Wednesday, December 15, 2010

Letter From ACOW re: "Green" Valuation

Here are the comments on behalf of ACOW regarding the "Department of Commerce's 2011 Strategic Plan regarding Energy Efficiency," directed to Chuck Murray, Department of Commerce:

December 6, 2010

Chuck Murray
Department of Commerce
P.O. Box 42525
Olympia, WA 98504-2525

Re: Public Comment Draft—Department of Commerce 2011 Strategic Plan for Enhancing Energy Efficiency and Reducing Greenhouse Gas Emissions from Homes, Buildings, Districts and Neighborhoods

Dear Mr. Murray:

On behalf of the almost 4,000 real estate appraisers in Washington State, we would like to take this opportunity to provide comments on the issue relating to the valuation of green residential properties highlighted on Page 19 of the Public Comment Draft: Financing—Appraisals.

We applaud your effort to ensure that housing (and our community) is more energy efficient, healthy and environmentally sustainable. As professional appraisers, we are pleased to see attention being paid to the appraisal process by your department.

We are concerned about this proposal for a variety of reasons, 1) Cost doesn’t always equal value, 2) Appraisers need to have the information, and 3) Dictating value adjustments is inappropriate and jeopardizes the independence of the appraisal process. We are also concerned that input from the appraiser community was apparently overlooked in the four work groups, and we hope that this letter will rectify this oversight. It appears the work groups intend to elevate recognition of energy efficient items in the real estate appraisal process. While we support that goal, we believe your department should consider the following:

1. Many home owners or other property owners may not know that appraisers themselves do not establish the market for a property – the appraiser merely reflects and reports on the market, and uses empirical-based market data to estimate the market value of a property.

If the market and market participants (i.e., buyers) do not yet recognize and/or adequately account for the perceived benefits of a “green” building in the way of an enhancement to the market value of the property, then an appraiser cannot simply increase the estimated market value of the property in an appraisal report merely because some developers, builders, or lay persons “believe” or “feel” that the property “should be” worth more. All elements of value must be supported through and based on market activity (i.e., sales, predominantly, or through higher rents for example in commercial properties).

Unfortunately, despite the passion of “green” industry building representatives and advocates, in many or most cases, the greater market has not yet perceived a significant enhancement in the market value of “green” properties, and reflected that enhancement in the form of either higher sale prices and/or higher rents for properties sufficient to cover the added costs of this type of development.

It is critical and important for the lay person to bear in mind that “Cost” does NOT necessarily equal “Value” (i.e., “market value”). This is a fundamental appraisal issue, and that is why appraisers complete a highest and best use and/or feasibility analysis for many properties prior to their development – to answer the question as to whether the costs of a project will be recovered, inclusive of a developer’s profit, based on current market data. Just because a builder spends more money to construct a “green” (“energy-efficient”) home does NOT mean that the market will ultimately compensate for this in the form of a higher price for that home, or a price sufficiently higher to cover all costs (with or without a profit element).

2. We agree that providing information to appraisers “may also increase recognition of the value of the efficiency items”. The builders need to provide this information to the appraiser, and the appraiser needs to make the judgment as to the impact on value as evidenced by the market. An appraiser needs to have all of the information – from builder, realtor, home inspector, etc. – regarding energy efficient features in order to be able to consider this information as part of their analysis.

3. For the Department of Commerce to be coming up with set value adjustments for various energy efficient features is completely inappropriate and borders on inappropriate influence on the appraiser’s independent judgment. As I am sure that you are aware, pressuring appraisers to report values not supported by the market is illegal, and appraisers have been fighting this battle for years. An appraiser is required to be independent, objective, and unbiased. Appraisers are being blamed that – during the good economic times – they too often appraised properties “too high; now that the market has softened, and they are “too low.” With the passing of the Dodd-Frank Act earlier this year, there are sweeping new changes to “Appraisal Independence”; several agencies have recently released updated guidelines and announcements specific to this topic[1].

We would be pleased to meet with you or your staff to discuss alternative language that would achieve the goals of this task force in a way that is consistent with existing rules, regulations, methodologies, and current efforts underway.


Justin Slack, SRA
President, ACOW

[1] For mortgage transactions secured by a consumer’s principle dwelling, refer to 12 CFR 226.36(b) under Regulation Z (Truth in Lending) through March 31, 2011. Also refer to 12 CFR 226.42, which is mandatory beginning on April 1, 2011. Regulation Z also prohibits a creditor from extending credit when it knows that the appraiser independence standards have been violated, unless the creditor determines that the value of the property is not materially misstated. Page 4 of 45 Footnote 14: Interagency Appraisal and Evaluation Guidelines (December 2, 2010—FDIC)

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