Valuing the role of the appraiser in home performance January 12 2015, 8 Comments
Here's something near and dear to the heart of anyone involved in the home performance industry: how to make energy efficiency sexy, appealing, and properly valued. When you're up to your eyebrows in insulation and you know that you are adding significant value to a house, it's sometimes hard to perceive why the value of the good work and long-term benefits that you are creating for homeowners seems to disappear with the installation of the drywall over the insulation and air barrier. Homeowners who are committed to the long haul are the ones who recognize the value -- they see it every month in their energy bills, and feel the difference in their overall comfort level.
Then there's a whole raft of other people who don't recognize the value, or have no way to quantify the value of energy efficiency work so that it can be included in the overall value. And it just so happens that that raft is tied to the financing and sales processes. And the person who has the tiller, to stretch the Maritime metaphor just a little bit more, is the appraiser: the objective third party who assesses the home determines how each feature contributes to the overall value of the house.
If an appraiser can't to evaluate energy efficiency measures because they don't have a way to navigate through the waters (ok, yes, I am liking the metaphor way too much), they are certainly not going point the raft into unknown territory. Both the US and Canadian Appraisal Institutes recognize that energy efficiency measures can add to value, but how the appraiser determines that value is at issue.
In Canada, properties are valued in three ways: the income approach, the direct comparison approach and the cost approach. The income approach is based on the value of the revenue generated by a rental or lease property at it's highest and best use. The direct comparison is based on what it would cost to buy another existing and equivalent property, based on recent selling prices and current listings in the immediate area. The cost approach is based on how much it would cost to build an identical building at current prices and estimated land value, less accumulated depreciation.
Regardless of the how the valuation is carried out, the appraiser cannot determine value of a component or feature if it is not included in the sales sheet. For example, if a deep energy retrofit on an older home or a solar thermal or a PV system or if the fact that a house is Net Zero Energy ready, are not considered sales features, they can not be included in the valuation. An appraiser coming across one of these unusual sales features for the first time might scratch their head. With nothing to compare it to in a region or a neighbourhood, how do you determine what it's worth?
Who needs to be involved? Homeowners who have houses with these features, builders who are offering new construction packages with these features, realtors who are selling houses with these features, buyers (and their realtors) who are looking for houses with these features.
There are already some tools, methods, and programs out there for green appraisals. I can't walk you through that process -- it feels a little like alchemy to me. And this article from Home Energy Pros in the spring of 2014 lays out the groundwork for how to start and makes two outstanding points.
What are homeowners, builders, and realtors all going to be required to provide for appraisal? Documentation. Performance testing results. Installation specifications. Possibly technical specifications.
Who's going to determine the value? The right appraiser. One who has some credentials and an industry-acceptable format with which they can catalogue home performance features. Any appraiser, regardless how experienced they are, will have difficulty parsing out the important info from a boatload of documentation on systems, products, and upgrades that they are unfamiliar with. consistent, standardized documentation across the board is going to help...
Once new features are on several sales sheets and transactions have been closed, they have become part of the product, and can then be assigned value that is pertinent to the local market. And then they're valuable. And marketable. Think better closing prices, shorter on-market times, happier clients all round: sellers get more money, buyers get more value. Win-win.
Floats my boat.