Green homes are designed with environmentally friendly and sustainable features, including the efficient use of energy, water, and building materials. Energy efficient homes are gaining in popularity as their affordability increases. As an appraiser, it’s a good idea to familiarize yourself with this unique property type, as the demand for green home appraisals continues to grow. In this article, we outline helpful information, resources, and special considerations for appraising green homes.
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What makes a house a “green” home?
There are five pillars of “green” when it comes to building a green home. These are:
All of these are considered regarding how they are affected by the seven components of a home, which are as follows:
- Building envelope systems
- Plumbing systems and fixtures
- Finish materials and coatings
- Waste management
Some energy efficient features you might see in green homes include:
- Solar panels
- Low-volume toilets
- Additional insulation
- Efficient HVAC
- Air exchanging
- Landscaping that utilizes a runoff system for watering
Appraising green homes
As an appraiser, you are required under Fannie Mae, Freddie Mac, and FHA guidelines to consider energy efficient features when valuing a property. Depending on whether or not the market supports an adjustment in value based on green home features, you must consider this in your valuation. The problem is that you cannot take green features into account if you are not aware they exist on the property.
That was the impetus behind this guide, recently created by the National Association of Homebuilders in collaboration with the Building Codes Assistance Project and the Appraisal Institute. It is intended to provide information to home builders, home buyers, and mortgage lenders on how crucial it is to hire an appraiser who is proficient in valuing a “green” property. The guide addresses the valuation of homes built to current energy codes and assists appraisers in identifying and valuing green components of homes.
The appraisal report form
An energy efficient property is one that uses resource-effective design, materials, building systems, and site orientation to conserve nonrenewable fuels. Unique energy-efficient items need to be recognized and noted on your appraisal report form. For example, on Form 1004, special energy-saving items must be addressed under the Improvements section, in the field labeled “additional features.” The nature of these items and how they affect property value will vary throughout the country due to climatic conditions, differences in utility costs, and overall market reaction to the cost of the features.
Some examples of unique energy efficient home features may include, but are not limited to:
- Energy efficient ratings or certifications
- Programmable thermostats
- Solar photovoltaic systems
- Low-E windows
- Insulated ducts
- Tankless water heaters
You must compare energy efficient features of the subject property to those of comparable properties in the sales comparison approach adjustment grid. If your analysis determines that an adjustment is warranted based on the market reaction to such item(s), you must include it in the adjustment grid.
The improvements found in green homes should conform to the neighborhood regarding age, type, design, and materials used for their construction. If there is market resistance to a property because its improvements are not compatible with the neighborhood, you must address the impact to the value and marketability of the subject property. In the appraisal and appraisal report review processes, you must give special consideration to properties that represent unique housing for the subject neighborhood.
Mortgages secured by unique or nontraditional types of housing are eligible for delivery to Fannie Mae, provided you have enough information to cultivate a reliable opinion of market value. It is not required that one or more of the comparable sales be of the same design and appeal as the subject property. However, the accuracy of your appraisal is enhanced by using comparable sales that are the most similar to the subject property.
On a case-by-case basis, both you and the underwriter must separately decide whether sufficient information is available to develop a reliable opinion of market value. This will depend on the extent of the differences between the unique property and the more traditional types of houses in the neighborhood, and the number of such properties that have already sold in the area.
Want to learn about other types of unique or odd properties? Check out our articles on tiny homes and stigmatized homes. Enroll in our course, Complex Properties: The Odd Side of Appraisal, to dive into a variety of unique property appraisals.
Looking to upgrade your appraisal license? Learn more with our free upgrade guide.