A New Appraisal- Lessons from the History of Efforts to Value Green and High-Performance Home Attributes in the United States

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Mills, E. (2015). A New Appraisal- Lessons from the History of Efforts to Value Green and High-Performance Home Attributes in the United States. Berkeley, CA: Lawrence Berkeley Laboratory. - Report Number: LBNL-1003835
TitleA New Appraisal- Lessons from the History of Efforts to Value Green and High-Performance Home Attributes in the United States
AuthorsE. Mills
AbstractRigorous consideration of green and high-performance (“green/HP”) features is rarely included in the property valuation process._ To help illuminate why this is the case, this report takes stock of the history of efforts to improve practices, and identifies barriers that have emerged and opportunities for overcoming them. Particular emphasis is placed on what energy and environmental policymakers and other stakeholders outside the appraisal community can contribute to the broader effort to advance professional practices. The history has unfolded in parallel with turbulent periods in the housing market for which appraisers and their customers are deemed to share responsibility, followed by cycles of regulations, siloing of appraisers in the name of professional integrity, and commoditization of the valuation process itself. This pattern has important ramifications for aspirations that appraisers engage more fully in identifying and valuing the green/HP characteristics of homes. On the one hand, it is legally and ethically incumbent on appraisers to do so, yet on the other hand it is perceived as a risky avenue to follow. Risks arise where findings can be challenged as either over- or under-stating value, together with a market environment in which the complexity of their assignments increases despite downward pressure on appraiser fees. While efforts to address green/HP considerations date back to the early 1980s, the vast majority of activity has taken place within the past five years. Many players have engaged in the efforts to promote improved valuation practices. These include the Appraisal Foundation, The Appraisal Institute, Colorado Energy Office, Earth Advantage, EcoBroker, Elevate Energy, Fannie Mae, Federal Housing Administration, Home Innovation Research Labs, The Institute for Market Transformation, Northwest Energy Efficiency Alliance, National Association of Homebuilders, National Association of State Energy Officials, National Association of Appraisers, RESNET, USEPA, USDOE and its National Laboratories, the U.S. Green Buildings Council, and the Vermont Green Homes Alliance. Many activities have resulted, ranging from trainings, to data-gathering instruments, and the emergence of a literature attempting to statistically isolate the effects of green/HP characteristics on home values. In some cases, the results of studies have been overgeneralized and oversold, and embodied flawed methods. Although the green/HP community has encouraged appraisers to focus on exemplary buildings (e.g., LEED or ENERGY STAR Certified), any level of green or energy performance can in fact influence value, including below-average performance (a.k.a. “brown discount”), irrespective of whether or not the building has been formally rated. This overly narrow focus represents a significant missed opportunity. Other surmountable challenges include limitations to non-appraisers’ understanding of the appraisal process (and practical constraints therein). A byproduct of this can be unrealistic expectations of what appraisers can and will do in the marketplace. These challenges notwithstanding, the environment for moving forward has improved. There is better data today (a critical need); expanded efforts to disclose energy use information (characteristics, consumption, bills); improved and more pervasive building energy codes, building rating and labeling initiatives; and a host of federal, state, and local policies that have collectively brought green/HP practices much more into the mainstream. Meanwhile, a renewed focus on professional standards of care and competency for assessing green/HP homes make it increasingly important for appraisers to consider these factors in their assignments. Despite the past four decades of studies, there is little if any discernible uptake of these practices by the appraisal practice at large. It would behoove interested parties to step back and consider what new strategies might be productive. A key element of any new plan should be to reset the nature of interactions with the industry, with the goal a more collaborative, two-way discussion to help improve outsiders’ understanding of the valuation process. It is not only the appraiser that needs to be engaged and could benefit from awareness raising. Homeowners, builders, lenders, utilities, insurance companies should also provide input on how green/HP factors impact property valuations and ways to accurately reflect these considerations in appraisals and real estate transactions more broadly. Given extensive inertia within the appraisal industry and a mixed history of interactions with the non-appraisal stakeholders, it is unlikely that the status quo will achieve much unless followed with more coordinated and persistent efforts. Workshops, studies, and memoranda of understanding will not on their own have much impact, and do not address deeper structural issues. Expectations are often unrealistic and not attentive to real-world constraints faced by appraisers. The report identifies key barriers impeding more thorough consideration of green/HP factors in residential real estate appraisals, and solutions for mitigating them. Barriers • Although industry standards of practice caution against bias of any sort, a skeptical predisposition towards “green” is reinforced by information deficiencies. • Information deficiencies result from the lack or difficulty of obtaining usable data on green/HP features in subject properties as well as valid sales comparisons or cashflow analyses. • Competency deficiencies, such as lack of conversancy in relevant technical topics, leads to oversights, and disjointed treatment of relevant information. • Time/cost pressure and process commoditization (e.g., template-based approaches) result from highly constrained budgets, quick turn-around times expected of appraisers, and standardized practices that were not developed with green/HP considerations in mind. • Professional differences between appraisers and sustainability professionals include divergent objectives, the former being market observers and the latter market influencers. • Risk aversion arises from multiple concerns including veracity, accuracy, and persistence of energy data, impacts of operational choices, new sources of appraiser liability associated with green/HP assessments, industry pressures not to over-value buildings or suggestion of bias, and concern about spending non-billable time on complex assignments. • A public policy vacuum has been created by disjointed and uncoordinated efforts from public-sector stakeholders, insufficient efforts to discuss and understand the appraisal industry and process, and a perception by some valuation professionals that green/HP is oversold. Opportunities • Elevating the competency of appraisers can be achieved through a combination of improved industry standards of care and equal-access training and professional development offerings. • Development of better information resources must focus on building-level information that provides robust documentation as well as aggregate sales-comparison data and other contextual information such as local codes, typical upgrade costs, energy prices, etc. • Improved energy benchmarking and rating tools could provide appraisers with information more well-adapted to their particular needs, which differ from those of typical audiences such as energy managers. • Better characterizing and managing risk will enable appraisers to cope with uncertainties in performance information, and help identify where risks may be introduced or mitigated by green/HP features, including higher costs or obsolescence of poorly-performing buildings. • Integrating disaster resilience and sustainability in appraisals would recognize important synergisms among these features, including durability and ability of green/HP buildings to better withstand external hazards. • Mitigating the problem of additional time/cost for performing assignments is an essential need that can be addressed by providing easier access to information and analytic procedures, perhaps coupled with new resources to defray the associated costs. • Enhancing demand for improved appraisals is a fundamental need, and depends on owners, developers, lenders, and others soliciting competent appraisers to perform scopes that expressly call out green/HP considerations, and to critically review the work product for compliance before acceptance. • Engaging new market participants, such as energy utilities and insurance companies can ensure fuller representation and participation of market stakeholders already engaged in green/HP activities and capable of furnishing valuable data and managing associated risks. Cutting across these individual activities, there is a need for outside stakeholders to formulate and follow a roadmap instead of piecemeal initiatives, bridging the professional/cultural divide between appraisers and green/HP communities, and tracking progress in order to know what is working. A more coherent communication and training strategy is needed, as the appraisal industry is highly fragmented, with two-thirds of appraisers opting out of membership in trade associations. In sum, while there is no silver bullet for advancing the practice of valuing green/HP features, there are concrete opportunities. Parties seeking solutions must identify barriers they wish to address and select from among potential initiatives that map to those barriers. Close collaboration with the appraisal community is critical, as non-appraisers have historically obtained limited traction with this industry due to lack of understanding of the nuances involved in the valuation profession. Large organizations and agencies should have a united approach; the perception or reality of a fragmented and uncoordinated strategy is unsettling for prospective partners in the appraisal industry. This requires improved communication and education within and among these communities.
NoteEE Office of Building Technologies (EE-2J)


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Copyright: Unless explicitly noted otherwise in the text, this manuscript has been authored by an author at Lawrence Berkeley National Laboratory under one of the following three contracts with the U.S. Department of Energy (or its predecessor agencies), depending on the date of the publication:

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