A Solution for Appraising Efficiency- The buyer's point of view

How much is it worth to a home buyer to invest in energy efficiency improvements? A minimum estimate is that the annual savings on the energy bill pay for the annual cost of the investment when financed. This removes the primary reason for home buyers not to invest in energy efficiency -- lack of money. When faced with a choice of continuing to pay for wasted energy or making improvements that will make the house more comfortable and more valuable, buyers will opt for the improvements.

It is essential that the appraisal of the value of energy savings are based on the existing features of the house modified by the improvements to be made. Otherwise, the energy savings will be too high since additional improvements can only reduce the savings of related improvements. 

By obtaining a dollar appraisal that shows the group of improvements that save more than they cost, the house is easier to sell than with an appraisal that lists which efficiency features the house has, or lacks. The latter shows the problem, the former gives the solution. (See my first Home Energy Pros article for more details).

Views: 642

Comment

You need to be a member of Home Energy Pros to add comments!

Join Home Energy Pros

Comment by Robert H on October 18, 2011 at 10:02pm

Jan

Yes the appraiser estimates gives his opinion of the market value and the lender uses that is mortgage underwriting.  But an appraiser can not assign a value greater than what the market premium is for that amenity.

 

In your post you said "Here in the Southwest, we are seeing more homeowners invest in energy efficiencies, but not to the level of giving value on an appraisal."  It sounds like what you are saying is that buyers will not pay extra for some of these upgrades or at least an appraiser does not have market data to support an adjustment.  If an appraiser can not support an adjustment then an adjustment should not be made on the appraisal.  

I have completed appraisals on homes with geo thermal heat pumps.  This is a very expensive upgrade but I did not see any evidence they added value.  Should I have increased the value on the appraisal because of the added cost - over $10,000- or should I report what the market was paying for the feature in question?

 

Appraisers will have to keep on top of  changing market trends and report what is the current market.  I live in an area that has   low electric and gas rates and that factors into the benefit of some improvements.  Now our electric rates will be going up due to the utilites cost to repair recent flood damage. Time will tell if this prompts people to seek out more energ efficienct homes.

Comment by Jan Green on October 18, 2011 at 3:00pm
Ed:  All very good points.  As an EcoBroker, I carry checklists designed to encourage conversation with home sellers so that we don't miss a single energy efficient feature.  Hopefully, with more awareness, appraisals will begin to reflect value and there will be consistency from state to state!  Or shall we say from sea to shining sea?!
Comment by Ed Minch on October 18, 2011 at 2:47pm

 

The appraisal should reflect the relative efficiency of houses so that efficiency becomes just another factor in the purchase decision, like granite counter tops.  A more efficient house should be worth a quantifiable amount more money.  Once we agree that this is the goal, the next step is getting an accurate software package that is accepted over a wide area for consistency.

This is a step ahead of buyer understanding, and if done right, will be the basis for education.  In the short run, some people will not pay extra for an invisible benefit, but over time, it has to happen.

I think that a problem we will face in the next couple of years is that most energy improvements are not going to deliver the promised savings - at least from what I see of the software used in the 4 states I work in.  If this happens, then the appraisal increases will be a moot point!

We tell our customers to keep their bills for display at resale - nothing like real-world information.

Ed Minch

Comment by Jan Green on October 18, 2011 at 2:37pm

Robert - I think what was meant was that the buyer doesn't determine the value of the property, the appraiser does.  The appraiser assigns a value based on the most recent comps.  If a property has green features, he'll look for a like property to garner that increase in value.  The buyer only decides how much he wants to purchase the property for.

A BPI or HERS Audit will determine utility cost savings based on energy efficient improvements.  The entire savings is detailed out in a written report for an Energy Efficient Mortgage to be approved, based on the findings from the BPI or Audit. 

Todays buyers are making decisions based on payback and utility savings.  If we can show them up front that their utility costs will be reduced and offset the increase mortgage amount on a 203K or EEM, then it's a wise decision for them.  They don't have to come up with out of pocket costs for the upgrades, they will be added into the mortgage.  So someone with the 3.5% down for an FHA mortgage can have the upgrades, and reduce their energy bills accordingly.  It's a win win for the buyers. 

The Appraisal Institute just came out with an added form for the homeowner and others in the transaction to review to list the Energy Efficient Features of the home. This will allow the appraiser to see what is in the walls!

Comment by Robert H on October 18, 2011 at 2:26pm

What do you mean it doesn’t matter what the buyer thinks, it all comes down to the
buyer. It is the buyer that makes the offer on buying a house. If a buyer does
not recognize the value they will not pay more.

There is a term "cost versus value". Appraisers say that cost does not
equal value. Something that does not return its cost minus depreciation is
deemed to be an over-improvement. Take a swimming pool in a northern climate.
It could cost $40-60K but will likely return $5-10k. This is a classic
over-improvement. 

As a buyer how do I know how the work will really impact the home? What if someone
spent $2000 on a radiant barrier in the attic and $4000 or more on windows and
the walls are uninsulated and the attic is under insulated. In my mind the
seller wasted $6,000. You could compound it by putting in a solar hot water
system and a geo heat pump. You could easily have over $20,000 in this house
and have not really dealt with comfort issues and the cost benefit is way out
of whack. Many people would like to see the appraiser be able to assign
additional value to the home based on the cost and not the value.



As a lender I do not want to lend on an inflated appraisal. It is the appraiser’s
job to report how much a home with particular features will sell for. It is not
the appraiser's job to help jump start an industry. When buyers start paying
more for energy efficienct homes then appraisers will report their finding. I
am all for better market data via MLS.



Comment by Tom on October 18, 2011 at 6:29am

But the appraisal is very important in determining mortgage eligibility when the loan to value ratio is calculated. Doesn't matter so much what the buyer thinks.

Comment by Robert H on October 17, 2011 at 5:17pm

The buyer determines value. This cant be forced on the appraiser to assign value based on what has been done to a property. Many times it will be hard to tell if a house sold for more because of a particular item such as energy efficiency or because some buyers will pay more than others for the same house. 

The combination of benefits is what should be sold ie comfort, lower bills etc.  The increase of value would be lower on the list. because it is not predictable.  Sometimes value might in other ways such as a quicker sale time. A home that  sells quicker can have lower holding costs.

As a former appraiser it can be hard to value particular items due to vagueor incomplete reporting by agents. There is also a lot of puffery.  Many time the size of the home reported are in error. There are seller's concessions that may not be reported/ All of this combine leads  to a very imperfect market for real estate.  

 

 

Comment by Jan Green on October 17, 2011 at 9:38am
I agree with Ed.  Here in the Southwest, we are seeing more homeowners invest in energy efficiencies, but not to the level of giving value on an appraisal.  Happily, I'm volunteering for USGBC, Residential Green Building Committee, to create a Builder Forum wherein appraisers and builders alike will be invited.  Our Builder Forum will include speakers re Appraisals and a green Builder to discuss energy efficient features.  I'm excited for the outcome.  Will be meeting a bank this week to house the event.  This bank is pro-financing solar and a huge voice in the desert!
Comment by Ed Minch on October 17, 2011 at 6:57am

"When faced with a choice of continuing to pay for wasted energy or making improvements that will make the house more comfortable and more valuable, buyers will opt for the improvements."

This would be great if it were true, but we find that it is not, at least here in the Mid-Atlantic.  It still takes a substantial rebate - potential for $3,500+ - for most homeowners to take notice.  There will always be those few who understand that this is an investment, and we have even had customers who over-invest because it is the right thing to do, but these two types of customer are not plentiful enough to move the market.

Fortunately, it seems that the hubbub over fixing your house generated by the rebate programs is starting to change perceptions, but it still takes a pretty good salesman to get a reasonable close rate even with the rebates.

Ed Minch

Comment by Tom on October 17, 2011 at 6:41am
FWIW, SAVE Act is expected to be released in the Senate this week - - includes changes to appraisal guidelines to include EE.

Home Energy Pros

Home Energy Pros was founded by the developers of Home Energy Saver Pro (sponsored by the U.S. Department of Energy,) and brought to you in partnership with Home Energy magazine.

Latest Activity

Kevin Jordan shared a profile on Facebook
5 minutes ago
Profile IconKimberly Loewen, Bob Whelan, Russ Pittis and 1 more joined Home Energy Pros
1 hour ago
Kari Sauder replied to James White's discussion What happened to Home Energy Pro's website?
"I stopped using Firefox -- too many glitches"
3 hours ago
Tom Mallard replied to Hal Skinner's discussion How our ceramic based RCC works in the group Radiant Control Coatings
"So it seems that what you're saying is for heat-transfer the stuff has little resistance or…"
12 hours ago
Mike Kandel posted a discussion

Earn BPI CEUs at 3rd Annual Building Performance Forum

If you're searching for BPI CEUs, you'll find plenty at the 3rd Annual Building Performance Forum…See More
18 hours ago
Mike Kandel added a discussion to the group Building Performance Institute (BPI)
Thumbnail

Earn BPI CEUs at 3rd Annual Building Performance Forum

If you're searching for BPI CEUs, you'll find plenty at the 3rd Annual Building Performance Forum…See More
18 hours ago
Sean Lintow Sr commented on Christopher Morin's blog post UPDATED: Big Changes for Duct Testing in MA
"4% TOTAL Ted - Leakage to outside was stripped from the codes & for good reason"
21 hours ago
tedkidd commented on Christopher Morin's blog post UPDATED: Big Changes for Duct Testing in MA
"Wait!  4% total leakage or 4% leakage to outdoors? "
22 hours ago

© 2014   Created by Lawrence Berkeley National Laboratory.

Badges  |  Report an Issue  |  Terms of Service