Building sustainable homes today makes sense: consumers want them, you know how to build them, and many municipalities demand them. The last frontier to full-scale green home acceptance, however, is financial: specifically, it’s making sure a home will appraise for its full value.
The Appraisal Institute
is working double time to catch up to green building practices while addressing other issues within its industry, such as the inflated appraisals that contributed to the housing bubble.
In fact, a law put in place in May 2009 in response to escalating foreclosures actually works against green appraisals, explains Sandy Adomatis of Adomatis Appraisal Service
, Punta Gordo, Fla. Called the Home Value Code of Conduct (HVCC)
, the law prevents lenders from putting undue pressure on the appraiser to inflate a value.
Because of this law, a third party must order an appraisal for a home, and these companies often hire appraisers on a rotational basis. So the appraiser sent out to look at your home may not have any experience assessing a green home (and was probably hired because he had the lowest fee and the quickest turn time).
“The green property needs an appraiser that has knowledge of the product to provide a credible result,” says Adomatis. “ Many builders are under the impression they cannot talk to the appraiser. But that is not true: The builder, realtor, homeowner, and appraiser need to communicate on all assignments.”
According to Adomatis, builders must request an appraiser who specializes in green and should do so at the beginning of a project. If an appraisal comes in lower than expected, builders should request a copy of it. “If it doesn’t talk about green or energy efficiency, you can appeal,” she says.
Adomatis, who wrote the seminar, “Inspecting the Residential Green House,” suggests that builders who want a smooth appraisal process to be prepared with the following:
1. A HERS
rating: This is an estimate of the rating expected on completion. The appraisal should be subject to this estimated rating at or above the estimate. The HERS rating should include the Fannie Mae Energy Report that provides a contributory value of the monthly energy savings.
2. Construction costs. The breakdown of additional costs relating to green and energy-efficient items.
3. If building to LEED-H
or NAHB’s National Green Building Program
, provide the approximate rating expected. The appraisal should be subject to this rating at a minimum.
4. Blueprints. These should be detailed with attention to the energy efficient and green products noted.
5. Detailed specs. Address energy efficiency and green construction products.
6. Incentives. Provide a list of incentives that might include rebates from the power company, federal or state governments, lender, or local sources. The appraiser should address the incentives in the report.
7. Local code information. Provide a table comparing the local building code to the subject product. This document is invaluable in documenting an appraisal to the lender and supporting potential additional costs in the cost approach. This is also helpful in comparable selection and adjustment process.
While this information will help you get the full value for your homes, you need to explain some green choices to your clients, so they will understand what does and doesn’t add value to a home.
Adomatis points out that energy efficiency and in some places water efficiency are a plus in terms of cost versus value. But say your buyer wants a recycled countertop versus granite. If the green top costs double the granite, the appraiser is not going to factor that into the home’s value. This holds true with other recycled products, such as flooring, wall coverings, and fixtures.
Adomatis believes that as a general rule energy efficiency will grow in importance as utility bills go up: think low-E windows and solar hot water heaters. She notes that other green features such as graywater systems and cisterns don’t add value today, but in water-strapped areas, that could change. “Eventually, we’ll see some number put to those systems.” For solar, the value is dependent on the capitalization, what it provides in kW hours and the life of the system.
John Freer, a consultant and president of Riverworks
in Missoula, Mont., is a LEED AP and a verifier for the NAHB National Green Building Standard. He points out that sustainable houses don’t have to cost more. “There is a misconception that a green home has to have geothermal or PV or it’s not green, and that becomes a challenge with the appraisal process because those things are more expensive. But truly building a quality product that addresses indoor air quality, resource efficiency, and energy efficiency holistically at design is not necessarily going to add costs.”
Freer points out that many builders are offering a green product even in the entry level market by selectively choosing the green attributes that will not only sell well but that will also appraise well.
“Lending and appraisal doesn’t get it,” he laments. “Until there is a certification [in the appraisal community] that is like the ANSI standard green code they won’t think a green home is worth more.” (Of note, the Appraisal Institute has designed a certification program, but it won’t roll out until 2011.)
“All parties involved in the green process from design to the appraisal have a part in the miscommunication currently in the industry,” summarizes Adomatis. “The appraisers are always the last to be involved in the process, and yet should have been involved from the beginning along with the third-party rater, designer, builder, architect, and so forth. If they were involved in the planning process, the parties would have a better idea of valuation issues up front. It’s time to turn things around and for all parties communicate.”
Photo information: John Freer—a consultant and president of Riverworks who built this house on Montana—notes that understanding how a green house is built will help it appraise. “If you are going to call yourself a green builder, you need to be a student of the building sciences. ... You have to get in depth in building science and learn how everything works and ties together," he advises.