When consumers buy products like appliances, automobiles, or even food, they are provided with labeling information about energy. Such labels increase customer awareness and help buyers make the best decision. With food, shoppers often select the lowest calorie product and willingly pay more for that product. A car that uses less fuel will be advertised as such and subsequently sell for a premium. The problem is that when a home is purchased, particularly a used home, buyers know little about its energy consumption and therefore tend to overlook one of the most important costs of ownership.
Portland, Oregon is a city that recognizes energy conservation as an energy resource and, for this reason, encourages home improvements that reduce energy consumption, thereby reducing the need for new power sources. The problem is that buyers of homes with energy efficient improvements don’t accurately know how much those enhancements reduce energy costs. To solve this problem, Portland has proposed a Home Energy Score Policy that would require anyone selling a single-family home in Portland to provide a home energy performance report to the city and prospective buyers.
The performance reports that Portland is proposing cost between $150 and $250 and are produced by a certified home energy assessor. The report would calculate the total annual energy used by the home and estimate the cost of that energy. Exemptions from Portland’s proposed policy would include foreclosure related sales and hardships. The cost of these reports have trended downward in cities that have policies requiring them.
A similar energy scoring policy is already in effect for commercial properties in Portland and there are similar policies or laws applicable to residences in Austin, TX; Berkeley, CA; Santa Fe, NM; Boulder, CO; the United Kingdom; Denmark; and Australia. If real estate professionals from these other cities have insight into how the policies have affected real estate transactions, I would love to hear about it in the comments below.
My guess is that buyers, sellers, and real estate professionals do not become educated overnight, but that they slowly start to weigh these factors just as buyers consider other routine purchases. This has been the case with green and solar in our area. Some new home builders in Portland started marketing energy efficiency to differentiate themselves. Buyers started recognizing the value of these qualities before appraisers did. However, through published studies, reporting of information in the multiple listing service, and more educational offerings, appraisers are now starting to better identify market reactions to energy efficient upgrades.
Voluntary Home Energy Scores have been in Portland for eight years but are being used in very few transactions. These are mostly just reported on new homes that have been built with green or Energy Star ratings that are energy efficient above code. Some might say, “If buyers demanded this information, then sellers would provide it voluntarily.” The problem is that buyers (particularly of used homes) do not know that they could have this information, and individual buyers do not have much power to ask for this information on homes that they are considering. The City of Portland believes that a policy is needed to more quickly make energy scores a part of the market and subsequently drive more improvements in energy upgrades like is already occurring in the commercial market.
I know that many appraisers and real estate professionals are thinking that if this information is available, no one will care and it will just cost sellers more. I do not believe that is the case. The following lists just a few national and local studies looking at certified energy efficient homes, green homes (that are tied to lower energy costs), and PV solar systems completed over the past twenty years. The reports show a demand for energy efficiency and a clear relationship between lower energy consumption in a home and its value.
Based on the overwhelming evidence in these local and national studies that lower home energy consumption equals a higher sales price, I believe that if buyers have access to Home Energy Scores and are educated about them, they will absolutely be willing to pay a premium for homes that have lower energy costs. I believe that if Home Energy Scores become policy in Portland, more energy upgrades will be made both by sellers who are motivated to increase the price of the home they are selling and by buyers who generally make additional improvements close to the time of purchase. Also, more buyers will likely take advantage of new loan products like FannieMae HomeStyle® Energy mortgage and government incentives that encourage energy upgrades. In the future, if this policy is approved, appraisers in Portland could be reporting the Home Energy Score for each comparable sale and might even be making line item adjustments for market reactions to them.
Are you an Oregon or Washington appraiser interested in seven hours of FREE continuing education about appraising energy efficient homes? I will be teaching a class in Hermiston, Oregon on December 9th. I know it is a long drive for many of us, but it’s otherwise free. Click here to learn more.
Did I leave anything out or do you want to join in the conversation? Let me know in the comments below.
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Thanks for reading,
Gary F. Kristensen, SRA, IFA, AGA
Recently I’ve been receiving calls from homeowners who don’t need an appraisal, but want to know how much an appraisal costs to see if they are paying too much for a Portland appraisal from a different company. The callers are typically involved in a refinance or home purchase loan, and are looking over the closing disclosure documents (a list of closing fees which could have another name depending on the loan type). There, they see a large number like $600, $800, or more for the appraisal. Usually after our conversation, the callers realize that they are not paying too much for the appraisal.
What most homeowners do not realize is that the amount listed for the appraisal on the closing disclosure typically includes management of the appraisal. To help ensure appraiser independence, most appraisals for loans are ordered through an appraisal management company (AMC). These companies have varied services that usually include hiring the appraiser, paying the appraiser, and a quality check of the appraisal report. Like AMCs or not, the AMC’s job is to make sure that the person hiring the appraiser is not influencing the appraiser and that the appraisal is of sound quality. In Portland, AMC costs typically range from $75 to $200 and are added to the cost of the appraisal shown on the closing documents.
The cost of a Portland area home appraisal (the fee paid to the appraisal company) runs about $500 in Portland right now, and will typically go up by $100 increments if the property is unique (few comparable sales), if the property is rural, if the appraisal is needed in a rush, or if the property is a rental in need of rent analysis. Add this to the cost of the AMC and it is easy to understand why homeowners are seeing fees of over $600 for an appraisal on their closing documents.
I know what you’re thinking, $500 for the basic appraisal is still a lot of money and many appraisers in other parts of the country receive much less. I agree that is expensive, but that appraisal fee must be placed in context. The appraiser typically spends eight hours or more preparing a residential appraisal report including viewing the property, driving by comparable sales, calling and interviewing agents, analyzing data, report writing, and responding to lender concerns. Office staff and technology can streamline an appraisal, but doing a thorough appraisal is labor intensive. Furthermore, most lenders do not allow an appraiser’s assistant to view the subject and comparable properties for the appraiser. (Interesting because assistants are commonly used to help control costs in other professional fields such as medical and legal.) The appraiser or appraisal company also has more overhead than one might think including unbillable hours, insurance, computers and office, automobile, licensing, continuing education, data subscriptions, professional associations, accounting, and so on. Also, the appraisal profession has high barriers to entry including required college degree, industry required education, and a two-year apprenticeship for certification. After overhead, the median residential appraiser earns roughly $50,000 annually with few or no employer benefits, and he/she retains a high risk of being sued long after a job is completed.
Appraisals are expensive to produce, but they are a necessary piece of a stable economy, real estate market, and your loan. The appraisal fee might be the best money you spend on closing your real estate finance transaction. Did I leave anything out or do you want to join in the conversation? Let me know in the comments below.
Do not miss the above parody video on Portland tiny homes. It is the hilarious and the perfect introduction for an article on Portland accessory dwelling units.
An accessory dwelling unit (ADU), also known around Portland, Oregon as “granny flats, mother-in-law apartments, and carriage houses” is a second residential living unit on an existing single-family home site. ADUs became popular in Portland in 2010 after the city waived many development fees as a way to increase density and affordability. Portland ADUs come in many shapes and sizes. An ADU can be created by building a small detached home next to (but a minimum of six feet away from) an existing home, by adding an attached unit onto the existing home, or by converting a portion of the existing home, garage, basement, or attic into a unit.
Appraising ADUs is difficult because each is unique and because there are often few comparable sales of other accessory unit properties. Additionally, it is common that ADUs have been built without proper permitting, and income from accessory units is not directly comparable to other more common income properties such as apartments or small detached homes. Rather than write a book about appraising accessory units, here is a list of some interesting appraisal-related facts about ADUs in Portland.
1. All residential zones in Portland allow for accessory units. This means that when an appraiser considers the highest and best use of a property in Portland, adding an accessory unit should be a legally-permissible consideration.
2. In the City of Portland, ADUs and the main house can usually be legally rented, just as with a traditional duplex. However, many of the municipal areas surrounding Portland do not allow renting. It is important for appraisers to understand the legal uses of the ADU because that could change the type of buyers who would be interested in the property.
3. In Portland, ADUs cannot exceed 800 square feet or 75 percent (including basement) of the main home.
4. The kitchen defines an accessory unit in Portland. Simply having a bedroom or a second living space is not considered an accessory unit. Also, ADUs do not require the separately metered utilities or additional parking that are common with a typical duplex.
5. Many ADUs in Portland were created outside of the permitting process. Such units may be unsafe and might not add value to the home. Legally permitted ADUs can be extremely valuable and many are becoming more valuable with the popularity of the “tiny home” and the proliferation of vacation rentals like Airbnb.
6. Sometimes accessory units will have very high site development costs due to sidewalks, permits, the need to match the existing home, utilities, and such. Builders have indicated to me that a person can spend $50,000 before even beginning construction of a detached unit.
7. When building an accessory unit, your entire house could become subject to additional tax due to reappraisal of the whole property and not just the addition of the accessory unit. (Click here for a recent article that shows citizens are upset about this and that reappraisal requirement might be changing in the future.) However, remember that tax laws are complex. Anyone considering building an ADU should first consult with the assessor.
8. Mortgage lenders often are not experienced with providing loans on homes that have ADUs, nor do many appraisers have experience with valuation of them. These two factors, combined with very few comparable sales, different ways for appraisers to report appraisals of homes with ADUs (as a Duplex on a 1025 form or a Single Family with ADU on a 1004 form) can make it challenging to refinance or purchase a home with an ADU. If you need to get a loan on a home with an ADU, I recommend the following.
a. Find a lender with experience in ADUs and income-producing properties. Often local credit unions will have more experience and offer loan options for borrowers with ADUs.
b. Ask your lender to select an appraiser who has experience in ADUs.
c. Provide the appraiser and your lender with documentation that your ADU was legally permitted. Also, list information about rental income, expenses, and detail construction costs (if your unit was recently constructed).
d. If you’re an appraiser, it is important to openly discuss the ADU appraisal with the client before accepting or proceeding with the assignment. Lenders who do a lot of loans for ADUs will often have a specific list of appraisal requirements to follow when appraising ADUs. Following lender guidelines will help appraisers avoid the problems and delays that come from client expectations not aligning with the final appraisal product.
If you want to learn more about appraising ADUs in Portland, I recommend taking Taylor Watkins’ class at Earth Advantage on February 18th, 2016.
Often, someone calls A Quality Appraisal looking for an appraisal on a residential home that has additional development or subdivision potential. I usually explain to the caller that this will be a time-consuming and expensive assignment because of the need to explore the value of different potential uses. Often, the response is, I do not plan to subdivide, I just need a value “as is”, why does the potential uses matter?
When an appraiser appraises a home (for most intended uses), the value is based on its highest and best use. In very basic terms, highest and best use is what the most likely educated buyer would do with the property. The theory suggests that if a property is worth more subdivided as two lots, then an educated and well advised seller will market it that way. The offering will consequently attract an educated and well advised buyer who will pay more for the property (and divide it) than the buyer who just wants a large back yard.
Typically, there is only so much that a buyer is going to pay for a large back yard. If that same property can feasibly be split into two or more parcels, it might be worth much more, even if it costs time and money to divide the property. The following is a list of all the information that an appraiser might need to develop an opinion of value on a property where there is subdivision potential.
1. What is the value of the subject house with a large yard and not dividable? Answering this question helps the appraiser determine highest and best use, or if dividing the lot is the most valuable alternative.
2. What is the value of the subject house after the extra lot is divided? To value the whole, the appraiser usually needs to know the value of the parts unless there are sufficient comparable sales of similar homes with similar extra lots.
3. What is the retail value (if sold individually) of the potential extra lot? Again, to value the whole, the appraiser usually needs to know the value of the parts.
4. How much will it cost to split off and prepare the extra lot for improvement? This amount can vary greatly from one property to another, so an appraiser must understand how the subject relates to the comparable sales in terms of development costs.
5. How much profit will an investor expect when purchasing a lot with a house? This estimate is key to valuation of a house with an extra lot. A well informed buyer in typical conditions would usually want profit (appraisers say “entrepreneurial incentive”) in exchange for the risk of purchasing a house with a lot that later needs to be divided. Also, buyers of a house with an extra lot will typically need to pay cash or bring more cash to closing which is also a cost that requires incentive.
This example shows how many pieces of information and value opinions that an appraiser needs just to determine the subject’s highest and best use and to ultimately value a house with an extra lot. Each of the items listed above might require several well researched comparable sales or a mini appraisal to answer. This shows why it can be costly to appraise properties where highest and best use is questionable and when these individual pieces of information are difficult to obtain.
Have you ever seen big white PVC pipes with fans running up from the basement of Portland homes? Those pipes are radon mitigation systems designed to reduce the amount of radon gas in homes to acceptable levels by ventilating the soil under the structure. Radon is an invisible and odorless radioactive gas that seeps naturally out of the ground. It can migrate through concrete slabs, and can cause health problems if it enters a home. Radon is the most common cause of lung cancer in nonsmokers and the second most common cause of lung cancer in the United States.
Most of Portland, Oregon is considered at moderate risk levels for radon. The highest risk occurs in North and East Portland, roughly from the Columbia River south to Interstate 84 and from Interstate 5 to Parkrose. An area of high risk also extends into Southeast Portland along Interstate 205, Rocky Butte, east of Mt. Tabor, and ending at the north edge of Mt. Scott. (Follow this link to the Oregon Health Authority Radon Risk Maps.)
Radon travels through soil in random ways. Your neighbor’s house could exhibit high amounts of radon while yours remains low. The only way to know if you are exposed to radon in your home is to have it professionally measured or to buy a DIY test kit at the hardware store. If your home tests at unhealthy levels, a mitigation system can be installed for around $1,500, but the price may vary depending on the home. Money spent on radon mitigation is regarded as fixing (appraisers say “curing”) an environmental problem and consequently, is not considered to be an upgrade or added value to your home.
This begs the question of stigma. If a home has a radon mitigation system installed, will buyers pay less for that home than a home that tests free of radon and does not need mitigation? After all, radon mitigation systems can fail. They draw small amounts of electricity, the fans require replacement every three to five years, and homes with radon systems should be retested for radon every one to two years to make sure that the system continues to work properly. Personally, I would be somewhat turned off by a home with a radon mitigation system due to having another maintenance item that, if neglected, could silently harm my family’s health.
I spoke to several Portland real estate agents prior to writing this article and their consensus was that most buyers do not stigmatize homes with radon mitigation systems. Radon education has been around Portland long enough that buyers, particularly in the high risk areas, are accustomed to radon mitigation and are not concerned with buying homes with the systems installed.
The only way to positively conclude if radon systems reduce value is through analysis of sales data of homes with and without mitigation systems to see if there is a difference in sales prices. However, this kind of analysis is difficult because homes with radon systems are not searchable in Portland’s Realtor Multiple Listing Service or in county records data. Therefore, my only observations come from small samples when the subject or a comparable sale is occasionally found to have a radon mitigation system. It is my experience here in Portland that any stigma toward radon mitigation systems is small or nonexistent because it is not evident in the small samples that I have analyzed. Additional study is needed to know with greater certainty.
Did I leave anything out or do you want to join in the conversation? Let me know in the comments below (Blog comments on this site have not been working for several weeks and the developers are working to get them repaired soon. Feel free to contact us instead. I’m always interested to learn from the experiences of my readers).