The enquiry into the interrelationship of valuation and sustainability first became evident in the commercial sector with the publishing in 2003 of the Green Value report by Chris Corps (former chair of the Royal Institution of Chartered Surveyors, Canada). Chris went on to initiate the Vancouver Valuation Summit in March 2007 out of which an Accord was signed by the major international valuation organizations attending the Summit, including the Appraisal Institute and the Royal Institution of Chartered Surveyors. The Accord represented a formal expression and commitment by signatories to advance understanding, knowledge, education and practices about Valuation and Sustainability.
This work was then picked up by the leading green building organizations in the Pacific NW, the Northwest EcoBuilding Guild; Cascadia Region Green Building Council; Built Green WA; Built Green King Snohomish; Built Green Pierce and Earth Advantage Institute along with key steering committee members of the Vancouver Valuation Accord. These organizations formed a loose alliance called the Green Building Value Initiative, which was charged between 2007-2009 with investigating the hypothesis of added value for green buildings, through sales data analysis, surveys and case studies. Since Oregon and then Washington were the first Multiple Listing Services in the nation to incorporate environmental certification checkboxes on their Input Form, for the first time green and energy efficient homes could be easily identified. Earth Advantage in Portland and GreenWorks Realty in Seattle analyzed the sales data, which revealed certified green homes were selling for more and spending less time on market. See most recent Earth Advantage Press Release 61610 and coverage of GreenWorks Realty’s findings in the Daily Journal o f Commerce .
The following reports were published:
- May 2009 Certified Home Performance: GBVI Residential Report Final_2010
- May 2009 HighPerfGB_ValueStudy_Final_2010
In addition, three residential case studies were undertaken of two subdivisions and one condominium project to isolate and determine the value, if any, of the green features. A format for this type of residential analysis had not yet been established, so the case studies have in effect provided the impetus to develop a nationally recognized format for the residential appraisal community.
The case studies were subjected to stringent third party review on two counts: from the real estate professional’s perspective and from the appraiser’s perspective and two versions of each case study are published. To view the real estate agent versions, which were released October 2009 go to: Real Estate Agents, Case Studies
The versions for appraisers have been developed by SEEC LLC under the guidance of an Appraisal Review Committee comprising of: Chris Corps, former chair of the Royal Institution of Chartered Surveyors, Canada; Peter Clarke, former chair of The Appraisal Foundation, Canada; Danny Wiley, former chair of the Appraisal Standards Board and Stan Sidor, former president of the Appraisal Coalition of Washington.
While there is discussion with the Vancouver Valuation Accord as to how to publicize this residential case study format, we are posting the first the three appraiser version case studies here: Charleston Place Case Study Appraiser Version
- Built Green & LEED – A Comparative Analysis by City of Seattle and King County GreenTools November 2008 – an analysis between Built Green, a local rating system, and LEED (Leadership in Energy and Environmental Design), a national rating system, for single family and multifamily projects at LEED Silver and Gold and at Built Green 4 & 5 star.
- Built Green Value Analysis by Gardner Johnson January 2009 – examines in State of Washington environmental certifications’ effects on the values and consumer preferences for green residential housing units.
- Built Green Consumer Survey by Robinson Research March 2009 – a telephone survey among households in the State of Washington. The overall purpose of this study was to evaluate the public’s attitudes and perceptions regarding green building practices.
- Green Building Marketing Analysis (Five Counties, Western WA) by Hamilton Investments April 2009 – examines the effects of marketing on premiums achieved for green homes.
- Seattle Built Green Portfolio 2008-2009 by Seattle Dept of Planning & Development published late 2010 – analysis of savings from Built Green certified residences
VALUATION AND MULTIPLE LISTING SERVICES
The importance for appraisers to easily identify comparables when valuing green and/or energy efficient homes was highlighted by the recent national release of The Green MLS Toolkit, initiated by the National Association of REALTORS and NAR’s Green Resource Council, in conjunction with the National Association of Home Builders (NAHB) and the Appraisal Institute. While this is only a recommendation to multiple listing services, it is an important first step that recognizes appraisers are currently working blind when valuing green and/or energy efficient homes.
Back in 2007 Oregon and Washington’s multiple listing services were the first in the country to incorporate environmental check boxes on their input forms. This allowed appraisers to identify homes with green and/or energy efficient features when searching for comparables. Importantly it also allowed sales data between environmentally certified and non-certified homes to be compared and premiums that were being paid by consumers to be identified.
The relevancy of sales data analysis is that it can identify consumer trends, even an emerging market, which appraisers should then respond to (as long as they are aware of this analysis) since they are market reporters, not market makers.
The obverse can also be true that appraisers actually become market inhibitors if they are not given appropriate tools to observe markets or if they are undereducated or unwilling to delve into required analysis if/when necessary.
‘What is the Norm?’
Is there a point in the future when appraisers will start to discount any home that is not green? Over 50% market share and a new normal has been established. In essence this is what is required of appraisers today in any market segment & property type where evidence of definitive market reaction is noted for the specific type of property being appraised.
A legitimate example might well be found in the Seattle market, where a July 2009 analysis of sales data of the NWMLS showed just over 49% of new homes sold that month were sold with a green certification and sold for a premium. So if a recently built non-green home in Seattle is the Subject in an appraisal assignment that is immediately surrounded by other Green and Non-Green homes and if there is a clear positive market premium for the green homes, a market adjustment would be required which would negatively impact the Subject of such an appraisal assignment…or, another way to say it is that the premium would not be applied toward that Subject.
Market share in Seattle and King County has sincehas slipped, but other factors are now coming into play (such as the national focus on moving towards energy independence) that are likely to increase the demand by consumers for green and energy efficient homes.
VALUATION, GREEN BUILDING CERTIFICATION PROGRAMS and VALUATION APPROACHES
According to a recent white paper issued in Sept 2009 by Marshall and Swift “green building certification does not equal real building value,” because amongst all the different green building certification programs “there are different methods to acquire certification points or credits, many of which have nothing to do with the actual construction of the property”.
Herein lies a dichotomy. The core tenet of green building is to reduce its impact on the environment – the environment viewed here in the broader context of encompassing people and resources now and into the future. Green building is more than the sum of its parts; it is a design and construction process that recognizes that a building is not separate from the land upon which it is built (it affects and is affected by the environment), and that people are affected by living within and in proximity to buildings.
Yet many of the strategies for reducing a home’s impact on both the environment and its inhabitants currently do not attribute to a quantifiable market value. For instance, there has been a heavy emphasis within green building programs on ensuring storm water pollutants do not infiltrate local water systems, including aquifers (entirely understandable in a region dominated by concerns over declining salmon runs and facing a large cleanup bill for the Puget Sound waters). Large scale strategies of Low Impact Development for subdivisions to individual strategies such as rain gardens, pervious concrete walkways and/or composted and tilled soils, though they usually cost the developer/builder more to install, are as yet not recognized as giving additional market value to a home or a community. Yet communities are starting to experience the true cost, both financial and environmental, to the business of ‘construction as usual’.
As we, “the market,” begin to truly see and feel the cost of ‘construction as usual,’ then the market value of green building will become accepted as quantifiably superior. Green building certification programs help bridge that educational gap. But again, this is social value. It only becomes market value when there is enough evidence showing that the ‘typical buyer’ within a given market area will pay X more dollars for the social impact.
The issue of whether to and when we will attribute value for social impact is the issue of our times and is being perfectly reflected in the highly public BP Gulf oil spill environmental disaster with its associated cleanup costs.
Green building certification programs
The social value inherent in green building certification programs is multi-fold:
- They promulgate local climatic green best construction practices, which often then serve to influence future changes in State Building and Energy codes
- They often initiate or promote education to the consumer and to various construction industry professionals
- They house accurate information on single family and multi-family homes being certified, therefore providing important information on market share i.e. consumer trends
- A certified home, in a region where the local or regional multiple listing service has incorporated environmental certification check boxes, joins the pool as either current sales comparison data or potential future sales comparison data. Analysis of this sales data, as mentioned earlier, provides valuable information on what consumers are actually paying for green homes.
The integrity of a green building certification program is carried through into its brand, which can be how a consumer is first introduced to green building. Green certifications have intrinsic value if the consumer trusts that homes developed under that standard really are superior to a conventional home. That trust factor can be undermined when there is no third party verification.
The relevancy of stringent third party verification (which must also include higher energy performance standards than their comparison) for appraisers lies in the fact that it should identify a quantifiable difference in the construction and the performance of that home. A home that has been certified green, but not third party verified is rather similar to a car claiming to be fuel efficient, but declining to be tested under the federal MPG fuel efficiency standards. There is very little reason then for the appraiser to take their valuable time to dig deeper and investigate the claims.
If a home is truly better than the norm, why would a builder not wish to irrefutably demonstrate this fact? Lack of third party verification has clearly led many appraisers to feel they are being sold a story for which there is often little quantifiable value.
Residential Valuation Approaches
While it is true that a green certification itself cannot be deemed value contributory, the individual components within the home do…of course. Green building programs, in essence, bundle up the hundreds of components of a home, and package them up so that the local consumer can react to it (positively or not at all). The reason Marshall & Swift say the certification programs don’t add value makes sense…they can’t speak for every single program out there. However, this is exactly the reason local appraisers need to have expertise on their local green building certification programs, so that they know what they signify about the building they are appraising or using as a comparable.
Residential appraisal relies predominantly upon the sales comparison or market approach to establish the value of a home. The current residential sales market, littered with fire sales, short sales and foreclosures combined with a prevalent practice by Appraisal Management Companies of shopping for the cheapest, and therefore typically in-experienced, appraiser unfamiliar with local market conditions, is . could be resulting in undervalued reporting. Coupled with these factors, on the whole, appraisers are unwilling to attribute value to green buildings, because they feel there is insufficient or no evidence to show consumers are willing to pay a premium for green homes and they are market reporters, not makers. In fact, it is true that there is frequently insufficient or no evidence showing that consumers pay more. Herein lies one of the many problems in appraising this type of home. Sometimes scarcity of evidence can indicate a lack of market reaction. Other times not. But whether an appraiser will dig deep enough to knowledgeably make that call is the question.
In addition, the cost approach for residential buildings (the secondary measure of worth that is used to establish the replacement cost of a home i.e. for underwriting the loan) currently only recognizes quantitative cost of components (e.g. heat pumps) and does not account for social/qualitative implications (even when low or no VOC paint costs more than conventional paint).
And the income approach in residential appraisals typically only applies for a property purchased primarily for income stream. The annual maintenance costs and the annual cost of utilities (energy, water and sewage) are frequently paid by the tenants not building owners or are insignificant costs for smaller residential income buildings. As such, these costs do not have an impact on the capitalized future income stream. Resource efficiency does not yet present a compelling enough reason for the majority of small residential income property landlords to change their investment priorities’ habits.
In conclusion, it is becoming obvious that as green and energy efficient homes gain market share, the self-limiting factors inherent in each of the different approaches will have to be addressed. In the meantime, green building certification programs provide a means for these homes to be identified and create a bridge to allow the market, as it get educated, to attribute $$ value to social value.
VALUATION AND ENERGY EFFICIENCY
Whether you are a homeowner, a builder, a real estate agent or an appraiser, upfront cost is often perceived as the main obstacle to making energy efficiency upgrades. In a Market Research Study prepared in December 2009 by Curtis Research Associates, energy efficiency was regarded with the same skepticism by the appraisal industry as green building, primarily because the appraisers in the survey did not believe consumers are swayed in their purchasing decisions by the energy efficiency, or lack thereof, of an home. For those consumers who are not compelled by their personal ideology, as mentioned earlier, the energy costs to run a home have not been perceived to be a barrier to ownership or even a burdensome expense. And when energy costs are considered an issue, curtailment, rather than undertaking efficiency improvements, has been mistakenly assumed to be the most effective course to reaching energy savings (see Columbia University National Report August 2010).
Are we really taking into account the true cost of the energy to run our homes? An interesting comment on two other reasons for the high default rates on loans in 2009 and 2010, besides lax lending practices, was noted in a blog by David Goldstein of the NRDC ” It seemed evident that a system designed to look only at the ability of the borrower to pay back the $178,000 or so loan but that ignored the affordability of the $375,000 commitment to transportation and utility costs was bound to go wrong”.
In the 1990s, a significant $ increase in value for annual energy savings was proposed in an article in the Appraisal Journal, but the concept never caught on in the residential appraisal community, though it has often been cited by the green building movement. Even the Energy Efficient Mortgages (EEMs) developed by Fannie Mae languished, largely in part because they offered extra money for energy savings, at a time when the mortgage industry was essentially giving away money on stated income, without the additional hoop of going through an EEM. Today, appraisers may give added value for a heat pump, but typically this is to recognize the cooling equipment, rather than the fact that there are real energy savings for the consumer using a more efficient heating system.
A legitimate reluctance to recognize value to energy savings derives in part to the fact that consumer energy consumption habits vary widely. In addition there hasn’t been a universal metric for the consumer to react to/compare the performance of different homes.
The residential market’s “rational perspective” (as Nevin put it) of energy efficiency requires insight into the performance of competing properties in order for any market reaction to occur. Large income/commercial markets have come to value utility efficiencies. It hasn’t happened yet in the residential sector. The market cannot react to what it does not and cannot yet know. The widespread implementation of an energy rating system to measure in absolute terms a home’s energy performance would assist the consumer (market) to identify energy efficiency as a preference.
Energy Performance Scores
As of 2008 a whole new energy performance metric is being tested in this region, largely influenced by the Energy Performance Certificate adopted in the United Kingdom. Energy Performance Scores (EPS), originally developed by the Energy Trust of Oregon, and currently under license with Earth Advantage Institute and Conservation Services Group, is an absolute measure of the energy consumption of a home (essentially a Miles per Gallon sticker) and is being tested in a 5,000 home pilot program with the City of Seattle.
The EnergySmart Home Scale (E-Smart) is another example of an energy performance score and was developed by the US Department of Energy and launched within their Builders Challenge program. It provides a means to differentiate their best energy-performing homes from other products in the marketplace, and to make the benefits clear to buyers.
EPS has also been adopted by at least one private sector residential retrofit development fund, G2B Ventures (also based in Seattle), which is buying older homes for energy retrofits, conducting a before and after EPS. Is the consumer convinced? It would seem so. In a stagnant real estate market G2B’s first EPS rated home sold in 7 days within .05% of its offered price.
Does the residential appraisal community already have approved methods to identify value for energy efficiency, as indeed it does for green building? The answer is yes. To support the sales comparison approach there is paired sales analysis; hedonic regression analysis; present value capitalization and accepted procedures to handle appraisal anomalies (a good example of an appraisal anomaly are waterfront properties).
But the majority of appraisers are reluctant do this extra work for the following reasons:
- Lack of awareness of consumer trends or lack of data/comparables
- Lack of education on green and energy efficient building translates into simply not being able to identify or recognize green
- Lack of enforcement of USPAP’s Competency Rule
- Pressure by many Appraisal Management Companies (AMCs) for appraisers to do more work for much less money.
APPRAISAL MANAGEMENT COMPANIES and USPAP’S COMPETENCY RULE in relation to GREEN BUILDING
With the implementation of the Home Valuation Code of Conduct (HVCC) many appraisers feel like they have been made the scapegoats for the collapse in the housing market, when in fact “there were some big lenders involved in pressuring appraisers”. As summarized from The Home Appraisers Qualitative Market Research Study by Curtis Research the realities of the residential appraisal industry in today’s market are as follows:
- Appraisers have been forced to simply sign up with a plethora of AMCs, in the hope of being called for an assignment
- Many people working for AMCs have no knowledge of real estate transactions or understanding of appraisals
- Appraisers with years of experience are treated the same as new-comers
- AMCs have raised the cost of an appraisal to the home buyer and yet are typically keeping as much as 40-60% of the appraisal fee that in the past went to the appraiser.
- AMCs shop for an appraiser willing to take the work for the lowest rate, therefore many inexperienced appraisers end up doing work in areas about which they know little or nothing.
- AMCs often operate with automated systems/or with reviewers who have little appraisal experience that demand extra work from the appraiser.
According to USPAP’s Competency Rule, appraisers must “have the knowledge and experience to complete the assignment competently”. The enforcement of this fundamental rule should be absolute with Appraisal Management Companies. Green and energy efficient new building and retrofits should be able to demonstrate standards significantly more demanding than producing a code built home or doing a remodel. This in turn means appraisers will need to demonstrate they have educated themselves in these differences in order to competently appraise such properties. Go to 7 clock hour class Green Home Trends and Appraisal Methodologies
Insufficient policing of this rule has led in many instances to green and energy efficient features being essentially ignored in an appraisal. The current system under the Home Valuation Code of Conduct (HVCC) encourages shotgun hiring and is certainly not conducive to encouraging appraisers to take the extra time that is required to identify and then justify positive adjustments when green and energy efficient homes are being appraised.
Legislation mandating continuing education is unnecessary when there is a strict adherence to the existing Competency Rule by Lenders and/or Appraisal Management Companies.