Residential Tools for Hidden Value

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Residential Tools for Hidden Value

Vermont Symposium

October 29, 2015

Time: 10:15 AM until 12:15 pm

2015 Copyright Adomatis Appraisal Service 1

Sandra K. Adomatis, SRA, LEED Green Associate

• Author• Real Estate Appraiser – SRA

Designation with Appraisal Institute

• REALTOR• Appraisal Institute Instructor• LEED Green Associate – U.S.

Green Building Council• National Speaker on High

Performance Houses

[email protected] Copyright Adomatis Appraisal Service 2

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Learning Objectives

When you finish this session you will be able to

List differences in house labels

Identify challenges in valuing high performance

Describe the data needed to assist appraisers in using the valuation tools

Illustrate the Valuation Tools


House Labels Defined


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Green

High Performance

Energy Efficient2015 Copyright Adomatis Appraisal Service 5

House Labels

Features Green House

High Performance

House

Code-Built

Net Zero

EnergyEnergy Efficient X X Maybe X

Resource efficient X X No Maybe

Environmentally responsible X Maybe No Maybe

Six Elements Site

Water EfficiencyEnergy EfficiencyIndoor Air Quality

MaterialsOperations & Maintenance

X MaybeNot all

sixMaybe


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Defining High Performance Modulars Versus Mobile or

Double Wide

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Features High-Performance

Modular

ManufacturedHome-Mobile-or

Single Wide

Double Wide

Manuf.

Energy Efficient X HUD CodeHUD Code

PermanentFoundation

X On Wheels Could be

Water EfficiencyEnergy EfficiencyImproved Indoor Air QualityLower maintenance

X No No

2015 Copyright Adomatis Appraisal Service

Challenges in Valuing High Performance


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Challenges of Valuing Green or High Performance

Defining green and high performance

Too many rating systems

Insufficient databases

Limited sales data

Fannie Mae guidelines are interpreted differently by underwriters. – Clarification needed from Fannie Mae similar to FHA Guide.


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Challenges of Valuing Green or High Performance

Lack of standardization of language

Appraisal forms do not address new building types

Insufficient knowledge by industry professionals

Industry professionals communication breakdown – data must be shared


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How Does Fannie Mae Define an Energy Efficient Property

Page 6032015 Copyright Adomatis Appraisal Service

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Fannie Mae Selling Guideline

December 16, 2014

What?

Part B – Page 604

USPAP says

Std Rule 1-1 (a) be aware of, understand, and correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal.

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HUD Handbook 4000.1

Page 461


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(d)Adjusting Comparable Properties

(i) Standard

Calculation of the Contributory Value includes methods based on the:

• direct sales comparison approach;• cost approach; and• Income approach.

Lenders’ Vision of Energy Efficiency

“The property is located in Big City for which there is minimal climate change, therefore the value for energy efficiency is less probable than a home in the desert.”

Source: Actual statement from a lender regarding validity of an energy efficient adjustment.2015 Copyright Adomatis Appraisal Service

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Target Group -Lenders/Underwriters

Must direct efforts to educate the lending world on energy efficiency or this battle will not be solved.


Data that brings results


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http://aceee.org/state-policy/scorecard

The State Energy Efficiency Scorecard


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Vermont Green/Energy Rating Programs

Only MLS in Vermont


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Local Resources

NNEREN green fields

NNEREN HERS tutorial

NNEREN HERS Appraiser Database

Efficiency Vermont support in VT

GDS Associates support in NH


Vermont Residential Building Energy Standards (RBES) VT’s

energy code 7/1/97 Act 250 new construction & additions > 500 sq. ft.7/1/98 All new construction & additions > 500 sq. ft.

1/1/05 All new construction & additions > 500 sq. ft. –added mechanical ventilation & combustion safety requirements (HERS Classic score used to mid 2006*)

10/1/11 All new construction & existing home alteration, renovation & repair – code began exceeding conventional construction specifications

3/1/15 Base Code - All new construction & existing home alteration, renovation & repair12/1/15 Stretch Code – Act 250 projects &/or where voluntarily adopted by towns

Log Home≤ 100

Non-log Home≤ 90

All Homes≤ 75 Base

Code≤ 60

Stretch Code≤ 54

* HERS Classic used until mid 2006 (higher score = more efficiency)

HERS Index 100 = HERS Classic 80 & HERS Index 90 = HERS Classic 82

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New Hampshire Energy Code

New Hampshire Code Adopted 1979 (Effective August 79’)

Administered by the Governor’s Council on Energy

Administrative responsibility passed on to PUC in 1982

Revised 1980, 1986, 1993 & 1998

New Hampshire adopts a State Building Code in 2002

No longer a local option

2006 IECC, August 2007

2009 IECC, April 2010

2015 IECC, under review by the Building Code Review Board

International Energy Conservation Code (IECC) Changes from 2006 and forward

IECC Year Percent of Change

2006 Base Year

2009 +15%

2012 +30%

2015 +31%

Seems there is a trend here that cannot be ignored.

Relax – I am just the appraiser.

When I look into the camera at your house, what do I see?

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AI Residential Green & E.E. Addendum

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The direct link for the fillable PDF “AI Residential Green and Energy Efficient Addendum” is http://www.appraisalinstitute.org/assets/1/7/Interactive820.04-ResidentialGreenandEnergyEffecientAddendum.pdf

• Appraisers• Builders• Real

Estate Agents

• Energy Raters

• Sellers


AI Res. Green & E.E. Addendum Benefits…

Notice to lender and/or AMC that appraiser with competency is required

Notice to Appraiser that the house has special features requiring competency and special documentation

Supplements the 1004 Appraisal Report Form that does not address these features


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AI Res. Green & E.E. Addendum Benefits…

Provides Appraiser with an inspection sheet and key to identifying “comparable sales”

Assists real estate agents in identifying the special features of the house and becomes a brag sheet for the seller

Assists the buyer in their decision-making


Vermont – Only Four Green Rating Organizations

• LEED – U.S. Green Building Council

• NGBS- ICC 700 National Green Building Standard

• Vermont Builds Greener

• Green Building and Design Standards


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NGBS Ratingsas of October 1, 2015


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74

158

0 20 40 60 80 100 120 140 160 180

NH

VT

NGBS Certified Single‐Family Homes by StateAs of October 4, 2015

http://www.homeinnovation.com/services/certification/green_homes/resources/certification_activity_report


ENERGY STAR

https://www.energystar.gov/index.cfm?fuseaction=new_homes_partners.locator

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Existing Homes • Low-E Windows• Good

Orientation• High Efficiency

Mechanicals• ENERGY STAR

Appliances• Overhangs to

control solar access

• Landscaping to enhance energy efficiency

Features that may reveal hidden value


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Home Energy ScoreFor Existing Homes

Home Energy Score website: www.homeenergyscore.gov


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Home Energy Score


• Takes an hour or less to complete

• Can be generated by home inspectors, contractors, utilities, others

• Can be used directly on‐line or linked to other software tools

• No reporting requirements, all automated

• Builds on social norming principles: “5” represents a home with expected average energy use2015 Copyright Adomatis Appraisal Service 31

Calculations provided by the Home Energy Scoring Tool can be converted into locally relevant information

Estimate annual utility costs pre and post upgrade using local utility rates

Show expected utility costs for a “1” “5” “10” etc.

Estimated energy use and cost for the home before and after improvements

Energy use per square foot

Carbon emissions and savings reflecting local fuel mix

Customizable Information


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http://programs.dsireusa.org/system/program/detail/46362015 Copyright Adomatis Appraisal Service

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Data Flow Possibilities


Data Repository

Inspectors

E.E. Services

Real Estate Agents

MLS

Appraisers

Lenders

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Data Flow Reality

Real Estate Agent

Appraiser

Lender

Home Performance

E.E. Services

MLS

Value?????


Valuation Tools Illustrated


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Review of the Valuation Toolbox

Cost Approach (Depreciated)

Income Approach

Sales Comparison Approach

Market Studies (Appraiser driven)


Are you missing hidden value?


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Paired-Data AnalysisSale 1 Sale 2

Sale Date 3/26/2015 2/4/2015

Sale Price $235,000 $252,000

Site Size 11,240 SF 9,000 SF

Room Count 7/3/2 + 2,500 6/3/2.5

Gross LivingArea/SF

1,580 +2,500 1,710

Age 2 4

Adjusted Sale Price

$240,000 $252,000

HERS Index 75 12,000 42

Adjusted Sales Price

$249,500 $252,000

Compares two similar properties to extract value of energy improvements. Sale 2 Sales Price $252,000 – Adjusted Sales Price of Sale 2 before making energy efficient adjustment $240,000 = $12,000 adjustment for EE. 2015 Copyright Adomatis Appraisal Service 39

Paired-Data AnalysisAppraisedProperty

Sale 1 Sale 2

Sale Date 5/1/2015 3/26/2015 2/4/2015

Sale Price $250,000 $235,000 $252,000

Site Size 12,000 SF 11,240 SF 9,000 SF

Room Count

7/3/2.5 7/3/2 + 2,500 6/3/2.5

Gross LivingArea/SF

1,650 1,580 1,710

Age 3 2 4

HERS Index 50 75 12,000 42

Other 2-car garage

2-cargarage

2-car garage

Adjusted Sales Price

$249,500 $252,0002015 Copyright Adomatis Appraisal Service 40

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Depreciated Cost

Cost New of Energy Improvement Items $17,500

Depreciation from all forms of loss

3 yrs old/23 yr life expectancy = 13%

13% x $17,500 - 2,275

“As Is” (Depreciated Value of Energy Imprv) $15,225

(23 year life expectancy based on Marshall & Swift Res. Handbook life of energy features. The energy improvements are 3 years old now.)


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Income ApproachHP12 C

20 N – Number of years features will last (physical life) (23 yr life

less actual age of 3 years)

5 (%) I - Discount Rate – based on mortgage rate plus 1%

$850 PMT - Annual savings amount (based on Home Energy

Score)

Press PV - Should give present value or

$ 10,600 rd

(It will show as a minus-press CHS for change sign)

(Uses Annual Compound Interest rate of 5% based on mortgage

rate plus 1% for risk factor)2015 Copyright Adomatis Appraisal Service

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Income Approach GRM

Fannie Mae’s Preferred Income Approach

Monthly RentAppraiser finds rents of Energy Efficient Houses $1,200Appraiser finds rents of similar non-EE Houses $1,100

Difference in rents (income) $ 100

Appraiser finds Gross Rent Multipliers of EE Houses Sale Price of EE House $110,000 / Monthly Rent $1,200 = 91.7

Indicated Value of Energy Efficient Items Using GRM

91.7 GRM x Rent attributed for EE $100 = $ 9,170 2015 Copyright Adomatis Appraisal Service 43

Tests of ReasonablenessOverview of Methodology to Value Energy Efficient FeaturesPaired-Data Analysis $12,000

Depreciated Cost $15,225

Income Approach (GRM) $ 9,170

Income Approach (PV) $10,600

Reconciliation: All methods form a reasonable value range for the energy efficient features. The depreciated cost method deserves the least consideration because the estimate of depreciation has most room for error. The Paired-Data and Income Approach closely point to $12,000 and deserve the most consideration because the Paired-Data Analysis is directly from sales in this market. The Income Approach closely represents buyers thinking on savings from energy improvements.


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Appraiser Driven Studies

More local appraiser driven studies are needed

Studies done by academia are not useful to support energy adjustments

Appraisers must understand the methodology

Appraisers are required by USPAP to deem the study credible prior to relying on the work of others By Lisa Desmarsis, SRA


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Steps Forward to Solving The Challenges


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Solving the Data Challenge

Coordinate with MLS Board and assure the green

fields are implemented and populated accurately

Auto populating the MLS where possible would

increase accuracy.

Complete the AI Residential Green and Energy

Efficient Addendum and make sure the borrower,

appraiser, lender, and real estate agent has a copy.


Solving the Data Challenge

Attach full energy and green reports to Addendum

Encourage agents to put Addendum, energy and

green reports in MLS

Label electrical box with energy/envelop ratings to

assure a permanent transfer of the data behind the

walls.


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Education is a MUST


Resources

AI Residential Green & Energy Efficient Addendum


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Appraisal Institute Green Registry

Find an appraiser w/education completed

http://www.appraisalinstitute.org/education/your-career/professional-development-programs/


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[email protected]

Follow me on Twitter:https://twitter.com/sadomatis

By: Sandra K. Adomatis, SRA, LEED Green Associate

Questions?

2015 Copyright Adomatis Appraisal Service52

Documents

Residential Tools for Hidden Value