If someone fell asleep in 1980 and woke up today, that person would be astounded at the progress the last three decades have brought. However, if someone fell asleep in the appraisal industry in 1980, and woke up in the appraisal industry of today, that person might barely notice a difference.
Okay, I'm exaggerating, but you get my point. When Henry Ford said "change isn't always progress," he could have been talking about the appraisal industry. Over the past several years we've seen plenty of change, but quite frankly, not a whole lot of progress. In addition to licensing requirements, appraisers have all new rules governing the way they handle Market Conditions Addenda (1004MC), photos, comparables and a host of other issues. To the naked eye, it may look like we're moving forward, but despite the number of changes to the way appraisals are completed, we're actually seeing very little progress. If our industry is going to undergo changes, they should be focused on establishing better appraisal practices and moving the industry forward with the rest of the world.
One way we could do this is for the industry to start implementing “green”—or eco-friendly—valuation standards for residential real estate. It seems like the rest of the world is focused on eco-friendly initiatives. It's time that our industry got in the game. We need to start addressing eco-friendliness in residential homes and accounting for it in property values.
Commercial real estate has come a long way in this area for obvious reasons—their utility expenses are huge and energy efficient systems can translate into big financial savings. The residential side, however, has made almost no strides in adopting standards for energy efficient homes and very little progress with the lending community when it comes to placing a value on ultra-energy efficient systems in residential homes. Let's be logical about this. Having an ultra-energy efficient home should make a difference in the value of a property, particularly when compared to a home with no energy efficient upgrades. There's a wide gap between a $3,000 annual utility expense for one home, as opposed to $500 for another. Look at those costs over a 2 to 3 year period then add the "trendy" appeal of a green home. Ultra-green homes should demand a premium in the marketplace, much like eco-friendly cars demand a higher price. How much higher? Here are a few options for how our industry can begin to value eco-friendliness in residential real estate:
- Via the annual utility bill. Requiring Realtors to record annual utility bill information (which is typically already listed in the contract) in the Multiple Listing Service would enable an apples-to-apples comparison of utility bills
- Via the “trend effect.” What's trending makes a difference. Homeowners are willing to pay a premium to go green. Homes carry a higher price point and require more investment to see an impact, however, investing in solar panels to use less energy over the next 10 years has a lot more impact than using eco-friendly soap to wash your hands. The value of that trend should be accounted for.
- Via energy efficient home certifications. I believe we will reach a point where homes can become "certified" green and, as such, be entitled to more perks. There are already a few programs where builders and green home companies offer energy star certifications for homes. If appraisers could access a home's "green certification" rating, preferably online, it would be easy to determine which homes qualify for energy efficient value adjustments and which ones don't. They could also see the overall cost savings. The commercial real estate sector is already dong this. LEED (the U.S. Green Building Council's Leadership in Energy and Environmental Design green building rating system) is the standard for certifying commercial buildings. Some large enterprises are leasing or purchasing only LEED-certified buildings. This could easily transfer to residential real estate, helping us establish not only clear guidelines and requirements, but also benefits for the homeowner.
The time has come for banks and GSEs to consider the eco-friendliness of a home when determining its value. It's progressive change like this that has the ability to help get the housing market back on its feet. Builders could build green homes and certified green homes that qualify for special financing, theoretically without using the (non-green certified) foreclosures in the market area as comparables. This would enable a new-home-to-new-home comparison, rather than the new-home-to-new-foreclosure comparison that is killing builders' morale, as well as their businesses.
