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?
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.