by Rick Reynolds
A big conundrum for many environmentally conscientious people intent on building a new home today lies in aligning their values with the financing process. Unfortunately, the construction of renewable energy-reliant, high performance homes is frequently hampered by the inconsistent and archaic appraisal methodologies.
Too often, inexperienced appraisers are left with insufficient data and inconsistent metrics to make apples-to-apples comparisons on comparable, high-performance houses in similar settings and markets. It helps to have residential appraisal resources for any high-performance home one is contemplating building.
For a little background, appraisals of homes are currently done using one of three methods:
- Sales Comparison Analysis – This is the most common method used in appraising a home’s value based on a comparison of similar homes in the same general geographic location. Unfortunately, a limited availability of high-performance homes makes this method not viable.
- Cost Approach – What it would cost to replicate the house in its current location.
- Income Method – typically used if the home is in an area with a lot of rental properties.
The appraisal industry has been slow to respond to the increased demand for high-performance home evaluations and has recently acknowledged the need to train and educate appraisers in the industry. Starting in 2015, certified appraisers are required to obtain training and education in the areas of green building and high-efficiency homes.
In order to help receive a fair appraisal based on the high performance, high efficiency, “green” aspects of their homes, homebuyers should include their lending institutions in their project planning early, so that the lending institution has adequate time to find qualified appraisers for their projects. And it is important to mention to the lender that you have a “complex valuation assignment due to a specialized property type.”
Per Uniform Standards of Professional Appraisal Practice (USPAP) an appraiser must:
- Be competent to perform the assignment,
- Acquire the necessary competency to perform the assignment, or
- Decline or withdraw from the assignment.
Fannie Mae, Freddie Mac, and FHA say an appraiser must:
- Be competent to perform the assignment OR
- Decline or withdraw from the assignment.
- The ability to properly identify the problem to be addressed, and
- The knowledge and experience to complete the assignment competently, and…
- The recognition of, and compliance with the laws and regulations that apply to the appraiser or to the assignment…includes familiarity with a specific type of property.
The Complex Valuation Assignment should state that your home is being built to nationally recognized standards above prevailing code. It is designed and constructed with unique features and materials and with highly efficient mechanical heating, cooling and ventilation equipment. It is also being built in accordance with high-efficiency standards. The lender shall choose an appraiser educated and knowledgeable in this type of valuation of these specialized homes.
Questions Your Lending Institution Should Ask Appraisers
- The following are questions that should be asked of appraisers about their qualifications before they come on site for the appraisal.How many hours of energy-efficiency and green-building education has the appraiser completed? At least 14 hours are appropriate. However, this training is relatively new in the appraisal industry and finding appraisers with this level of education may be difficult, depending on your geographic location.
- What is their actual experience appraising green or high-performance homes? How many high-performance homes have they appraised?
- Is the appraiser familiar with the Appraisal Institute’s Residential Green and Energy Efficient Addendum?
- How will the appraiser assign value to the Appraisal Institute’s Addendum define green categories: “(1) site, (2) water, (3) energy, (4) materials, (5) indoor air quality, and (6) maintenance and operation?”Ask if the appraiser would consider the use of a present value calculation of the energy savings income stream, and if so, what are the assumptions, methodology and duration of the savings that they would use?
- Ask if the appraiser would consider the use of a present value calculation of the energy savings income stream, and if so, what are the assumptions, methodology and duration of the savings that they would use?Does the appraiser subscribe to the local MLS(Multiple Listing Service)?
- Does the appraiser subscribe to the local MLS(Multiple Listing Service)? If no, this causes concerns about the competency above and beyond energy efficiency and green building.
Communication Allowed Under Lending Guidelines – Dodd-Frank Act
- Appraisers can talk with builders, brokers, agents and sellers.
- Builders, brokers, agents and sellers can provide the appraiser with documents.
- Builders, brokers, agents and sellers can accompany appraiser on the inspection.
- Appraisers cannot be pressured by loan officers or others involved in the process to arrive at a value conclusion or to omit important facts.
Challenging an Appraisal
- Be in writing
- Based on error of fact(s) or omission
- Based on inconsistencies
- Addressed with the Lender directly
- Addressed in a timely manner
- Cannot be based on: “I don’t like the value of the appraisal!”
Finally, DO NOT approach the appraiser directly – you are not the appraiser’s client, the lender is.
Since our green buildings are essential to both the health of our families and our planet, it is imperative that borrowers receive accurate premiums on their green home appraisals. Being armed with green appraisal strategies will help towards this effort while encouraging more change within the appraisal industry.