Transaction Process Summit on High Performance Houses in Washington DC on January 30, 2013

I attended a meeting yesterday in Wash. DC sponsored by DOE and titled, Transaction Process Summit, - intended as a first attempt to develop a strategic road map to help the residential transaction process recognize the value of high performance homes.  Sam Rashkin of DOE led the lively discussion on the issues that surround the residential high performance home transactions.  Champions in the room included representatives from government agencies, MLS, NAR, NAHB, Mortgage Bankers Assoc. Appraisal Institute, Solar PV, HUD, builders, ACEE, IBACOS, ACEE, Colorado Gov. Office, EcoBroker, American Society for Home Inspectors, CNT Energy, Information for Market Transformation, and a real estate agent.  Unfortunately, Fannie Mae and Freddie Mac were not represented. 

 

It became apparent that a large barrier for these transactions involves a number of issues but the largest one being a database that has appropriate searchable fields to allow appraisers and others to develop accurate analysis of a high performing house.  Several representatives talked about their databases of relevant information, but the databases do not interface with each other. In addition, most are not for use by anyone other than the organizations internal use. More importantly, the MLS and appraisers do not have access to interface with them to obtain appropriate property ratings and certifications.  This problem trickles down to the appraisers’ lack of data; therefore, inability to choose true comparisons and develop market extracted support for energy efficient or high performing adjustments.  The market-extracted support from direct sales data is what Fannie Mae and Freddie Mac most prefer although their guidelines do not directly prohibit the use of other recognized methodology.  The Uniform Standards of Professional Appraisal Practice (USPAP) does not prohibit the use of recognized methodology.

 

Unfortunately, underwriters are often forcing appraisers to ignore energy efficient or green features unless they have sales to support the adjustments.  Underwriters do not recognize other proven methods that are used on other features like; depreciated cost, discounted cash flow of energy produced, income approach for energy savings using the gross rent multiplier, or studies developed to support a premium that is typically less than cost new.  The cost of these items is always a test of reasonableness for the other techniques.  In most cases, the line item adjustment for energy efficient or green features would not exceed the underwriting gross adjustment limits.  Which begs the question, how often does an underwriter allow a similar percentage line item adjustment with no support in the report?

 

Another barrier is the need to speak the same language.  Because one standard definition of high performance or green exists, there are many different ideas of the term.  The Appraisal Institute’s Residential Green and Energy Efficient Addendum is the tool that could solve this problem.[1]  The champions in the room agreed this could be the solution.  Builders, third party raters, contractors, homeowners, and agents will be encouraged to complete as much of the Addendum as possible and provide copies to homeowners.  Sales agents, loan officers, and appraisers need the Addendum upon a sale, listing, refinance, or appraisal of the property.  Sales agents should attach the Addendum, HERS Index, and Green Ratings to the MLS for users of the MLS to access.  This provides sufficient information for an appraiser to evaluate the high performing property characteristics.  It also provides agents with talking points for selling the properties.  Proper documentation of the certifications would provide some level of confidence in the property characteristics and limit liability concerns for appraisers and agents. 

Proper marketing of the properties by builders and agents presents another market barrier.  NAHB, ENERGY STAR, LEED, and other rating organizations provide marketing tools.  However, it is apparent they are often not used.  I told the story of a speaking engagement I had to a group of high performance homebuilders that were frustrated with the appraisal process.  Upon reviewing their new homes magazine prior to the presentation, I discovered only one advertisement mentioned the energy efficiency of the home.  If the properties’ high performing characteristics were not important enough to advertise, why would anyone think they were more valuable? 

 

The market is overwhelmed with rating systems from more than a hundred organizations with different measuring sticks.  How is the public expected to make an informed decision when they cannot determine how one label compares to another?  Compound that with confusion amongst sales agents and appraisers for the same reason.  It is highly unlikely that a document will be published to provide a true comparison placing the burden on the market participants to figure it out.  A visit to a net-zero energy home sales office displaying a sample of high performing products and a HERS Index scale proved rather interesting.  Upon asking the sales agent if I could take a photograph of the HERS scale, he agreed but added, “I have no idea what that means”.  If he does not know what it means, how can he educate a potential buyer on the energy efficiency?

 

Education of the public, sales agents, appraisers, underwriters, lenders, appraisal management companies, and the government sponsored enterprises (GSE) is a goal that needs to be priority to solve many of the issues addressed.  The Appraisal Institute has been the forerunner in green state approved education with four courses and one seminar.  They provide a registry of the designated members that has completed the “Valuation of Sustainable Buildings Professional Development Program” or the complete series.[2]  NAR and EcoBrokers have educational classes available but sadly, a low percentage of the professionals involved in these transactions have taken the courses. 

 

The low number of professionals taking green education leads to the next barrier, competency.  Appraisal management companies (AMCs) and lenders are not seeking competent appraisers to appraise the properties.  It is usually the next one on the rotation list regardless of their experience of green education.  Overcoming this barrier will take time but can be solved by builders, sales agents, sellers, and buyers, demanding that appraisers’ competency be measured appropriately.  The GSEs ultimately hold lenders responsible for choosing competent appraisers even if they do not use AMCs. 

 

Many AMCs expect appraisers to provide a credible report in 24-to-48 hours from the time of accepting the assignment at fees that often range between $175 and $350.  A credible report on a high performing house will take more than the standard time involved in the conventional built house; therefore, it deserves a higher fee.  The limitation of the MLS and documents readily available places a great deal of responsibility and time on the appraiser’s part to produce a fair analysis.  If the appraiser cannot expect a higher fee but must assume more liability and more education, why should they accept the assignments?  Good education is not cheap and takes time away from production resulting in loss of income while in class.  Appraisers’ errors and omissions insurance have increased dramatically. 

 

The Green MLS Toolkit is making great strides in improving the searchable data fields but it is evident we have a way to go.[3]   Laurel Stukel, a Realtor, EcoBroker and CNT Energy Consultant, is a champion in this area.  She is a great connector of professionals and devotes time to moving the MLS to a greener place.  Laura was a valuable contributor to this meeting. 

 

Lastly, builders and property owners must realize they must sell their properties for more than conventional built houses if they ever expect them to appraise for more.  Builders often sell ENERGY STAR Homes at the same price as the conventional built home but expect the appraiser to value it for more.  Their reasoning is to sell more homes or take over the market share; however, that is all they will get until they sell them for more.  The market data determines the value, not the appraiser.  Until a sufficient number of sales exist at higher prices in an accessible database exists, we will continue to have a problem with high performing transactions. 

 

Overall, this was a well-planned meeting lead by Sam Rashkin.  It was informative and efficient.  I believe we can expect some steps forward from the time spent in Washington D.C. on January 29th, 2013. 

 

By:  Sandra K. Adomatis, SRA, LEED GA

Adomatis@hotmail.com

 

 

 

 

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Comment by Melissa Baldridge on July 2, 2013 at 7:32am

Great post, Sandy.  Thanks for all your hard work.  You're one of the bridge figures connecting the dots for all of us.  We're snapping the pieces together routinely for our real estate clients to help them get higher values for green properties and features, but WOW!  It's NOT an easy process.  A green MLS is HUGE, but as you've pointed out, it's only part of the process - helping the market identify what features matter.  Valuation is critical.

 

Keep up the amazing work.

Comment by Laura Reedy Stukel on February 2, 2013 at 7:10am

Sandy - Outstanding recap of this meeting. It was inspired conversation and hopefully will shape a path for working better together.  

As Tony already stated, you highlight that education needs are both top down (from builders/contractors to real estate professionals) AND bottom up.  

Again, I commend the Appraisal Institute for creating the Green & Energy Efficiency Addendum.  We are still dependent on the GSE's like Fannie and Freddie to recognize High Performance Homes in their underwriting guidelines.  But in the meantime the Addendum can be that baton that helps us work together in our shared relay race to closing (and value) for these homes.  Until the GSE's get engaged it is paramount that every builder and contractor completes the Addendum for every HPH they touch.  

Progress can flow from that simple step!

Comment by Tony Richardson on February 1, 2013 at 8:30am

Sandy, another great job of identifying and articulating the various challenge areas within the real estate/new home construction industry that need to be addressed before each stakeholder within the various industries will receive their just reward for their 'greening' effort up to and including the ultimate client, the home buyer or seller.  As you know, I have been involved in attempting to Green the MLS here in Southwest Florida for the last five months and have experienced much of what you elaborate upon within your blog.  The most striking truth you have identified needing the greatest priority is education, in my efforts, from the bottom up to the top down.Thank you for the great effort and invaluable contribution you are making to our industry.  Best wishes,  Tony Richardson     

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