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
Happy New Year everyone and sorry my blogging has not been consistent of late. For appraisers, particularly those in the Portland area, last year was an incredibly busy year. Fees for appraisals went up by 50% or more in Portland. This was a shock to home buyers and others looking for appraisal services, but it represented the first raise for appraisers since the 1990s. Finally, fees in Portland are at a place where appraisers can attract fresh talent into an aging industry. Let’s hope that these gains do not disappear in the next real estate slump, leaving appraisers looking for other ways to earn a living.
Speaking of other ways to make a living, many of my blog subscribers know that our company, A Quality Appraisal, LLC maintains a home measurement service, in addition to our appraisal business, that provides square footage estimates independent of an appraisal. Many appraisers also provide similar side services.
This last year was eventful for our home measurement business. Luckily, after a little research and not a claim or problem, we found that most appraiser Errors and Omissions (E&O) insurance providers do not cover appraisers when they are doing a measurement that is not part of the development of an opinion of value.
I was shocked when told this by one of the largest appraiser E&O providers because most appraiser E&O policies claim to protect customary professional services performed in the insured capacity as a real estate appraiser, and that many of the services appraisers can provide do not involve an opinion of value. How much more customary of a service is a measurement when almost all appraisers measure homes on almost every appraisal assignment?
After I pushed back against the E&O provider, a senior underwriter of the company responded that it would come down to the definition of appraiser as described by the insurance policy, and that they would need to decide if the measurement service was “usually and customarily rendered by a real estate appraiser.” The underwriter explained that square footage estimates are not unique to the appraisal industry and non-appraisers can provide them. Coverage would only be triggered if an appraisal report underlies the square footage estimate.
The senior underwriter went on to explain that when a real estate agent or broker asks an appraiser for a measurement, it is because they seek to shift liability to the appraiser. The senior underwriter also said that measurements are considered risky by insurance companies and added that “about 50% of claims presented to our company involve sq. ft. issues.” This was contrary to what I believed was true — that measurements are only a small piece of the appraisal liability and are easily verifiable. I knew if we wanted to keep our measurement customers, we needed to fix this problem.
To solve it, we contacted all companies that we could find in the US that are exclusively measurement businesses and asked where they secure E&O insurance. After chasing down numerous leads and talking to many insurance providers, we found that most home measurement businesses think they are covered through architectural or real estate policies. However, like appraisal E&O policies, when we contacted the insurance companies, we found out that measurement services are not actually covered.
For this reason, we sought legal advice. Thus, A Quality Measurement was split into its own business name and website, separate of A Quality Appraisal, LLC. After committing many dollars and countless hours, we believe that we have resolved our specific insurance and liability problems. We are not offering legal advice here, nor can we provide the plan our attorney put in place specific for our business. I merely suggest that if you are an appraiser doing home measurements, contact your E&O provider first to see if you are covered.
Are you an appraiser who does home measurements? We would love to hear from you.
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.
Due to the shortage of appraisers in Portland, Oregon (and other places around the country), appraisers are bombarded with requests from Appraisal Management Companies (AMCs) requesting that they fill out mountains of forms; provide copies of identification, licenses, and insurance; submit to background checks, provide examples of work; and apply to be on the AMC’s roster of appraisers. So how do appraisers know if the AMC will be a trusted client? How do appraisers know if the AMC will treat them fairly? Will appraisers be confident that private information will be safe? The AMCs vet appraisers, but do appraisers screen AMCs? Perhaps appraisers need to scrutinize AMCs just as diligently before doing business with them. Here is a list of seventeen things appraisers could do before signing up on that next AMC roster.
I hope that you find this list helpful even though it is written partly in jest. My goal is to elicit thought and discussion about the imbalance of power and liability in our industry as it relates to appraisals done for AMCs and lenders. Remember that if an AMC fails in parts of your vetting process, the appraiser could charge a complex client fee to account for the shortcomings. If you missed my interview with The Appraiser Coach Dustin Harris, about my blog and how our business focuses on non-lender (non-AMC) type appraisal work, Click Here.
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.