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Earth Day and Real Estate Appraisers: Valuing Energy Efficient Properties

Celebrated every April 22nd, Earth Day emphasizes sustainability and highlights the economic benefits of green practices. For real estate appraisers, the rise of energy-efficient properties and technologies, like solar photovoltaic (PV) systems, are both a challenge and an opportunity, expanding valuation methods for today’s market.

The Shift Towards Energy Efficiency

Energy-efficient housing, mixed use development, and commercial buildings are now a part of a significant movement; more homeowners and commercial building owners are installing solar panels and developers are integrating green technologies during design planning. These features reduce carbon footprints, while meeting energy needs for residential and commercial properties alike, enhancing desirability and value. 

Energy-efficient certified properties, such as those with ENERGY STAR ratings, are at least 10% more efficient than standard code properties, featuring superior insulation, high-efficiency windows, and advanced HVAC systems. The Department of Energy’s PV Value Tool (https://www.pvvalue.com/) quantifies the added value of solar PV installations, aiding buyers, sellers, lenders, and appraisers in recognizing the financial value of green upgrades. For instance, the Department of Energy PV Value tool assists appraisers with determining a value for systems based on type, size, age, and region. Therefore, it would not be unreasonable to use the  PV Value tool number in your adjustments. After all, it was provided by the federal government; therefore, it should be deemed reliable, and you want to make appropriate disclosures regarding its usage.

Earth Day’s Influence on Market Trends

Earth Day boosts awareness of sustainable living, highlighting the long term advantages of energy-efficient systems, and prompting real estate professionals to include green features in property valuations. 

Growing awareness is increasing consumer demand for eco-friendly properties, leading appraisers to utilize valuation methods that fully reflect the benefits of energy saving features.

Challenges in Appraisal

Valuing properties with sustainable features presents several challenges. Conventional appraisals of the past typically only consider the market approach as relevant. However, if only a few properties with similar green features have been sold nearby, establishing a fair market value becomes more difficult. In these cases, the cost approach and even the income approach can be used to help support value. For instance, you could use the cost approach in supporting an adjustment made in your market approach comparable sales grid. 

This is where tools like the ENERGY STAR score and the Department of Energy’s PV Value tool come into play. They provide a framework for quantifying the economic benefits of energy-efficient features in terms of expected cost savings and potential increase in property value. Real estate appraisers must become proficient in using these tools to adjust their valuations accurately. 

The Future of Green Valuation

As the market continues to evolve, the role of real estate appraisers in valuing properties with energy-efficient features will only grow in importance. Earth Day serves as an annual reminder that real estate professionals need to focus on sustainability.

With ongoing advancements in technology and a growing body of research on the benefits of sustainable living, the real estate market is set to continue its shift towards more energy-efficient properties. Real estate appraisers, equipped with the right tools and knowledge, are essential in guiding this transformation, ensuring that energy-efficient properties are valued with the full effect of their sustainability considered.

Good luck and do good work,