CalypsoEdu Food for Thought: No Comps… No Problem… Appraising Energy-Efficient Homes By: Francis X. (Rich) Finigan
Major stumbling block in the proliferation of energy-efficient homes in America is not the additional cost associated with construction or improvements, but the Realty world trifecta, which is composed of three disparate, but intrinsically linked professions:
- The lack of qualified real estate sales professionals who are capable of identifying and relaying to customers the intrinsic greater value in an energy-efficient home. Relating directly to this is, lack of information that is easy to obtain, retain, and disseminate in a compelling enough way for Realtors® to capture and share. The sharing of that information includes completing MLS documentation for access by the real estate appraisal community and other documentation.
- The lack of qualified real estate appraisers available to complete credible valuation assignments on energy-efficient homes. Currently when an appraisers’ assignment is an energy-efficient home, and they don’t have comparable sales, they might identify the improvements as “super adequacies”. Is this an appraiser competency issue? (See USPAP COMPETENCY RULE).
- Lending institutions, especially underwriters, lack the requisite knowledge to review an appraisal on energy-efficient homes. Just because a home is in energy-efficient home doesn’t necessarily mean it has a special FHA energy efficient mortgage. There is no reason that energy-efficient homes cannot be financed through conventional secondary mortgage lending. Unless you think not having comparable sales is a reason. Well… It’s not.
In the Freddie Mac Single Family Requirements, the secondary mortgage market clearly identifies that when comparable sales are not available, it is not only acceptable, but a requirement that two other credible methods to value be utilized to support the value opinion.
I wonder what those two other methods might be! (Just a tongue-in-cheek, which, for those of you who know me, know I can’t resist) The cost-approach and the income-approach. Don’t panic, it’s a lot easier than you think. For instance, the secondary mortgage market prefers that you don’t use regression-analysis, discounted-cash-flow, but use gross-rent-multipliers in presenting the income approach.
In Appraising Energy-Efficient Residential Properties we supply a step-by-step refresher on how to perform the cost-approach and income-approach for residential properties. We also identify pricing considerations when the assignment is for energy-efficient homes. The course includes a set of forms to incorporate with your appraisal to capture relevant data and support your conclusions.
Stay tuned for one of our Food For Thought articles where we will further explore dramatic changes in the appraisal profession, including those upcoming changes to USPAP.
Good luck and do good work,