Category: Appraisal News


REQUIRED READING: Here is the scenario: A homeowner spends $20,000 turning his home from an energy-sucking abode into an efficient, cost-savings oasis. This individual installs solar panels, ultra-efficient appliances, a tank-less water heater, energy-efficient windows and blinds, and paints the roof white. As a result, the property can now reap the rewards of almost no monthly utility bills while helping to improve the environment.
But what happens when the homeowner brings in an appraiser to value all of these new features? Do not be surprised if the appraiser tells the homeowner that the house isn’t worth any more than what it was originally.
This scenario is happening more frequently as homeowners and builders ride the atmospheric green wave to make homes more energy-efficient. There is a big problem here: The mortgage industry has not yet caught up with the green wave. It is going to take the support of both the mortgage and appraisal industries to ensure energy efficiency is valuable to the market and not just to the homeowner.
Admittedly, this is still a relatively new trend. Thus, the cost of building green is relatively high, and to a certain extent, the cost outweighs the short-term benefits. The average cost of installing solar panels on a home is $35,000 – and with an average savings of $1,700 a year, it would take approximately 20 years to recoup the total cost.
Furthermore, due to the lack of comparable sales and unknown actual cost savings by appraisers, it would be relatively difficult to evaluate the home’s energy efficiency. So what needs to be done to green up collateral valuations? There are several considerations that need to be addressed.
First, utility-bill data must be available on multiple listing services (MLS). Appraisers cannot take into account information they do not have. An MLS indicating a home is "green" means nothing to appraisers, thus making it very difficult for them to make adjustments due to unknown information.
In most states, home sellers are required to put 12 months of utility bills in the addendum of the contract. Having this information available for the appraiser on the MLS would enable an apples-to-apples comparison of the subject’s home and comparable. If a home that is "green" has utility bills that total only $1,000 a year versus a typical house that averages $4,000 a year, an appraiser is able to make tangible adjustments and give tangible value to the home.
Next, mortgage-backed securities need to give better pricing to green homes. The U.S. Department of Housing and Urban Development’s (HUD) Energy Efficient Mortgage (EEM) is a step in the right direction, but conventional lenders and the secondary market need to catch on. If lenders are concerned about the qualified residential mortgage requirements and the homeowner’s ability to pay the mortgage on a monthly basis, they should also be concerned with the utility costs.
The principal-and-interest payments on home loans do not change month to month, but utility bills do. Depending on the harshness of the weather, these monthly bills can skyrocket. 
Homeowners will default on their mortgage before they will have their heat or electricity cut off. Having homeowners with lower overall utility costs will make a significant impact on their monthly ability to pay the mortgage. For this reason, homes that are built with green items should get special pricing for being lower-risk. This would give homeowners an incentive to make the green upgrades – not only for a better mortgage product, but also monthly savings and a better environmental footprint.
Go green!
Furthermore, the appraisal industry needs to recognize the benefits of green improvements. The appraisal industry is quick to adapt to what lenders want and require, but it will not make the first move to create the curve. The industry needs to ensure that the market has clearly recognized that there is tangible value in energy-efficient homes before value will be given to them. 
Currently, there are no standards for valuing green homes. This makes it difficult to place a value on the property – after all, what are you comparing it to? Until the appraisers are supported with MLS information on recognized standards for the valuation of green homes and tangible evidence that the mortgage community places weight on green homes, appraisers will not be able to do anything.
Finally, green technology needs to be easily accessible to homeowners. Of course, this is outside of the control of lenders and appraisers, but it needs to be addressed. Energy-efficient technology is still fairly pricey, but over the next two to three years, it is likely that favorable price developments will be witnessed in solar power, solar thermal, geothermal and small wind solutions, as well as energy-efficient household appliances. If the price point is friendlier to the average homeowner’s budget, more homeowners will adopt the green home solution.
None of this will happen overnight, of course, but it is coming down the road. Lenders and appraisers need to recognize that this issue needs to be resolved before tomorrow’s solutions become more commonplace today.
Brian C. Coester is CEO of Coester Appraisal Group, based in Rockville, Md. He can be reached at (888) 485-1999.

(Photo courtesy of USPS)

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The issue of whether or not a property is more environmentally friendly when compared to neighboring homes is not currently taken into great account during the appraisal process.

It’s a practice that should end, according to a recent white paper from the Royal Institute of Chartered Surveyors.

RICS is suggesting that, in cases when homes contain sustainability features such as solar panels or tankless water heaters, it should favorably impact the appraisal.

"A property’s sustainable status can cover a range of social, environmental and economic matters that can potentially lead to changes in demand and therefore affect value," said Ben Elder, RICS global director of valuation.

While RICS is most recognized in the United Kingdom, the independent land valuation association maintains a network of 100,000 qualified members and more than 50,000 students and trainees in 140 countries, including the United States.

Sustainability features can also include a home’s energy efficiency rating and green materials used in construction, but RICS says the concept needs to go even further.

For example, if the home is close to public transportation, it lowers the carbon footprint of residents. This should also make the property more valuable, the white paper states.

"When calculating a property’s worth, the market doesn’t always take the issue of sustainability into account, but this could also have been said for central heating way back in the 1970s when people weren’t convinced it was going to have a market impact," said Elder, who is expecting some industry headwinds.

"With the increased emphasis on green living and energy efficiency, it is highly possible that the market will need to adapt," he added.

Homes built in the aftermath of the U.S. financial crisis should be more efficient in their use of space and energy to address a renewed emphasis on cost-consciousness among homebuyers, New York-based residential developer Mitchell Hochberg, principal at Madden Real Estate Ventures, told HousingWire in an interview appearing in the September issue.

Homebuyers are willing to pay more to get green features because they realize the operating costs of the home long term are far more important than the potential additional costs associated with buying a green home, he said.

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As part of the Obama Administration’s efforts to improve commercial building efficiency 20% by 2020, U.S. Energy Secretary Steven Chu announced a new partnership that will work to ensure that appraisers nationwide have the information, practical guidelines, and professional resources they need to evaluate energy performance when conducting commercial building appraisals.

In conjunction with the Washington, DC-based Appraisal Foundation, the Department of Energy (DOE) will develop information and educational tools relating to valuing green buildings based on the Uniform Standards of Professional Appraisal Practice, the generally accepted standards for U.S. building appraisers. These tools and resources will help appraisers appropriately include energy performance and sustainability in valuations.

While the agreement is for commercial buildings, over time the foundation also will consider the need for green home guidance, according to Paula Douglas Seidel, Appraisal Foundation executive administrator.

Under the partnership, the DOE will develop educational materials and create a database to provide commercial appraisers with energy-savings data, federal green building programs and policies, and additional information on energy performance. Last year, commercial buildings accounted for about 20% of all the energy used in the United States.

The public-private partnership is a good step in the right direction in the painfully slow process of advocating for energy-conscious appraising and lending practices, says David Porter, owner of the Stanwood, Wash., consulting firm Porter Works, which offers a Green Specialist training program for appraisers, lenders, and insurance professionals nationwide. Nevertheless, there is still much more work to be done before green buildings are fully valued by lenders and appraisers.

“Ultimately we need state appraisal boards to require training on green and energy efficiency before an appraiser can accept an assignment for such a property,” he says.

Finally, Porter is looking forward to the day when energy-efficient residential projects receive full recognition and value from the lending community, especially retrofits. “Out of 128 million homes in the U.S. we have 95 million that are in need of some energy efficiency improvements,” he adds.

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Appraisal Buzz

As the song goes, “…Should I stay or Should I Go?” Many appraisers are thinking about leaving the profession and many have already moved on. How much time does it take to complete a residential appraisal, what are the costs to produce an appraisal and what is an appraiser’s net take-home pay after all those costs? Attached is a spreadsheet that can be used as a tool by residential appraisers to evaluate the Anatomy of an Appraisal, the performance of their business and their net take home pay.

Typically, an appraiser would compare their net take-home pay with the gross salary they could receive in an alternative salaried position (appraisal or non-appraisal) when determining whether to leave their appraisal business. As a result, the spreadsheet provided is a pre-tax estimate of the appraiser’s net take-home pay. Some appraisers could opt to hire a staff appraiser to author appraisals for their business and when doing so, would be required to pay that appraiser an acceptable wage which we estimate as a national average gross wage of $40,000. The fees, salaries and expenses in your local area may vary but the model can be adjusted to reflect your actual expenses, revenues and salaries. Our use of an average $40,000 gross salary is for illustration purposes only and immaterial since we add then deduct the salary with business profits or losses to arrive at net take-home pay. Thus, increasing or decreasing of the $40,000 salary we used has no effect on the net take home pay. Some appraisers for example, despite seeing a decline in fees and revenues continue to pay themselves the same salary so they can keep paying their bills. However, this requires increased capital contributions to their business from savings, draw down their IRA or 401K or increased debt. If fees ultimately fail to recover, then appraisers with unsustainable gross salaries would be required to reduce their salaries and the model can help appraisers evaluate their production costs.

We calculate the average appraisal takes about 12.5 hours to produce, factoring in both actual production time plus the appraiser’s non-productive overhead time. Our model also estimates that a typical USA residential fee appraiser produces a mix of fee work with some at Customary & Reasonable Rates and some AMC fee work well below Customary and Reasonable rates resulting in average annual gross revenues of $70,000, representing a gross hourly rate of $23.40. Sounds great right?

However, after accounting for all expenses and cost of producing the appraisal, we calculate the typical residential appraiser has a net take-home pay of just over $29,000, which after accounting for a typical 60 hour appraiser work week represents effective net take home pay of about $9.70 per hour.

Wow. A few weeks ago I offered a comment on the Buzz (in jest) that I was thinking about a full-time 40 hour job at McDonalds or Wal Mart – but I wouldn’t know what to do with the raise or the extra time off. Although it was joke at the time, having now calculated all the operational costs, I find the joke was on me and other appraisers because those alternative jobs would in fact appear to be a raise.

Hold on, it gets worse.

If the appraiser decided to do exclusively AMC work in my market, taking into account the notably lower AMC fees in my area, the appraiser’s annual gross revenues would decline to $45,000 and after accounting for all expenses, their net take home pay would be negative $3.82 per hour! That’s right, after accounting for business losses, an appraiser who relies exclusively on AMC work would have a negative net take home pay. That means there are likely appraisers out there who are funding their business losses and trying to survive by drawing down IRA, 401k, selling off assets, making capital contributions, going further into debt and taking other drastic steps to survive. Taking into account those business losses, a typical AMC dependent appraiser is in fact suffering an annual economic loss and would certainly seek alternative employment.

Appraisers have commonly shared with me two primary reasons for the decision to close their business or leave the profession: 1) Economic considerations and 2) Battle wary and tired of fighting after 17 years of “war”. The war they refer to is the constant battle since 1994 federal policy allowed and required (for the first time since the Great Depression) that Independent and Objective Appraised Value reports be required to compete with advocated values of Broker Price Opinions. Appraisers are also fighting a second War of fees with AMC’s who commonly take 40% to 60% of the overall appraisal fee, reducing fees paid by many (but not all) AMC’s to appraisers well below “Customary & Reasonable” Levels. The third War has always existed (but worsened considerably in 1994 and since) which involves the constant War by clients, borrowers, agent and others constantly wanting to negotiate the appraised value.

Is it any surprise that the huge increase in volume of advocated BPO valuations along with the huge increase in market share of AMC’s since 1994 resulted in a bubble (over valuation of assets) – and an environment where appraisers were forced to compete on the basis of their willingness to hit advocated values and forced to compete with unregulated, agent advocated BPO products? Its been estimated that since 1994, the market share of BPOs in lending transactions has increased from near zero to an approximate 60% market share today compared with a 40% market share for appraisals.

Appraisers are losing the war and as a result, fleeing the profession. An appraisal of the appraisal profession and economic review of the numbers suggests it may be time to get out.

Comments About the Model:

Why include a salary? Most businesses that run a P&L include a market supported salary. Increasing or decreasing the salary for your local market is easy and has no effect on the net take-home pay, as increasing your salary will reduce your net profits while reducing your salary will increase your net profits.

Why such an expensive SUV? That model had lower operating costs and higher re-sale value. Thus, if you use a lower priced car, the maintenance costs may rise and your resale value may decline having the effect of increasing rather than decreasing your annual fully loaded auto costs.

Why loan expense? Above the SUV cost, we needed to account for the car loan interest expense.

Don’t AMC’s have the effect of reducing marketing costs and/or allowing appraisers to produce higher volumes of reports? Maybe. However, in light of the huge difference in fees in my market between AMCs vs Customary and Reasonable, it would be economically advantageous for an appraiser to seek non-AMC work at higher fees and thus they still incur marketing expenses. Also, certainly some appraisers can attain higher rates of production but my experience managing large volumes of appraisers is that these represent valid, sustainable production numbers while maintaining high levels of quality. My sense is that AMCs spend a considerable amount of increased cost and time asking for and chasing down corrections because of their reliance on the lowest fee provider. Conversely, my experience in awarding hundreds of million in appraisal fees that higher fees when coupled with higher quality appraisers, leads to lower overall operating costs and lower loan losses.

My Health Care Costs are higher and I don’t belong to an appraisal organization? Also, the fees are different in my market. Great, adjust the model accordingly to reflect your actual revenues and expenses and find out how much you really are earning on an effective net take-home basis.

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Lines of people are waiting and hoping that they can fight to get their property appraisals lowered at the downtown Appraisal District.

Today was the deadline to protest your appraisal.

Norma Holder said, "You can’t triple like that you know, nobody can come up with money like that."

Once a year the Appraisal District sets the value of your property.

The higher the value, the more you pay in taxes.

So most of the folks in line today are trying to get their property values lowered because they claim the dollar amount unfairly went up.

Holder said, "I think more people need to come down here because if everyone comes, we can bombard them and we can lower those taxes."

The reporter asked, "How much did you get yours lowered?"

Holder said, "About $20,000."

This year more than 4,000 people formally protested.

That’s about 3% of county homeowners.

Some people waited in line for a couple of hours to protest their property values today but others decided to take a free pass and come back later so they didn’t have to wait.

Appraisers only gave passes to people in line who couldn’t stick around Monday so, they’ll come back later this week armed with anything that helps to prove their case.

Jenny Walter said, "So I brought my pictures. I did my homework and I’m here to protest and I have a hearing on Friday if I don’t get satisfaction today."

Unfortunately, if you didn’t meet Monday’s deadline, you’re stuck with the property value the Appraisal District set for you.

Nueces County officials say each appraisal review is done fairly and as accurately as possible.

However, appraisers say they do rely on homeowners to speak out about any problems since they know their property best.

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