We know we save money on utilities when we invest in energy-efficient components for our homes. We even feel better about going a little "green." Yet when selling, those upgrades aren't reflected in the home's appraised value. At least they haven't been in the past.
However, the appraisal process is changing, and this change will give you a credit for those energy-efficient upgrades.
Until recently, appraisers lacked guidelines on how to value properties with energy-efficient upgrades. But the Appraisal Institute, the largest professional association of real estate appraisers, has recently created an appraisal addendum, the Residential Green and Energy Efficient Addendum, to help appraisers document energy value adjustments. The addendum standardizes the appraisal process nationally and will positively affect the value of properties with energy-efficient components.
This addendum was needed for many reasons. One reason came from the growing number of homeowners who received refunds from programs such as the Alaska Housing's Energy Rebate Program for energy-efficient upgrades. With the rebate, a homeowner could recoup some of the costs of the upgrades much quicker, increase his personal enjoyment and fight high utility costs. While energy-efficient upgrades made economic sense on many levels, their value was difficult to quantify when the property sold.
Another reason came from the Appraisal Institute's response to potential legislation, the Sensible Accounting to Value Energy (Save) Act. This act, if passed, could affect a buyer's mortgage loan qualifications.
Currently a lender uses four debt ratio factors to determine a buyer's loan qualification: principle, interest, taxes and insurance (PITI). However, home ownership involves more than just the mortgage so a primary part of the SAVE Act would add energy costs to the computation. In some areas of the nation, energy costs exceed property taxes and insurance. So, the reasoning goes, the more energy-efficient the home, the less spent on utilities and the more likely the mortgage will be repaid.
A secondary consideration under SAVE could add water- and location-based transportation costs. In some areas of the nation, water reclamation and conservation are a part of life. The SAVE Act could include those monthly water bills as part of the buyer's loan qualification. Location-based transportation costs could include scores for walking access and public transportation.
While the appraisal change may be cumbersome at first, the addendum will actually help everyone involved in a real estate transaction in at least three ways. First, the new appraisal addendum will provide lenders the necessary information to consider utility costs of a specific property. Second, information is more accurate because the appraisal standardizes energy-efficient guidelines, thus decreasing the chances of faulty or inflated claims. Third, homeowners will be able to demonstrate what separates their homes from competing nonefficient properties.
However, implementation of the new process will be slow while the appraisers' property databases improve. The appraisers still have to learn what value adjustments to make between properties with and without energy-efficient upgrades. Lenders and underwriters will need more education on what to look for, especially if the Save Act becomes law. Eventually, even Multiple Listing Services will need to include searchable fields and standardize what is energy efficient or green, and what is not. This will help potential buyers differentiate between properties during their house-hunting searches.
For sellers or homeowners wanting to refinance, the Appraisal Institutes suggests downloading and completing the new appraisal addendum form. Give the completed form to the lender, to then be given to the appraiser for consideration. Much of the information necessary to complete the form is available from the Pre- and Post-Energy Rating as well as from contractor invoices, which can be attached to the addendum.
So if you haven't gotten your home energy rated, funds are still available and the wait time has dramatically decreased. The Alaska Housing Energy Rebate Program will cover up to $325 of the initial rating cost. Then you have up to 18 months to complete the recommended work, complete a post-rating and submit for reimbursement. For more information, go to ahfc.state.ak.us.
Clair and Barbara Ramsey are local associate brokers specializing in residential real estate. Their column appears every month in the Daily News. Their email address is info@ramseyteam.com.
Barbara and Clair Ramsey
Housing