Fuel Cell Arrival at 360 State Street, New Haven, CT. Courtesy: Bozzutto

The Appraisal Institute (AI), an organization that provides educational opportunities for both commercial and residential appraisers, has taken the bold step of trying to educate the public.  

It is a wise public relations move intended to elevate the appraiser’s role in sales and financing transactions with the hope that it will replace the lay person’s impression of appraisers as ’delay-makers’ or ’deal-killers’. Taken at face value, the AI’s advice to buyers could be expected to accelerate if not improve the appraisal result as well as a buyer’s experience and level of satisfaction. The expanded two page pdf document is here, but we offer the following as the essence of the advice: 

• Understand the role of appraisals.
• Make sure the lender hires a qualified appraiser (such as a designated SRA, SRPA or MAI member of the Appraisal Institute).
• Accompany the appraiser during the inspection of the property if possible.
• Request a copy of the appraisal report from the lender.
• Examine the appraisal report and ask questions.
• Appeal the appraisal if appropriate.
• Ask the lender to order a second appraisal by a qualified and designated appraiser.
• File legitimate complaints with appropriate state board or professional appraisal organizations.

AI’s president, Joseph C. Magdziarz, goes even further by acknowledging both borrower angst and pain by proclaiming, 

“Too many consumers in this struggling real estate market face problems with appraisals when attempting to buy or sell a home. But rather than passively endure delays in closing a sale, homeowners and buyers can take proactive steps to avoid pitfalls.” 

It all sounds great, Joe, but over the last few years the Appraisal Institute – and many others lobbying on the industry’s behalf - have made it impossible (and in some cases illegal) for buyers or loan officers to have any contact with the appraiser.  In fact, in some states like Washington, a third party loan originator must use an intermediary to even schedule an appraisal. Unfortunately, the problem this is intended to solve – undue pressure on appraisers to come in at sales price – creates additional problems.  The best appraisers are lumped in with the average and incompetent, and the trust relationship so important in any real estate transaction can be further eroded. Using a random appraiser - who may or may not have experience in a particular community – is risky, particularly with such a volatile marketplace. 

AI’s remedy of asking a lender for a second appraisal -  lenders often require second or review appraisals anyway – borders on naiveté. The expense of that second appraisal almost certainly will be borne by the borrower. The first appraisal will be provided to the second appraiser, and few will substantially counter the first appraiser’s original conclusions. In residential commercial real estate transactions the cost of a second appraisal could range in the thousands of dollars. In the current real estate market appraisers are also tending toward the low end of the market as a precaution and to hedge their liability. Candidly, this defeats the whole purpose of an appraisal which is technically to determine the value of a particular property on a specific date in the appraiser’s opinion. There is always a market range, but coasting down to the low sales averages is just as inaccurate as only picking the top sales. In addition, if an appraiser does stick his or her neck out, their entire valuation may be discarded. There are addenda and predictions in most appraisals on which way the financial and economic wind is blowing, but  an appraiser is not a prophesier. With so many appraisers lingering on the bottom numbers for safety, even if there is a measurable rise in the amounts offered by buyers, these sales will rarely complete at those numbers. This further undermines one of the oldest appraisal rules determining market value: willing seller/willing buyer. 

We do applaud the AI for these newest courses for AI members and making them available as well to others in the real estate and lending industries. The courses below comprise the Valuation of Sustainable Buildings’ Professional Development Program currently, but additional courses are being developed and will be added to the program.  

• Introduction to Green Buildings: Principles & Concepts
• Case Studies in Appraising Residential Green Buildings 
• Case Studies in Appraising Commercial Green Buildings (coming sometime in 2011)

Courses intended for appraisers wishing to receive an official designation as Certified Residential Green Appraisers are also offered by other entities like the Earth Advantage Institute (EAI), a Portland area building-rating non-profit.  EAI’s excellent course was developed by Taylor Watkins, one of the first appraisers with practical green appraising experience in the northwest. The course is sponsored by Earth Advantage and has been co-sponsored by the State of Washington several times in the past year. 

Of course, sustainable design and construction practices within building science include great complexity. The speed at which new green materials, construction methods and building systems are being developed further complicates the educational process. Although the percentage of sustainably built construction has increased dramatically over the last three years, the majority of our existing building stock - somewhere between 95% to 97% – remains incredibly energy-inefficient. This creates problems for appraisals of sustainable projects mainly because there are few comparable sales against which to develop a value range for the greener projects. An unfortunate result is that a building with a conventional HVAC system – no matter how energy inefficient - is often considered comparable to buildings with superior HVAC systems. If the cost factor of both systems was equivalent, it would be a mute point, but they are not. 

This sort of specific knowledge is valuable for appraisers – and buyers – but the reality is that the market has yet to value sustainability features for their worth over the lifespan of a building. This is where education can make a big difference in appraisals, but real estate lending underwriters and HUD need to cooperate and change regulations to acknowledge and address these issues. Presently many underwriters will not allow appraisers to add value for the increased efficiency of a green building or the anticipated future utility savings when the benefits inure to the occupants. In a perfect appraisal world, these savings would be used to offset the cost of the often large-ticket green systems and improvements. It would also establish that rents that included lower-cost utilities (or the lower utilities cost paid directly by residents) would allow for higher rental amounts. 

The current policy discourages innovation. For instance, an appraisal of a building with alternative energy production resources – like rooftop photovoltaics or a fuel cell that require a major investment – under current regulations and practices are technically over-improved.   This means that the appraiser must consider the extra cost of the building ‘out of the market’ and the value of those improvements is subtracted from the total cost/sales price or even shown as a negative.  The result is that the cost to add or build these alternative HVAC systems will not be financed by a conventioanl lender beyond the cost for a non-sustainable system.

Suddenly the down payment need jumps from 10% to 30% or 40%, which has the obvious chilling effect on the buyer, builder or owner’s desire for that improvement. Grants, incentives and tax rebates have been filling this lending gap, but what really needs to change are the appraisal rules. That can only be accomplished with education of the public and the cooperation of Washington, D.C., lenders and industry players like the Appraisal Institute and the U.S. Department of Energy. 

Of course, the magic of the real estate market is that none of us can predict anything with 100% accuracy.  However, like appraisers, some of us can use common sense and be pretty good guessers. Appraisal rules need to reflect the realities of the market as well as provide a correct valuation of the more costly but sustainable improvements needed to improve our quality of life.  If we want to encourage cleaner and more energy-efficient HVAC alternatives within our old and new building stock, we need to give a fair and realistic value to these improvements. 

Other Articles of Interest: 

Living the Platinum Dream: 360 State Street 

Green Appraisals: An Art Form, Part I 

Green Appraisals: An Art Form, Part II