Appraisal Scoop

Finding Value in a Green Home Appraisal – Lenders & Appraisers – Part I

GUEST BLOG: Roger Normand of http://edgewaterhaus.com has graciously given his permission to re-blog his article on appraising "Green Homes". 

 

If you have read my previous blog entitled “Seeing Red on a Green Appraisal – the Challenge,” you know that the appraisar failed to list or value any of the green/energy efficient aspects of EdgewaterHaus.  Does it matter?

ABSOLUTELY!

Most borrowers include the cost of the green enhancements as part of the overall construction cost.  They then get a loan to cover some or all of the up front construction cost.  If the appraisal doesn’t value the green enhancements, the lender will likely reduce the value of the loan accordingly, particularly if the borrower is already at the maximum loan to value amount.  It’s the “no tickee, no laundry” syndrome.  Without the money to finance the up-front cost of green enhancements, the borrower may be forced to decide among competing priorities.  What to give up: Upgraded kitchen cabinets?  Imported granite countertops?  Back yard deck?  Garage?  Thicker walls for higher R-value insulation?  Triple-pane windows for double-pane?  Geothermal HVAC?  Solar voltaic or solar thermal systems?

That’s a tough call for many people, even for those who want to go green. Green enhancements are often invisible – you can’t see the extra insulation; a window is a window. Yet’s it’s easy to fall in love with very visible upscale kitchen appliances, custom draperies, or the lovely landscaping. These amenities provides an immediate, visceral connection of quality and beauty, while the former is invisible to the casual observer. Some green enhancements like a tighter building envelop or solar systems provide an economic benefit, but the pay back period extends over a period of years. I’m not a sociologist, but I think most Americans prefer immediate vs delayed gratification. So they opt for the lovely imported tile floors, and so what if they spend $100 a month or more on utilities.

I should also clarify shades of “green” here. Good for you if you are going to replace incandescent bulbs with CFL bulbs, or use energy star appliances. Just don’t expect the appraiser to note or value that. These are “typical” upgrades. I am talking about more substantial improvements, like additional wall, ceiling or sub-slab insulation beyond code minimums requirements. And while use of sustainable materials is noble for the environment, I suspect somewhere between few and not many individuals would be willing to pay more for a home that includes sustainable materials. Perhaps more importantly, there is really no way for the appraiser to objectively quantify its marginal market value. So go for sustainable materials; just don’t expect it to be valued in the appraisal.

In my web research I found many articles written about the failure of property appraisers to equitably value green construction, but few suggestions on how to increase your chances of getting an appraisal that equitably values “green,” or how to challenge one that failed to do so.

So here are my suggestions freshly culled from the school of hard knocks.  I wish I knew then what I have now learned through experience and research.

1. Work with a lending institution that sees real value in “green.”  Lenders who value green construction may be just as scarce as green appraisers.   It will likely be an easier case if you will be building or substantially remodeling a home to a nationally recognized LEED, Energy Star, Passive House green standard.  Talk to the lender about whether they will support your green efforts before applying for the loan.  If not, walk!  You want the lender on your side if your wanna-be green appraisal turns you red, like it did with us.  Our lender was extremely supportive, agreeing to discard at no cost to us an appraisal that valued our Passive House/LEED Platinum home as “typical” for energy efficiency.  The bank then agreed to engage another recognized green qualified appraiser.

2. Work with the lender to find an appraiser with green credentials.  This can be tricky on many fronts.  Lenders typically have a list of approved appraisers that they work with, and may be uncomfortable using an unfamiliar appraiser.  Under new federal loan standards, neither you or the loan officer has any say in which of the approved appraisers will be selected.  But you can suggest to the lender individuals from nationally recognized appraisal organizations that have demonstrated green skills.  One such organization is the Appraisal Institute(AI), a global membership association of professional real estate appraisers with more than 24,000 member throughout the world.  AI launched a Green Valuation Program in January 2011 to “educate appraisers on the intricacies of valuing high-performance residential and commercial buildings.”

AI maintains a registry of individuals who have completed courses in residential and/or commercial courses in its Valuation of Sustainable Buildings program.  Find out which appraisers in your region have completed these courses and suggest to the bank that they select one of these individuals.  Fortunately for us, our bank agreed to employ one of the two AI member in our area with green credentials, even though they had never used him before.

3. Make sure the appraiser is properly armed with all the green features in the home.  Don’t let the appraiser guess or assume he/she will realize all the features.  Lead the horse to water and hope he will drink it!  Be sure the architectural drawings fully identify the green features.  Ditto with the list of construction specifications.  The appraiser should have access to all the drawings and specifications, and be suspicious if none are requested.  Provide the appraiser with a summary, brochure, web link or other reference material that explains the green construction standards you plan to meet.  Offer to discuss the green specifics with the appraisers.  Even better is to have the builder or architect discuss the green features with the appraiser.  Be specific, polite, and professional.  And remember that the appraiser’s job is assess the VALUE on the property based on what other individuals are likely to willing to pay.  So emphasize the economic benefits of energy efficient aspects.

4.  Take a deep breath and wait for the appraiser to prepare the appraisal.

My next blog will discuss how the appraiser should recognize the green features of the home, and different approaches on valuing green. 

Finding Value in a Green Appraisal – Tools are out there – Part II

GUEST BLOG: Roger Normand of http://edgewaterhaus.com has graciously given his permission to re-blog his article on appraising "Green Homes". 

E&O Alert: Have you been called to testify for FDIC litigation against AMCs?

Important Alert for FREA Appraiser Members

If you receive a call from someone involved with the AMC litigation between the FDIC and LSI or CoreLogic, and they ask you to agree to be a witness in either case, you must call FREA, as your E&O provider, immediately. If you don't and you offer any testimony by making a written statement, by sitting for a deposition, or simply by agreeing to a telephone interview, you could end up getting sued.

It's too complicated to explain the how and why here, but rest assured you are taking on risk you cannot see.

There are ways to cooperate, including getting qualified and paid as an expert witness instead of testifying for free, but before you agree to "help", you must get a signed release so anything you say cannot end up being used against you later in a civil lawsuit.

As a FREA member, you benefit with the guidance of FREA counsel. If you receive one of these calls, contact FREA immediately at 800.882.4410 and receive instructions on how to proceed.

If your E&O carrier isn't alerting you to issues like this on a regular basis, maybe you need to join FREA where we work for you and your profession all of the time and not just when there is a commission to be earned. After all, we all know in the end you usually end up getting exactly what you pay for... and sometimes that isn't much.

At FREA, we've got your back.


Best regards,

The FREA Team

800.882.4410

[email protected]

Appraisal Institute Helps Appraisers Perform Evaluations for Lenders

CHICAGO (Nov. 14, 2012) – The nation’s largest professional association of real estate appraisers published guidance today to help appraisers learn what evaluations are, when they are used and who can prepare them.

The Appraisal Institute’s “Guide Note 13: Performing Evaluations of Real Property Collateral for Lenders” addresses how appraisers should prepare an evaluation for a lender and comply with the Uniform Standards of Professional Appraisal Practice.

The Guide Note states, “Federally insured lending institutions in the United States are subject to regulations regarding real estate appraisals. For lending transactions involving real estate, a lender must obtain an appraisal from a state licensed or certified appraiser. There are 12 exemptions from this requirement. For three of these exemptions, in lieu of an appraisal by a licensed or certified appraiser the lender may obtain an evaluation.”

Evaluations, per the Interagency Appraisal and Evaluation Guidelines, are market value opinions that may be provided by individuals who are not state licensed or certified appraisers. However, state licensed and certified appraisers may provide them, according to the Appraisal Institute’s Guide Note. The interagency guidelines also state that an evaluation must be based on a valuation method that is appropriate for a transaction rather than the method that renders the highest value, lowest cost or fastest turnaround time.

The Appraisal Institute’s Guide Note states that USPAP allows an appraiser to adjust the scope of work for a valuation assignment as long as the resultant value opinion is credible, given the intended use. When preparing an evaluation, the appraiser may consider narrowing the scope of work as appropriate. According to the interagency guidelines, a lender may obtain an evaluation in lieu of an appraisal when the loan transaction:

• has a transaction value equal to or less than $250,000;
• is a business loan with a transaction value equal to or less than the business loan threshold of $1 million, and is not dependent on the sale of, or rental income derived from, real estate and the primary source of repayment, or
• involves an existing extension of credit at the lending institution, provided that:

- there has been no obvious and material change in market conditions or physical aspects of the property that threaten the adequacy of the institution’s real estate collateral protection after the transaction, even with the advancement of new monies; or

- there is no advancement of new monies other than funds necessary to cover reasonable closing costs.

Click here to download the Appraisal Institute’s six-page “Guide Note 13: Performing Evaluations of Real Property Collateral for Lenders.”

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The Appraisal Institute is a global membership association of professional real estate appraisers, with nearly 23,000 members in nearly 60 countries throughout the world. Its mission is to advance
professionalism and ethics, global standards, methodologies, and practices through the professional development of property economics worldwide. Organized in 1932, the Appraisal Institute advocates equal opportunity and nondiscrimination in the appraisal profession and conducts its activities in
accordance with applicable federal, state and local laws. Members of the Appraisal Institute benefit from an array of professional education and advocacy programs, and may hold the prestigious MAI, SRPA and SRA designations. Learn more at www.appraisalinstitute.org.