The New Green Appraisal Movement and How it Can Help Property Owners

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When it comes to improving the energy efficiency of their homes and buildings, property owners are highly motivated. After all, it saves energy, lowers utility costs, reduces America‘s dependence on foreign oil and cuts carbon emissions from fossil-based fuel.

So, why doesn‘t everybody “just do it” when it comes to greening up our properties? Don‘t we have everything to gain and little to lose?

Unfortunately, it‘s not that simple. For most property owners, making energy improvements hits them where it hurts most-in their pocketbook. Energy upgrades, even basic steps to achieve modest gains in energy efficiency, can cost thousands of dollars. More ambitious projects, like alternative energy generation, typically surpass the cost of a new car.

To make things tougher, property owners who do upgrade see few rewards for their efforts and face significant obstacles in the real estate, appraisal and lending industries. This is because guidelines and practices haven‘t yet been updated to reflect today‘s new energy policies.

Change is Coming, but the Pace is Slow

Proposed legislation would change how property is appraised and treated during loan underwriting. If passed, the SAVE Act (Sensible Accounting to Value Energy) will require lenders to consider utility costs in their debt-to-income ratios for underwriting. We need to address how this will affect homeowners who barely qualify now; by adding the utility costs into debt ratios, this may prevent many owners from qualifying for the loan. The solution is to leave out this part of the legislation and instead “reward” owners who are engaging in energy efficient measures by providing improved, recognized value on their appraised values.

The bill also calls for energy features and their lifecycles (usually 20 years) to be factored into appraised values using present value formulas. This important legislation can help new standards and lending guidelines be adopted. In turn, this would provide substantial “pocketbook” incentive for property owners to get greener sooner. For more on this topic, see this blog post on

Some changes are already underway. Fannie Mae‘s new Uniform Appraisal Disclosure (UAD) and the new Green Appraisal Addendum developed by the Appraisal Institute are nudging the industry toward more favorable treatment for energy-efficient properties. But it‘s a slow process.

The new UAD guidelines call for reporting and using new line items:

  • Property condition C1-6 (C1 being highest)
  • Quality of construction Q1-6 (Q1 being highest quality)
  • Several other data inputs, such as time on the market.

The quality and condition of property can help, since these ratings help indicate the extent to which energy-efficient building materials are included, but there is little to support renewable equipment. There is a new line item for energy efficiency adjustments, however most appraisers state either “none,” “typical” or “average” on the line item because they don‘t know how to quantify the value of energy efficiency. This is often reflected in the line item; if it is used for a value adjustment, the typical value increase seen in most regions ranges between $1,500 to $5,000.

Property owners can request that their appraiser use the Green Appraisal Addendum, but it doesn‘t quantify your energy reductions.

The new Green MLS System is being developed and launched in certain regions. It will include information on listed properties with energy features and measures. This is a welcome addition to the green evaluation process for comparing properties with similar features. Yet, one of the most helpful additions for buyers-yearly operating expense data-won‘t be included because Realtors are reluctant to display this type of data for privacy disclosure purposes.

Until industry standards change and new legislation is passed, what can/should homeowners do in the meantime? Stay tuned for suggestions in an upcoming post.