of the tool has been extremely well-received; it has worked magic to simplify how information is presented to or gathered by an appraiser, serving as a means to verify opinions of value for High Performance Homes and helping to identify competency requirements. Version 2.0 is very consistent with the first release, simply clarifying some field names and some organization tweaks that make it easier to use. Perhaps the biggest change for the appraiser is that it spells out an answer to the question: Who should complete this addendum?
The answer is clearly this: whoever has the most first-hand knowledge with the performance and features of this home. Continue reading »