Trying to Put a Value on Sustainable Building

Sustainable building is making an ever-increasing impact on both the commercial and residential real estate markets.

In a survey of local home-building associations announced June 6, the National Association of Home Builders reported that in excess of 97,000 green houses have been built and certified by voluntary, builder-supported building programs nationwide since the mid-1990s.

That’s more than a 50 percent increase from the last survey of green homes: In 2004, the National Association of Home Builders Research Center counted 61,000 green homes in the United States.

Although the numbers still make up a small percentage of the total number of houses built each year, even in this slower market, green building has created a problem for the nation’s appraisers, and for the Appraisal Institute, the professional association celebrating its 75th anniversary next month:

How do you set a dollar value on green building? What short- and long-term effects will sustainable building have on the local and national real estate markets?

That’s something Thedi Wright Chappell is trying to sort out these days. Chappell, who grew up in Tennessee and Georgia, is an MAI based in Beaverton, Ore. While she and other appraisers have been trying to “create tools to evaluate ‘green,’ one of the main issues we have to deal with is what exactly are we talking about,” she said.

“Global warming has increased our awareness of sustainable building, but all of our references are for high-performing buildings and not sustainable ones,” she said in a recent interview. “We are moving toward sustainable buildings; however, we need to let people know what features make up those buildings and then, by using cost-benefit analysis,” determine the value reliably and easily.

Although the number of green buildings has been increasing, there still isn’t enough empirical data available yet to make accurate comparisons. Appraisers have to do lots homework to identify the benefits of sustainable building and their market value, she said.

An appraisal is based on the four forces of value: economic, environmental, social and governmental, and each of those forces must be present for an appraiser to make an accurate determination of value. Green building won’t revolutionize the appraisal industry, nor will it cause one of those forces of value to become a more valuable tool than the others in ascertaining value, she said.

Geography certainly is major determinant in placing a value on a feature of sustainable building, since what is valuable in one part of the country might not be as important in another part, she said.

Chappell focused on water conservation as a feature, pointing out that it would be much more important to an appraisal in a dry area such as Phoenix, with 7 inches of rain a year than Portland, Ore., which receives 37 inches of rain annually.

“Moreover, if green building is designed to improve indoor air quality, how do you measure the value of such an environment for a child who suffers from asthma,” she said.

Americans appear to be embracing green building and its features at a much faster rate than, for example, energy efficiency.

She cited a survey by Earth Advantage, a nonprofit organization in Portland, Ore., that focuses on green building. The survey found that 42 percent of the people interviewed would pay 10 percent or more for a $300,000 house for green features.

“While energy efficiency is cited as a concern, indoor air quality appears to be more important to the people who were surveyed,” Chappell said. It may be that people will expect that apartment buildings should be built with green features, and if a building doesn’t have those features a couple of years down the road, the value of the property could be discounted because of it.

Energy-efficiency might not be as important as a measure of value until higher prices begin to hurt the more fortunate, who can afford recent increases in the price of electricity and gas. On the other hand, large commercial buildings tend to be more energy efficient — taking advantage of solar energy, for example, because corporations tend to believe they will be seen in a bad light by consumers if they don’t use this technology to reduce consumption and costs, she said.

“The four forces of value determine the highest and best uses of a property,” she said. In ordinary circumstances, the appraiser has comparable properties to help make that determination.

“In assessing the value of green building, without hard empirical data, the appraiser has to put a greater focus on the physical attributes of a property, because how the building is put together has an impact on its performance, and thus, its value,” Chappell said.

Geography, as was pointed out, is a major factor in the value of green building features, but “who the probable buyer of the building will be also will determine value,” she said.

“If the buyer will occupy the building, indoor air quality will be more of a determinant of value than if the buyer is planning to flip the property,” she said. “It comes down to what does the buyer want and the features the buyer values most?”

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Mortgage Rates Fall for Second Consecutive Week

McLEAN, VA — Freddie Mac (NYSE: fixed-rateFRE) today released the results of its Primary Mortgage Market Survey (PMMS) in which the Fixed-rate mortgage (FRM) averaged 6.67 percent with an average 0.4 point for the week ending June 28, 2007, down from last week when it averaged 6.69 percent. Last year at this time, the 30-year FRM averaged 6.78 percent.

The 15-year FRM this week averaged 6.34 percent with an average 0.4 point, down from last week when it averaged 6.37 percent. A year ago, the 15-year FRM averaged 6.43 percent.

Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 6.30 percent this week, with an average 0.5 point, down from last week when it averaged 6.31 percent. A year ago, the 5-year ARM averaged 6.39 percent.

One-year Treasury-indexed ARMs averaged 5.65 percent this week with an average 0.5 point, down from last week when it averaged 5.66 percent. At this time last year, the 1-year ARM averaged 5.82 percent.

“Mortgage rates edged down slightly for the second week in a row after having risen over the previous month and a half, and as financial markets prepared for the June 28th Federal Open Market Committee’s announcement on monetary policy,” said Frank Nothaft, Freddie Mac vice president and chief economist.

“This week we saw further effects of the current housing recession. May’s existing home sales (including condominiums and co-ops) fell 0.3 percent to the slowest pace since June 2003, and the number of months houses were available for sale rose to 8.9, the longest since June 1992. In addition, home prices fell 2.1 percent in twenty metropolitan areas for the year ending April 2007, according to the S&P;/Case Shiller® composite index, the largest year-over-year drop since the data began in January 2001.”

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Appraisals and a Tale of Two States

The appraisal process is supposed to represent the independent valuation of properties by unbiased professionals, people paid for their opinion — whether their opinion is higher or lower than clients might like.

This idea that appraisers should stick to the truth does not necessarily make them the most popular folks in town. Independent views are great in theory, but sellers often would like to see higher estimates while buyers might prefer more conservative valuations. Loan officers, also, are among those who frequently prefer steeper valuations because elevated prices make it easy to reach loan-to-value ratios.

Because sales, commissions and fees are dependent on solid valuations, appraisers are often pressured to assure that a given value is reached. If pricing targets are not met, say appraisers, lenders may elect to go elsewhere for appraisal services. Not subtle, but perhaps effective.

Unfortunately, when prices rise to levels not justified by the marketplace we then have lenders making loans which are larger and riskier than they should be — what I call overlending. Buyers, in turn, face inflated monthly mortgage payments and thus a greater potential for poverty, foreclosure, and bankruptcy.

The Attorney General of Ohio, Marc Dann, has now announced suits against 10 companies alleging “undue influence on an appraiser.” The complaints allege that the accused companies had violated state laws by “knowingly compensating, instructing, inducing, coercing, or intimidating appraisers for the purpose of improperly influencing the independent process.”

“Allegations” are just that, not proof of anything — just ask a few former Duke University athletes. That said, you can imagine a lot of interested parties nationwide will be closely watching the Ohio cases — and that a lot of appraisers will now be taking contemporaneous notes when pressured by lenders, brokers, and consumers to come up with the “right” price.

Meanwhile, when we last left off with appraisals, the state of Arizona was threatening to sue unless the online site got an appraiser’s license.

Zillow provides estimated home values and says that such estimates are not appraisals. But regardless of what Zillow says, can their numbers be construed as being “appraisals” under state rules in Arizona?

Arizona has a remarkably-broad definition of the term appraisal. According to Arizona, an appraisal is defined as “a statement independently and impartially prepared by an individual setting forth an opinion as to the market value of real property as of a specific date and supported by the presentation and analysis of relevant market information.”

Now, however, Arizona has decided not to contest this matter in court. The solution? Change the law.

Senate Bill 1291 says you don’t need to be a licensed appraiser if you’re “a person who produces a statement that is provided to any other person concerning the estimated value of real property through an internet website, automated valuation or other software program or other means of comparative market analysis and who discloses that the estimate is not an appraisal.”

Sounds a lot like Zillow, doesn’t it?

If I was the author of such language, I would have said the disclosure must be in large type and in a prominent, highly visible location on the home page and elsewhere. I would also have said that to avoid being tagged as “appraisals” value estimates must be available to all without a fee or any actual or perceived requirement to disclose an individual’s name or contact information.

As of this writing, SB 1291 has passed the Arizona House and Senate. The bill has been sent to Arizona Governor Janet Napolitano for her signature.

An important point about the Arizona dispute is to understand that state regulators must follow the law. The Appraisal Board had no choice but to confront Zillow and it did. The inevitable and appropriate result was to change a law that does not work, rather than try to defend the indefensible in court. It would not be surprising to see other states now begin to revise outdated professional definitions.

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