Due to a new City ordinance, on January 1st, 2018 most homes listed for sale in the City of Portland are required to first obtain a Home Energy Score. Our sister company, A Quality Measurement now offers this service. Portland’s policy is unique in that sellers are required to obtain the energy score prior to listing the home for sale. This can be a burden to sellers, but it is a benefit to buyers who want to purchase a home that uses less energy. The question that always comes up is, “If I get a low score, will my home sell for less?” I have two thoughts on this.
1. The Home Energy Score is like the miles per gallon (MPG) rating of a car. We all know that a car with a lower MPG rating is not necessarily less valuable than one with a high rating. For example, a luxury SUV may have a very low MPG in relation to a compact car. However, it is also likely that the luxury SUV will sell for more money. A low score does not necessarily equate to a low value. 2. On the other hand, a home with a lower energy score might sell for less. If two homes are equal except that one uses less energy, we can expect that a well-informed buyer will pay more for the more energy-efficient home. A long history of scientific (and unscientific) studies link a buyer’s willingness to pay more for a home that uses less energy. However, most such studies involve new homes where buyers are more likely to have information about estimated energy consumption. Now buyers of used homes in Portland will have the information and scientists, appraisers, and real estate agents will be watching to see what happens. Here is a link to a blog post where I go into more detail about existing studies.
1. The Home Energy Score is like the miles per gallon (MPG) rating of a car. We all know that a car with a lower MPG rating is not necessarily less valuable than one with a high rating. For example, a luxury SUV may have a very low MPG in relation to a compact car. However, it is also likely that the luxury SUV will sell for more money. A low score does not necessarily equate to a low value.
2. On the other hand, a home with a lower energy score might sell for less. If two homes are equal except that one uses less energy, we can expect that a well-informed buyer will pay more for the more energy-efficient home. A long history of scientific (and unscientific) studies link a buyer’s willingness to pay more for a home that uses less energy. However, most such studies involve new homes where buyers are more likely to have information about estimated energy consumption. Now buyers of used homes in Portland will have the information and scientists, appraisers, and real estate agents will be watching to see what happens. Here is a link to a blog post where I go into more detail about existing studies.
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
I just returned from a daytrip to Las Vegas where I addressed the attendees of the Appraisal Summit and Expo. It was such an honor to speak at this event alongside my business mentor Roy Meyer and to meet some of the most involved and inspirational people in the appraisal industry. My only wish is that I would have been able to stay longer to build more connections and listen to more of the speakers.
Also while in Vegas, I was interviewed for an upcoming episode of the Appraiser Coach Podcast with Dustin Harris, I got to meet Jeff Bradford and demo the new Bradford Technologies Appraiser Mobile App, and I received a live a demo of ANOW appraiser business management software. Talking directly to the people behind these brands and seeing them in action is so much more valuable than visiting a website. It was definitely a worthwhile trip.
If you were at Appraisal Summit and Expo, hopefully we got a chance to meet. If we did not connect, please get in touch with me online and perhaps we can meet up at the next big appraisal event. One of the things that I most enjoy about being an appraiser is meeting appraisers from all over the country.
Two weeks ago we added another vehicle to the A Quality Appraisal fleet. Three of our four associates now drive company cars. This one was purchased for appraiser Lucas Warren. (Yes, we do hope to make it four for four in the future.) As the photo above shows, the new vehicle carries the AQA logo, just as the others do. Many appraisers ask, “Does putting logos on your appraiser cars attract any additional business?”
We did not choose to put the company logo on our appraisal cars to increase business; although over five years we can identify about five jobs attributable to the vehicle graphics. This has been from people either approaching our vehicle or calling us after we drive by. These additional jobs do cover the cost of the graphics, but they are not justification for the expense.
We use company vehicles because we want to show our employees that they are valued. Also, using company cars helps to elevate our professionalism above that of our competition, who usually drive a personal vehicle. A client who sees us pull up in the driveway is put at ease knowing that the professional who will soon be walking through their home is working for a legitimate company and not just a fly-by-night operation. This is especially important given that our business relies on non-lender clients. Referrals are the lifeblood of our company; professionalism and identity are vital for return business.
An additional benefit of having logos on our cars occurs when we survey comparable sales by viewing them from street and by taking photos. Homeowners and neighbors often get nervous when a strange car pulls up outside and the driver begins taking pictures. With a company vehicle, the logos tell the homeowner that we are appraisers. That is often enough to put people at ease. Other times, homeowners will see the phone number and call to ask what our suspicious-looking activity is. In those cases, I usually tell the caller that we are not real estate appraisers, but private detectives hired to conduct surveillance on their neighbor and that we will need their help in our undercover sting operation. — Just kidding.
When a home is exposed to the market under normal conditions, it will most often sell within a reasonably tight range. This range is the most probable price and is a fundamental part of the definition of market value. So how is it that market participants (buyers, sellers, and agents) usually agree on a price that is close to market value, even when they are not making adjustments, verifying data, and analyzing statistics like an appraiser does? There are three key factors why the market usually gets the price right.
When someone decides to buy or sell a home, they usually start by contacting an experienced agent who provides expert advice. Agents help to educate buyers and sellers on factors that may not be readily apparent to the layperson. An agent may or may not know the value of a property, although most agents have experience in setting price based on comparable sales or other approaches. (Even so, I still recommend ordering an appraisal before you sell). In addition to helping with setting strategic list prices or offer prices, an agent will be able to point out local trends, help guide decisions, and provide buyers or sellers with a foundation to start searching.
Buyers will usually determine where they want to purchase and start looking at homes in their price range to see what is available. When a buyer is focused on one area, one price range, and one set of key features, it is not long before they can accurately determine what a good deal is. Buyers will not necessarily know what market value is, just that some homes are priced better than others given the buyers’ individual need and budget. This process usually leads a buyer to the right price.
Sellers will set a price, but once the home is exposed to the market, they will usually know quickly if the price is close to market value. A home that is priced very high will typically not receive many showings. A home that receives showings, but no offers, might only be slightly high. A home that is priced too low will often receive multiple offers and still sell for close to or even more than market value (depending on many factors but there are different opinions on this).
This begs the question, if buyers usually get the value right, then why do banks require an appraisal in a purchase? The answer is that buyers usually get it right, but sometimes do not. Some properties are unique, and buyers will just fall in love without sound justification for the price. Other times there are non-market factors that influence the price. Whatever the case, banks use appraisers as one way (of many) to verify and protect their interest in the loan. The typical appraisal cost is very low in relation to the cost of making a bad loan. An independent opinion of value from an experienced local certified appraiser just makes good financial sense.
Happy Fourth of July real estate appraisers and others who follow my blog. I am excited to take a day off to spend time with my family, enjoy a big slab of watermelon, watch some fireworks, and celebrate our country’s independence. On this Independence Day though, I am also celebrating my appraiser independence. No, I’m not talking about the independence from pressure to reach a specific value, which is often referred to as “appraiser independence”. I mean that in 2015 I have not accepted an appraisal order from a single appraisal management company (AMC) or conventional lender.
Why would I exclude myself from by far the largest segment of the appraisal market? Previously I was happy appraising for AMCs and lenders. I had good clients who paid full fees, who had reasonable turn-time requests, and who did not hassle me too much.
Don’t get me wrong, as we still have an appraiser in our office who does work for AMCs and other lenders. He has a select group of clients that he likes, they like him, and we are all happy with that. The following are my personal reasons (experiences may vary) that made me decide to focus my work only on private party (non-lender) appraisals for clients like divorces, estates, pre listings, pre purchase, and litigation.
The number one reason to celebrate independence from lenders and AMCs is because they take business management away from the appraisal company. If I receive an appraisal order from a lender or AMC in a part of Portland that another appraiser in my office is headed to or is more experienced in, I typically cannot simply trade jobs with that appraiser for increased efficiency.
Many AMCs and lenders have long lists of requirements for the appraiser to address that are intended to limit the liability of the lender, but often take the appraiser’s focus off what is most important – appraising. AMCs and lenders will often send pages and pages of instructions with each assignment for appraisers to read. The problem is that the instructions are usually just repeating USPAP, Fannie Mae, or FHA rules with a few “lender-specific” requirements mixed in for the appraiser to hunt down. If the appraiser happens to miss any lender-specific directives, like take photos of smoke alarms, the appraisal report is returned for revision immediately after delivery.
Much of AMC and lender work is all about fee and turn-time. We receive a constant stream of phone calls and emails every day asking, “What is your fee and turn-time for this property.” The AMCs and lenders almost never ask, “What is your experience with this property type or market area?” something that non-lender clients ask regularly.
The system of AMC and lender work can often seem stacked against appraisers who work the hardest. Doing a good job can mean working more and making less money. For example, an appraiser who recognizes how unique a property is (be it condition, features, or location), and reconciles toward the end of the value range is likely to be questioned more regardless of how much explaining and analysis is done. The questioning occurs understandably because the data is not as strong as it would be if the subject’s value falls in the middle of the range.
AMC and lender work is more cyclical than non-lender work. Lender and AMC work peaks when interest rates are low, when loans are being made, and when homes are selling. Non-lender work tends to be less cyclical because such work is driven more by continuous life events.
AMC and lender work typically means waiting from a few weeks to a few months for payment. My company usually pays its employees sooner than AMCs and lenders pay us, which can be hard on the cash flow of a small business. With non-lender work, we are paid prior to the delivery of each report.
AMC and lender work can feel less personal. Appraisals for lenders are just that, for the lender only. Appraisers cannot talk to the homeowners about value opinions. With lender appraisals, the homeowner is often left with resentment toward the appraiser when the value opinion is not as hoped. With non-lender appraisals, I usually discuss the conclusion with the client. In the end, even if the client does not agree with me or is upset by my conclusion, they usually respect or understand my professional opinion.