Better than Code Homes: Translating & Quantifying Appraisal Value

As building science and technology continue to evolve, scale and become more affordable, innovative builders are finding ways to meet and exceed mandated energy building code requirements. However, builders are finding that projects built better than code can pose new challenges when translating the extra costs to buyers, lenders and appraisers; even though the energy savings are at least 50 percent greater than comparable conventional new homes.

Quantifying and monetizing the value of homes built better than code is possible today through a certified third-party HERS Energy Audit; and education that teaches appraisers and lenders how to interpret and monetize building performance data.

The Appraisal Foundation (TAF) provides appraisers with critical tools to make proper comparisons and adjustments to appraisal valuations. Appraisers are now being armed with guidance for homes that are better quality, more durable and energy efficient. Still, many appraisers are not competent in interpreting or adopting green premium guideline adjustments.

The potential value the high-performance building market represents is only beginning to be understood. Collateral in current loan portfolios may be discounted (brown discount) in the near future as homes built beyond code (green premium) inventory and demand increases.

Market research and studies show that building performance represents a new era of risk mitigation, and high-performance building can serve as a buffer to those risks.

The Appraisal Foundation’s (US) 2013 1st Exposure Draft Report, Valuation of Green Buildings: Background and Core Competency, included a definition of a brown discount noted in their research: Potential for obsolescence, also known as the brown discount, for existing buildings that don’t “green up”.

Just as green buildings that outperform the market may show a value premium, brown buildings that underperform relative to their market may show a discount.

Building science quantifies durability, quality of construction, efficiency and HERS Audits provide baselines on energy savings and costs; and allow for an industry accepted present-value formula calculation. This practice combines a paired sales analysis with an income adjustment for energy savings.

Appraisers typically can’t factor the costs associated with high-performance building upgrades in value. However, the costs to operate and the savings can be quantified to make “income” adjustments in value. This is a critical factor for appraisers who need data in order to support energy cost-savings adjustments and can now use HERS Analysis data. This methodology can impact higher “green” value premiums in appraisal valuations.

A recent Green Energy Money, Inc., (GEM) economic analysis conducted for a Brookfield Residential, Toronto project – compares a better than code home with and without solar power. The analysis proves the potential return on investment the savings represents over conventional homes and adding solar actually provides an excellent financial investment. Brookfield’s test cases are proving that building better than code offers greater community and buyer investment potential.

Even though the sales price was $40k higher due to the solar equipment price (doesn’t include any rebates or incentives that could reduce the costs); the energy savings and reduced operating expenses can be absorbed in value. Cost benefits also account for a potential future value and can be applied to pay off the loan sooner.

Green Energy Money, Inc., (GEM) developed an Energy Efficient rating methodology that includes over 39 points of certified data for appraisers to properly quantify value.

GEM offers a nationally accredited (TAF Approved) Green Appraisal course for appraisers.

GEM conducted a beta green appraisal program with several US mortgage lenders 2014-16.

The $38M loan portfolio conducted in 9 US cities achieved a $2.8M, or an 8%-10% green premium, appraisal value increase in incremental property value.

The portfolio’s HERs Index averaged 41 on 78 loans; all were better than code and over 30 percent of the portfolio were near-to-net-zero homes-producing as much energy as they were using.