written by Dr. Lee BallAppraising “green” homes can be complicated and confusing, especially if you are not sure what supposedly makes them green. Many homes built in North Carolina in 2013 had some type of green feature. In fact, North Carolina leads the nation in green building in terms of volume (http://www.homeinnovation.com/about/blog/a_year_in_review_for_ngbs). As a result, residential appraisers need to study the market and get green appraisal training in order to legitimize their competency as this market trend continues, especially since the market data drives the adjustment process. The process of making adjustments to homes with green features or certifications may require an approach that the residential appraiser is not accustomed to.
The sales comparison approach or paired sales analysis is not reliable in some markets due to the lack of available data. This requires the appraiser to use other methods such as the cost and income approaches in order to provide evidence for adjustments related to green building features. Fortunately, there are numerous resources available to the appraiser. For the cost approach to making adjustments, appraisers can reference the Marshall and Swift Green Building Cost Supplement or RS Means Green Building: Project Planning & Estimating, 2nd Edition in order to accurately estimate the cost of certain features (http://www.rsmeans.com/bookstore/detail.asp?sku=67338A).
The income approach can be used by calculating annual operating expenses which are usually much lower in residential properties with energy efficient or green building certifications or features. Reduced operating expenses or monthly/annual savings are examples of quantifiable “positive cash flow” which benefit homeowners on the day they move in. Monthly utility savings can also be calculated into a contributory value by using the present value of the annual energy savings, the mortgage interest rate, and the anticipated life of the savings (http://www.appraisalinstitute.org/library/bok/highperformance.pdf). Contributory value can also be calculated by multiplying monthly energy savings and the property’s gross rent multiplier.
Other methods include using market data such as the McGraw HillSmart Market Report 2012 which stated that the added cost to build a green home was approximately 7% above the cost to build a conventional home.
Our next blog will focus on how to use a home’s HERS score to demonstrate added value.
The NC Energy Efficiency Alliance is proud to offer CE training for Appraisers seeking knowledge of this subject matter. Please contact us for more information and to book trainings.