Portland Area Real Estate Appraisal Discussion

I just returned from the Oregon Solar Energy Conference as a guest speaker/panelist discussing the valuation of residential homes with owned (not leased) solar photovoltaic (PV) systems.  It was an honor to share the panel with Ben Hoen, a staff research associate with Lawrence Berkeley National Laboratory who coauthored a study published in the Winter 2016 Appraisal Journal titled, “An Analysis of Solar Home Paired Sales across Six States.”  The contributory value of PV in appraisals done for residential lending is a hot topic in the solar industry because the easiest way for owners to finance PV systems is within the mortgage of their home.

During our session we discussed the rapid increase in solar installations across the country, including Portland, and the complexities that such features present to appraisers.  Some of the appraisal problems identified by the panel include: finding comparable sales of homes that sold with owned PV systems, difficulties in obtaining performance characteristics about the PV systems on home sales, how to ask for and find appraisers with solar or other green credentials, and the green addendums  that can be filled out by homeowners and agents to help appraisers gather information about a property.  (Click here for an example of one popular green addendum)  The panel also discussed several different ways that appraisers can support adjustments for PV solar systems.  A listing of techniques that appraisers can use to estimate and support adjustments for PV systems follows.

1. Paired Sales – This method is most accepted, but it can be difficult to find comparable sales; however, an appraiser is not only limited to properties that would compete with the subject for paired sales. For example, the appraiser might appraise the subject as if it has no PV system and then use sales from a nearby community (or further back in time) to help support an adjustment that can be applied to the gridded comparable sales in the report and other approaches to value.
2. Cost Approach – Studies, like those published in the recent “Appraisal Journal,” have shown that there is a strong correlation between the net cost of a PV system (less total of all incentives) and value. This is reasonable because someone should not pay more for something on one home that they could merely purchase for another home; although cost and value are not always equal, and it can be difficult to accurately estimate depreciation if the system is more than a few years old. In addition, the appraiser must estimate the current cost of the system and not its cost at the time of installation. This is particularly important because of the rapidly falling cost of solar power systems within recent years.
3. Income Approach – Recent studies also show that the present value of the energy savings has a strong correlation to value. This is reasonable because the main selling point of a PV system is to save money on future utility bills (although buyers often see other benefits such as prestige or feeling good about conservation). Appraisers and others can estimate the present value of energy savings using spreadsheets or a free online tool called PV Value. The limitation of this approach is that it can be difficult for the appraiser to estimate or support the risk premium to apply to the discounted cash flow (studies on risk premiums are coming) and other factors like energy production or energy prices over time. The good news is that much of the necessary information can be obtained from the new system documentation and unknowns can be estimated using PV Value defaults or online estimators like Solmetric Roof Azimuth Tool or PVWatts Calculator.
4. Additional Support – After appraisers have performed one or more methods to support an adjustment for PV, the indicators can be checked against recent studies to see if the results are reasonable given the quickly growing body of evidence. However, appraisers need to be aware that often the studies are dated by the time they are published and may not be applicable to a particular subject property.

If you need more resources, the Appraisal Practices Board recently issued an advisory on “Valuation of Green and High-Performance Property: One- to Four-Unit Residential.”  It is a voluntary guidance for appraisers on methods and techniques for valuation that includes green homes, but it also includes a section on PV systems.  Solar power systems are here to stay and are becoming increasingly common.  Are you ready?

Did I leave anything out or do you want to join in the conversation?  Let me know in the comments below.

If you find this information interesting or useful, please subscribe to this blog and like A Quality Appraisal, LLC on Facebook.  Also, please support us by making Portland real estate appraisal related comments on our blogs and YouTube videos.  If you need Portland, Oregon area residential real estate appraisal services for any reason, please request appraisal fee quote or book us to speak at your next event.  We will do everything possible to assist you.

Thanks for reading,

Another appraiser in my office and I just completed three days of green appraiser training provided by Earth Advantage, a Portland, Oregon nonprofit that encourages more sustainable building practices through home certifications, education, and other involvement.  This is a fantastic course package that gives appraisers an understanding of the differences commonly found in green construction techniques.  When finished with the training, appraisers know how to identify green construction techniques, and thereby measure the market reaction to those differences — and I am not just talking about bracketing a color.

The concept of building green comes from the goal to be more sustainable in construction and living.  The pursuit of green building practices results in carefully engineered high performance homes with integrated and interacting systems that make them more comfortable, durable, and efficient.  As a result, green homes sell for a premium in some markets.  Green building practices include exceeding local building codes under the Five Pillars of Green Construction as follows:

1. Site Development includes convenient locations that require less vehicle use, low impact site development that values plant retention and controls water runoff, and the harnessing of natural light, solar energy, and air movement to maximize performance of all systems.  An example of a green site would be to select a lot near public transportation that is also south facing and can benefit from passive solar heating.

    

2. Water Efficiency through controlling indoor and outdoor water consumption and by managing the water that is available naturally onsite.  An example of water efficiency is collecting runoff water from downspouts for use in irrigation.

    

3. Energy Efficiency using more efficient appliances, mechanical systems, and (most importantly) a building envelope that is sealed and insulated for maximum comfort with minimal heating or cooling cost.  An example is that many green homes can downsize heating systems to units that would typically be used in smaller homes, thereby helping to offset some of the other increased costs of green construction.

4. Materials Selection includes materials made from renewable resources, are locally produced, and have a long service life.  When local or natural materials are not feasible or acceptable in the market, an effort is made to use quality materials that will last and avoid repeated replacement waste over the life of the home.  An example of a materials selection compromise that a green builder might make is a foam panel that might not be locally produced, but its light weight makes shipping easy, its strength permits less lumber use, and it will last the life the home.

5. Health and Indoor Air Quality includes proper ventilation and air filtration.  For example, because green homes are so airtight, indoor air may be better controlled by introducing fresh or filtered air from outside without the tendency to pull air from dirty crawlspaces or attics as in typical code built homes.

Since the Five Pillars of Green Construction are difficult for buyers to observe prior to purchase and because green construction offers benefits to the owner (and to society in general) throughout ownership, different rating and certification programs exist to help buyers identify and compare green homes in the market.  In Portland, Oregon, the most common certification programs are Energy Star (dealing with only energy), Earth Advantage, and LEED.  Builders that join these programs and who document building components and receive independent inspections are rewarded with government incentives, a third-party rating, and market differentiation.  The buyers of certified green homes know (in advance) the performance of their home in terms of its effect on the environment and its energy cost in relation to building code minimums.  Appraisers who assess green certified homes can better quantify benefits that might affect marketability and make comparisons to other certified homes.

Did I leave anything out or do you want to join in the conversation?  Let me know in the comments below.

If you find this information interesting or useful, please subscribe to our blog and like us on Facebook.  Also, please support us by making Portland real estate appraisal related comments on our blogs and YouTube videos.  If you need Portland, Oregon area residential real estate appraisal services for any reason, please request appraisal fee quote or book Gary F. Kristensen to speak at your next event.  We will do everything possible to assist you.

Thanks for reading,

Gary