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Three-for-One Bonus: V2.0 of Appraisal Institute’s ‘Green & Energy Efficient Addendum’ Hits the Street

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.

The bottom of Page 1 says:

The objective of this Addendum is to standardize the communication of the high performing features of residential properties. Identifying the features not found on the 1004 form provides a basis for comparable selection and analysis of the features. Builders, contractors, homeowners, and third party verifiers are encouraged to complete this Addendum and present to appraisers, agents, lenders, and homeowners(Author’s emphasis)

Just as when they’re provided with potential comparables for a subject property, appraisers have the ultimate responsibility for deciding what information provided on the addendum gets factored into the final appraisal file.

With this clarification, organizations from national green building certifications to local efficiency remodeling programs are now looking to make a populated addendum part of the standard paperwork that comes at the completion of a new-home build or a remodel project.  If you haven’t seen one of these forms cross your desk yet, that’s likely to change.  Green building had its strongest year last year with growth continued and expected to exceed one out of four appraisals in 2013, according to McGraw-Hill.  On the existing-homes side, programs like the Department of Energy’s Home Performance with Energy Star and Better Buildings Neighborhood programs are putting thousands of upgraded homes into the housing inventory through 2013 and beyond.

But the real beauty of the addendum is when you think about two other important groups using this form. First, when a completed copy of the addendum is attached to purchase or refinance paperwork, it can serve as a trigger for competency, indicating the type of experience needed for the job, especially when an AMC is making the assignment.  Likewise, when a completed addendum is attached to the file, it is a consistent method for documenting the opinion of value. While the form itself is not specified in underwriting standards, consistency of its use will mean it’s less likely to trigger any red flags with the file.

Keep an eye out for this Swiss Army Knife of a resource to show up in an assignment that passes your desk soon! And if you are interested in more information on the process for an appraiser to complete the tool, consult the Appraisal Institute’s related resources and courses, or other training on high performance homes.

Laura Stukel

Laura Stukel is an efficiency "insider," serving in multiple industry roles to blur the lines where efficiency overlaps real estate. Her projects include convening the Green MLS/Better Buildings Roundtable in September, 2011. As outputs of that work, she is currently developing the Real Estate Transaction Standard Green MLS Implementation Guide for the National Association of Realtors, and managing a test project to automate how residential green building program data can interact with MLS data.

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Comments
  1. Thanks for your article. This new form is a great step forward, as a consciousness-raiser for everybody in the home sales and appraisal marketplace. The philosophy of the Appraisal Institute has been evolving for quite a while now, and it is coalescing around the idea that reductions in the cost of ownership that result from energy efficient upgrades should reflect in an increase in the retail value of the property.

    Many of our customers are Green, and this is their primary motivation. We would like to see them properly rewarded for their heightened awareness, and their service to the planet.

    The cost of ownership of a house is a combination of the mortgage, property taxes, maintenance costs, and utility bills. If utility bills are substantially lower, the seller of the house should be rewarded by receiving an amount that brings the total cost of ownership up to that of an equivalent property in the neighborhood.

    The current valuation methods suggest that, for every $1 of annual energy savings, the house should appreciate by $22 in value, at mortgage interest of 5.5%.

    Thank you for your work to educate appraisers and realtors to fair practices in Green appraisal. I would like to get more information on the Real Estate Transaction Standard Green MLS Implementation Guide, and the process of implementation. As a solar manufacturer, our customers needs a clear understanding of the methodology to get their energy-efficiency enhancements properly valued when they list their house, and where their resources are for doing this.

    My best regards for your excellent work!

  2. Mr. Gibbs… you wrote “current valuation methods suggest that, for every $1 of annual energy savings, the house should appreciate by $22 in value…”

    I love those numbers… what’s your reference? I’d love to be able to cite this.

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