Appraisal Scoop

Do Energy Upgrades Add Value to Existing Homes?

GUEST AUTHOR: Debra Little was selected to direct this study because of her combined expertise in home performance and residential appraising. She led a team of senior appraisers who were on site in Los Angeles. See Debra at the ACI national conference in Baltimore this March where she’ll be presenting twice on this study

Results of a valuation study of three existing homes located in Los Angeles indicate the energy upgrades in these cases, added 6-9% to their current market value. In query of proof that energy upgrades contribute value, the study determined appraised market values of the before and after upgrade conditions.

The question is how much, in today’s market? Debra Little, a home performance consultant with an appraising background, directed the study, “Most would agree that it’s rational to expect a knowledgeable buyer to perceive added value. A text book scenario is when we have a shopper looking at two houses with prime assets that are similar in location, size, age and amenities, and the only differentiation is that one house has energy upgrades and the other does not. We would expect the house with the upgrades to sell first. The question is, will it earn a premium?”

The challenge for appraisers is in finding direct market evidence, comparables, required to make a strong enough case with a level of support acceptable by underwriters. It’s particularly challenging when valuing upgraded existing homes, which represent the majority of the market focus of the emerging home performance industry. There is more evidence for new energy efficient homes than is discoverable in the existing home sector.

Data affirmation that energy upgrades add value to existing homes may be a long time coming. Along with energy upgraded homes, the numbers of happy home owners continues to climb. How can happy home owners be a problem for valuation affirmation?

Two reasons why evidence is tough to find in the existing home sector:

1- Happy owners of energy upgraded homes don’t often sell. This is a compelling part of the story as we witness market transition. As home performance contractors are out there doing good work, they are creating a segment of occupants who are so comfortable in their homes that now cost less to live in, they are looking to stay, not sell. These homes don’t often turn over. What is the value of a home that is so treasured by its owners, they say they will never sell?

2- The second reason is the need for accurate, accessible, sales data of green homes. By now, many of us have heard the call for “greening the MLS”. More data may actually exist but goes unreported. To get there, training is needed for real estate agents, appraisers and lenders. And, we need to get 800+ MLS systems up to speed, or create another information solution. Is it realistic to hope this will happen any time soon?

When there are no comparables what methods can appraisers use to read the local market? Debra Little continued, “Our mission going into this assignment was to turn every stone in search of evidence. We knew that after we exhausted our typical sources, we would need to dig deeper.”

There are approved methods available to appraisers when challenged with valuing a unique property or a variety of other factors that can make market evidence scarce. Several approaches may be employed, and then reconciled with the others for a resulting range of value. A white paper will be published later this year that will describe the approaches employed in this study.

Energy and non-energy benefits. Energy efficiency, as it reduces operating expenses, produces numbers appraisers can work with. Proof of performance as evidenced by utility records will be one of the foremost considerations. Non-energy benefits such as improved durability and indoor air quality are also important but more difficult to quantify. The control of heat, air and moisture of a house envelope should significantly extend its effective life. Effective life is a question appraisers raise, not only about the house being valued but each comparable researched.

Appraisers may include further support of their conclusions by citing what they term as secondary evidence.

Secondary evidence is in accelerating growth mode. We know that energy efficiency awareness is increasing and home owners are responding by talking with their dollars as they invest in their homes. Incentive programs and home performance contractors are driving the business of energy focused remodeling. Build It Green, California’s premier green certification program surpassed the 10,000 mark in 2011 for number of certified new homes. Shoppers are asking about operating costs. Financing for energy upgrades is a hot topic as the market spurs new opportunities and innovative loan products, some of which require valuation of the home “as improved”.

We see these market shifts, but appraisers must ask how they translate locally.

A look at the effects of upgrades on two of the study’s homes. Family “A” opted for extensive upgrades as summarized: envelope, mechanicals, interior and exterior water fixtures and a 2.5 kWh solar PV system. Attic and crawl space were air sealed and can lights replaced to reduce infiltration. New insulation was installed to crawl space walls and ceiling, and to attic. A new heating/AC/ducts system and variable speed pool pump completed the improvements for a total cost of $44,500 after their $8,000 rebate.

The appraisers were able to obtain 3 months of utility records subsequent to the completion of work which they measured against the contractor’s modeling projections. This house appears to be on track for total annual savings of 73% or more.

This family is enthusiastic about the results. Mr. “A” boasted that their recent bill was $19 as compared to $110 for the same month last year. “My wife and I have discussed the possibility of moving in the future but have concluded that we are not willing to compromise in living without the benefits of energy upgrades we have become accustomed to. If we were to put a number on it, we would definitely be willing to spend 5-10% more for a house with upgrades that are at minimum, equal to or better than what our home now has.”

The second family, with a smaller budget, chose a similar but less extensive scope without solar. Their case is interesting in two ways.

1. The result they’re most excited about is the notably improved indoor air quality. Their sons suffer from asthma. The significant reduction of asthmatic symptoms they experienced immediately after the upgrade work was an unexpected benefit. They are thrilled!

2. The second, and an interesting twist for the appraisers, was the home office over the detached garage with literally loads of electronic equipment. A disaggregation of the electric bill indicated a large plug load. This required the appraisers to differentiate the effects of upgrades to the house as separate from the office, in effort to derive relatively accurate numbers to account for energy savings.

This case underscores the need for appraisers with green expertise to have the skills to analyze utility records and understand how a house uses its energy, as well as the recognition that energy upgrade scopes of work often produce important non-energy benefits, such as healthier indoor air.

These cases are two examples of happy home owners who now have experiential knowledge. Having lived in their upgraded homes for a few months, they now value the improved comfort, indoor air quality, reduced costs and other aesthetics so much, they say they would not want to move. They stated to effect, that if they were shopping today, they would want a house that has, at minimum, similar energy efficient elements and they would spend more to get it.

Knowledgeable buyers. The definition of market value incorporates the concepts that buyers and sellers be willing, able and knowledgeable. Home shoppers who could be defined as “quite knowledgeable” about energy efficiency today are ahead of the curve. They represent a minor percentage of the collective market. A few examples were found where shopper education is occurring with focused intent. The study looked at two businesses that are extraordinarily proactive in informing their buyers; Green Earth Equities in Fresno, CA and Green Canopy Homes in Seattle. Their model is to buy distressed properties, improve with deep energy upgrades and resell with fast turn times. Their effort to educate not only the individual buyers but also their local communities is a key to their success.

Home owners and buyers will drive the market. Real estate professionals with green expertise may be pivotal catalysts as they are on the front lines, working face to face with these decision makers. Agents can help guide to ask important questions about utility costs, longer term operating and maintenance considerations as well as cost and availability of energy. Appraisers are called to define and report the actions of buyers, while they recognize the complexities of new building methodologies, standards, products, terms, trades and sources. Lenders need the knowledge base to understand all these.

Proof of value of energy efficiency upgrades. Until more energy upgraded homes actually sell, the task to find proof as expressed in dollars will be a tough job for valuation analysts. Appraisers will need to look beyond their typical sources to find what evidence they can. It may not be 100% proof, it may not be undoubtedly clear, but they are called to understand the current state of their local market. As more real estate professionals gain green expertise they will be key contributors to the awareness building of home owners as well as the affirmation of their green-informed buying decisions.

A white paper on this study will soon be published and look for Part 2 later this year, the study of four sold energy upgraded homes.

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GUEST AUTHOR: Debra Little was selected to direct this study because of her combined expertise in home performance and residential appraising. She led a team of senior appraisers who were on site in Los Angeles. See Debra at the ACI national conference in Baltimore this March where she’ll be presenting twice on this study. Contact Debra Little, [email protected] , 530 320-2107, PO Box 2183, Nevada City, CA 95959

NAHB Issues Guidelines on Drywall Fix

The National Association of Home Builders has produced, ""Imported Problematic Drywall: Identification Strategies and Remediation Guidelines," a new resource for its builder and remodeler members. According to a press announcement, "The publication represents more than a year of intensive research, testing, analysis and evaluation under the auspices of NAHB's Chinese Drywall Task Force, whose mission was to identify a permanent solution to problems with drywall emitting or off-gassing corrosive compounds, which can lead to blackening of copper electrical wiring and air conditioning evaporator coils and can cause mechanical, electrical and electronic failures."

March 16, 2011 - A new resource for builders and remodelers looking for answers on the critical question of how to detect and remediate problematic drywall imported from China in recent years is now available from the National Association of Home Builders (NAHB).

"Imported Problematic Drywall: Identification Strategies and Remediation Guidelines" can be downloaded at www.nahb.org/drywallguidelines.

The publication represents more than a year of intensive research, testing, analysis and evaluation under the auspices of NAHB's Chinese Drywall Task Force, whose mission was to identify a permanent solution to problems with drywall emitting or off-gassing corrosive compounds, which can lead to blackening of copper electrical wiring and air conditioning evaporator coils and can cause mechanical, electrical and electronic failures.

"The downstream effects of these problems include widespread property damage, huge financial losses, hundreds of lawsuits, and legitimate concerns about possible health effects from living with these unpleasant airborne compounds," said NAHB First Vice Chairman Barry Rutenberg, who moderated a webinar to introduce the guidelines to NAHB members.

"In a landscape cluttered with untested products, devices and procedures purported to resolve drywall problems, NAHB based these guidelines on scientifically proven technologies, materials, means and methods for remediating drywall problems in single-family homes, condominiums, apartments and townhomes," Rutenberg said.

Designed to address problematic drywall in residential applications, the document does not represent the only approach to remediating the problem. It is not intended to set minimum or maximum requirements for remediation nor is it intended to be used to determine the effectiveness of remediation efforts that have already been completed. Builders might decide to follow different guidelines that are less inclusive or that include additional measures.

Among some of the document's recommendations:

• Replace all low-voltage, signal and data wiring; all switches and receptacles; and all smoke, fire and carbon monoxide alarms and life-safety systems. This reiterates interim remediation guidance issued by a Federal Interagency Task Force on this issue last year.
• If the home was built between 2001 and 2008 and it has been confirmed that problematic drywall is present throughout the entire home, total remediation is the only viable option. Selective remediation is an option if problem drywall is found in a limited portion of the home that can be isolated.
• To determine whether the remediation has been adequate, conduct clearance testing after the drywall has been removed and the house has been cleaned and aired out but before the drywall is replaced.

HUD and CPSC Issue Guidance on Identifying Problem Drywall in Homes

 Guidance will help property owners and contractors determine whether home has problem drywall

WASHINGTON – The U.S. Department of Housing and Urban Development and the U.S. Consumer Product Safety Commission (CPSC) today issued guidance on how to identify the presence of metal corrosion, as well as other indicators of problem drywall in homes. The guidance takes into account visual signs of metal corrosion, evidence of drywall installation in the relevant time period, and the identification of other corroborating evidence or characteristics.

HUD and CPSC’s two-step guidance requires a visual inspection that must show blackening of copper electrical wiring and/or air conditioning evaporator coils; and the installation of new drywall (for new construction or renovations) between 2001 and 2008.

To view the full text of this guidance, visit HUD’s website or CPSC’s website.

The guidance also describes obtaining additional corroborating evidence of problem drywall, since it is possible that corrosion of metal in homes can occur for other reasons. For example, homes with new drywall installed between 2005 and 2008 (and the significant increase in imported problem drywall due in part to Hurricanes Katrina and Rita) must meet at least two additional criteria related to: the chemical analysis of metal corrosion in the home; elemental markers in the drywall; markings on the drywall; or specific chemical emissions from the drywall. Homes with new drywall installed between 2001 and 2004 must meet a total of at least four of those criteria. Collecting evidence of these corroborating conditions may require professional assistance and analysis.

“Families have the right to know if their homes contain problem drywall so they can begin the process of doing needed repairs,” said Jon Gant, Director of HUD’s Office of Healthy Homes and Lead Hazard Control. “This guidance offers homeowners, contractors and state and local authorities a course of action for knowing if they’re dealing with problem drywall or not.”

“We are moving forward to help families who are suffering from problem drywall in their homes. We are committed to helping them, and we will continue to rely on solid science to identify the specific causes and remedies for problem drywall,” said CPSC Chairman Inez Tenenbaum.

This preliminary identification guidance developed by the Federal Interagency Task Force on Problem Drywall is based primarily on the presence of metal corrosion in homes as well as other indicators of problem drywall. Additional analysis will continue to validate these methods and the identification guidance may be modified as necessary.

Consumers largely report that their homes were built in 2006 to 2007, when an unprecedented increase in new construction occurred in part due to the hurricanes of 2004 and 2005.Common features of the reports submitted to the CPSC from homes believed to contain problem drywall have been:

• Consumers have reported a "rotten egg" smell within their homes.
• Consumers have reported health concerns such as irritated and itchy eyes and skin, difficulty in breathing, persistent cough, bloody noses, runny noses, recurrent headaches, sinus infection, and asthma attacks.
• Consumers have reported blackened and corroded metal components in their homes and the frequent replacement of components in air conditioning units.

FHA-insured families experiencing problems associated with problem drywall may be eligible for assistance to help them rehabilitate their properties. HUD’s Community Development Block Grant (CDBG) Program may also be a resource to help local communities combat the problem.

Homeowners who believe they may have problem drywall should immediately report to CPSC by calling 800-638-2772 or logging on to www.cpsc.gov/cgibin/drywall.aspx. Hearing- or speech-challenged individuals may access the phone number through TTY by calling the toll-free Federal Relay Service at 800-877-8339.

Video - Learn the "Story" Behind the Chinese Drywall Issue

Dr. David Krause discussing issues related to imported drywall found throughout structures in Florida

Dr. David Krause from DOH Content on Vimeo.

Who’s Measuring America? - Creating a Measurement Standard

Most real estate professionals (and homeowners) perceive real estate values based on a simple philosophy; price per square foot. The two amounts which provide this powerful number are the sales price and the size of a home. The sales price is a fact recorded at the county courthouse. The size or square footage is a number which has been taken for granted for so long, no one really thinks about where it comes from. The current trend (by real estate professionals, homeowners, insurance companies, and especially AVM’s) is to use the square footage information recorded in public records.

The property assessor uses a mass appraisal process and in most states never enters the dwelling. The errors in square footage should alarm us all. 50, 200, 500, many over 1,500 square feet, and mistakes are more often the rule, rather than the exception. Measuring and calculating square footage from the outside of a home is virtually impossible. The county assessor’s department is creating an estimate of size, for assessment purposes only. That information was never meant to be used as a detailed source of square footage. County officials have no liability (to homeowners or the real estate industry) in reporting square footage details and they don’t have to worry about errors and omissions.

The real estate industry is simply taking information, meant for use within the assessor’s department only, and trying to force that data to work in the real estate information system. Property values are being determined based on information which is wrong more often than it is right.

Automated Valuation Reports (computer generated value systems) base their values on some formula, which includes the square footage of the home. Any “value” conclusion based on faulty data can only provide unreliable results. Use of these inexpensive value services are gaining momentum among lenders, often due to the quality of the profits, not the quality of the product. Many consumers are now being forced to pay for an Internet based report as well as a traditional appraisal.

The Realtor® organization was founded (and grew to prominence), being the providers of real estate data. Known as providers of “the most trusted source of real estate information in the world,” agents have fallen prey to the easily accessible, free, and without personal liability, public record system. So, does this mean that public records are now the providers of the most trusted source of real estate information? Over the past five years, the use of public records within the real estate industry has skyrocketed. During the same time period a real estate crisis continues to grow.

After years of investigation, I believe there are two things which must happen to get the real estate industry back on tract. First, Realtors® must measure houses. This seemingly simple number, controls real estate loans and values across the country. Public records were never meant to be used for this purpose and cannot accurately provide this vital data. The second step is one that real estate professionals have been unable to agree on for over a century . . .

Click here to continue reading . . .

Video: Lighthearted look at "misleading" property descriptions

Need a little break on a Friday?  Take a couple of minutes to watch this short video of a property inspection and how it MIGHT be described in a sale flyer or inflated appraisal report.  Thanks to Steve Smith, MAI for sending me this video!   Download FixerUpperVideo.wmv

NPR Radio Takes Us On An REO Walk-Through With Appraiser Mike Timoni

NPR's All Things Considered, radio interviewer says Mike Timoni has an almost recession-proof job. He appraises home prices in New Jersey — and in today's volatile market, his assessments are very important. He gets a lot of calls these days to appraise foreclosures before they are auctioned.  Timoni says that despite the market downturn, his job is as busy as ever.

Listen as he warns his interviewer: "Careful kiddo . . .Just stay close to me".  "Can you see?"  NO!  "This is the scariest part for me . . .in the Wintertime . . because the squatters get in these buildings". 

Click here to here the complete interview

Click here to here the complete interview

Thanks to Ann O'Rourke, MAI, SRA, Appraiser and Publisher of Appraisal Today newsletter, 2015 Clement Ave., Alameda, CA 94501 - mailto:[email protected]  - http://www.appraisaltoday.com -  Subscribe to her free newsletter:   Send a blank message to:

mailto:[email protected]

Humor - Why would I want a Home Inspection?!

As appraisers, we run into a LOT of funny stuff, but can anything compare to what our "brothers" the Home Inspectors run into?   An appraiser friend of mine sent me a Powerpoint show that was compiled from a series of Home Inspection Nightmares on the This Old House web site : Download ThisOldHouse.pps (1167.5K)   

Below are just a couple  of examples! (click image to enlarge)

Details, details
Photo: Lon Grossman, Technihouse Inspections, Inc.

Flashing—who needs flashing?!

Another automotive heating system - Photo: Scott Sharp, Guardian Home Inspections LLC   You're looking at some fine Ozark engineering. Yes, that is an automotive radiator attached to floor joists with hot water piped to it. All the pipes and the wood-burning boiler were constructed of recycled components from who knows what. And this is only what I could see. The system never did function to their satisfaction. I wonder why?

Download ThisOldHouse.pps (1167.5K)

• Home Inspection Nightmares I
• Home Inspection Nightmares II
• Home Inspection Nightmares III

Swimming Pool Maintenance Takes Time & Money

Scott Hubbard of Homewerx, Inc, a family-owned Home Inspection firm, recently posted some great information about swimming pools to their company blog.  With Scott's permission I'm re-blogging his complete article here.  To read the article from his site - click here.

Also Read: Swimming Pools: Do They Increase or Decrease a Home's Value?

Even in Arizona, you may not use a swimming pool very much in the winter time.  But if you're considering adding a pool to your home, winter is the slow season for Arizona swimming pool companies and therefore, you may be able to negotiate a better price on a new pool.  Whether you add a pool to your existing home or buy a house that already has a pool, below is some information to consider about swimming pool maintenance.

Maintaining a swimming pool takes time and money.  Pools consist of many systems; the structure itself, as well as electrical, plumbing & mechanical systems.  So there's alot to maintain including pumps, filters, lights, valves, sometimes a heater and other features.  Each pool is different, therefore the exact cost of maintaining your pool will depend on many factors such as the pool's age, surface area, type of finish, water capacity, type of pump & cleaning system, etc.

STRUCTURE & FINISH: The pool's structure will usually last many years provided that it's built right and the finish is properly maintained.  The pool's finish may be plaster, pebble-tec or fiberglass.  All three types will require regular brushing, cleaning and chemicals.  Algae is a bigger concern with a plaster finish.  This is because algae can actually etch the plaster finish, or pit the surface and make it rough.  Also, the type of pool matters...a diving pool usually holds a lot more water than a play pool, and therefore it will probably cost more to maintain.

COST OF CHEMICALS, ETC. : Properly maintaining the chemical balance of the water is important.  If you aren't sure what to add, you can take a sample of your pool water to the local swimming pool supply store for help.  They will test it and tell you what chemicals you need and how much to add.  Pool water generally requires more chemical maintenance when the weather gets hotter and the pool is used more frequently.

For a pool that does NOT have a chlorinating or soft water system, you'll have to buy chlorine, acid and other chemicals.  The chlorine is by far the most expensive of these chemicals, which will probably cost $200 or more per year (depending on the size of the pool, the amount of water it holds, etc.).

If the pool does have a chlorinating or soft water system, you won't need to buy the chlorine but you'll need to buy salt and other chemicals.  Also, this type of system is more complex and requires more maintenance.

Click below to continue reading . . .

NAHB Study Sheds New Light on Life Expectancy of Home Components

By any reckoning, a home is expected to last many years and serve several successive generations. But what about the individual components that comprise the house? How many years of service can a home owner reasonably expect from a roof or a door, a window or a whirlpool tub? 

A new NAHB study sponsored by Bank of America Home Equity takes some of the mystery out of the subject with the caveat that numerous factors, including use, maintenance, climate, advances in technology and simple consumer preferences can have a dramatic effect on product longevity.  Go to the study (pdf format).

Click below for a few of the highlights of the survey . . .