From eliminating disposable straws to banning single-use plastic bags, reducing human impact on the environment is at the forefront of many citizens’ minds in recent years. As a result, the real estate industry is progressively adopting ecology-minded trends, resulting in the gradual emergence of green buildings (both commercial and residential) across the country. Green buildings are defined as properties that use renewable energy and efficient building materials in their operation, construction, and design to create positive impacts on human and environmental health. One of the key technologies that embody this growing shift towards sustainability is Photo Voltaic (PV), otherwise known as solar panels. Although we can rejoice that the green building movement is becoming more mainstream, the question of whether or not this energy source and other green features add value to a property is still up in the air.

Property owners are often surprised when the time comes to estimate the fair market value of their green building. Many appraisers believe that these green features, although expensive, add little value to the property, while potential buyers find these features appealing and valuable. This dichotomy between the perceived value of the property and the one reflected in the appraisal can lead to many issues when selling or refinancing. Let’s explore how solar panels and other green features add value to real property.

Solar Panels and Other Green Features Are a Good Investment

The good news for owners of green buildings is that several studies demonstrate that they tend to sell for more than the average property. In the residential world, a 2015 report from the Lawrence Berkeley National Laboratory concludes that houses equipped with solar panels sell for $14,329 more on average than a non-solar comparable property, which represents a 3.74% increase. Other recent reports support these findings, with green homes selling, on average, for 2.19% to over 8% more than traditional buildings, depending on the property’s features and location.

Given the significant investment that these features represent, particularly if they are added once the building is already built, the previously mentioned numbers seem low. However, the most compelling argument for installing solar panels or other eco-conscious elements in a building remains that they pay for themselves in the long run, as the owners save money every month on their energy bill. For commercial buildings, green features like solar panels can significantly decrease their operating expenses. Additionally, tax credits for commercial and residential buildings are an added incentive for those who install energy-efficient products or renewable energy systems in their property. Finally, as technology progresses, these elements will become not only more efficient but also more affordable.

With analysts predicting that energy prices will continue rising in the coming years, it is likely that green features, such as photo voltaic, will become more widespread and something that buyers will demand and be willing to pay more money for.

The Other Side of the Coin: The Appraisal Process Doesn’t Always Reflect the Contributed Value of Green Features

Sometimes, appraisals do not reflect the perceived value of these improvements, to the dismay of building owners.

This is due in part to the fact that, to establish the market value of a property, appraisers must present in their report comparables with similar features to support the opinion of value. Although green buildings are becoming more popular in some markets, often at the initiative of the state—for example, California’s goal is to have 33% renewable energy by 2020 and 50% renewable by 2030—they are still scarce in many parts of the country. In the absence of green comparables, appraisers have little evidence to conclude that solar panels and other features add value to a building.

To objectively derive the additional value that solar panels contribute the property, appraisers turn to the discounted cash flow (DCF) method. DCF consider the present value of the future cash flows (or savings) that the array will generate over a given period of time.

While DCF is useful, some appraisers lack the specialized training needed to fully consider the value of these features. They have little incentive to educate themselves on the subject, especially if green buildings are not prevalent in their area and if the chances that they will need to value one are slim. Appraisers specializing in green buildings exist, but they can be few and far between in geographic areas where green technologies have yet to catch up.

Finally, with the constant changes in technology, the information required by an appraiser to evaluate the added value of each feature accurately is not always available. Some features are not visible to the untrained eye, and unless the owner informs the appraiser of which elements are present on the property and their characteristics, he or she may easily miss them.

Keeping Up with Green Trends: Appraisers Are Catching Up Quickly

Nevertheless, with more green buildings constructed, bought and sold every day, the issue of finding appropriate comparables will diminish over time. Moreover, the appraising community is making a conscious effort to catch up with these trends. Companies are offering specialized training to educate appraisers on the different features to take into consideration when valuing a building and how to incorporate them in an appraisal.

The Appraisal Institute (AI), which is the largest professional association of real estate appraisers in the United States, released “The Residential Green and Energy Efficient Addendum” in 2011 (updated in 2017) to help appraisers communicate the green features of a property transparently and efficiently in the appraisers’ reports. AI is also at the forefront of green building education for appraisers with its Valuation of Sustainable Buildings Professional Development Program.

How can building owners ensure that green features are reviewed in an appraisal?

Appraising a new feature is always a challenge, and it can take time for the perceived value to be reflected in the appraisal, based on sales comparison. Builders, homeowners, and real estate agents should prepare to provide the appraiser with all the documentation necessary to identify the characteristics of each green feature and prove that these features contribute to the value of the property by saving money every month. Detailed technical specifications, HERS rating, comparative energy bills, etc., help the appraiser to support the added value for each high-performing and energy-efficient element.

Have you encountered a situation where a building’s features were not reflected in an appraisal? How was the situation resolved?

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Real estate appraisals can be used to serve a wide range of purposes: selling, buying, refinancing, or settling an estate. However, the most common goal of an appraisal is to establish the market value of a property. Although the concept of market value (sometimes also called Fair Market Value) is frequently mentioned in the real estate business, it is not always understood. It is type of value opinion among others definitions of value. It is essential to define what market value represents to understand its relevance to an appraisal.

What Is Market Value?

Market Value has multiple definitions and varies by state and region. The one most commonly used by appraisers is given by Fannie Mae, but USPAP encourages appraisers to “identify the exact definition of market value, and its authority, applicable in each appraisal completed for the purpose of market value.” Generally speaking, market value assumes several conditions:

• A buyer and seller who are well informed, act in their own interest, and not under duress
• The property is exposed for a reasonable period on the open market
• The payment is made in cash or equivalent, excluding cash or non-cash incentives

These conditions are not always met in real life, which is why the price a property might reach on the market is not necessarily its fair market value. For example, a seller may need to move out of the area by a specific date and sell the property for a price lower than it might have reached had it stayed on the market longer.

The market value of a property is not a price opinion or a price prediction. It is an opinion of value that typically falls within a range. Therefore, the market value of a property may differ from one appraiser to the next.

As the market (and the condition of the property itself) may change quickly, the market value can also evolve. The market value given in a report is a snap shot in time, which is why appraisal reports are only valid for a limited time. The effective date of the appraisal is traditionally the date an appraiser visited the property, but not necessarily. For example, if the appraisal is ordered to settle an estate, the effective date would be the date the owner passed away.

For most non-commercial properties, appraisers assess the market value by comparing the subject property to similar buildings comparable in location, features, age, etc., that sold recently. However, such comparables are not always available, and the appraiser may have to adjust the different properties used to match the subject.

The appraiser may also be confronted with a changing market (appreciating or depreciating) that sometimes affects the market value of the property. An influx of comparable properties in foreclosure or short-sale could lead to a declining market, while property prices might increase artificially in a bidding war in an area in demand. In this case, the appraiser must conduct a thorough market analysis and adjust the comparables accordingly.

Market Value: One of Many Types of Valuation

Even though establishing the market value of a property is the most common purpose of an appraisal assignment, especially if the report is to be used by several parties, it is far from being the only one. Market value is occasionally confused with other opinions of value, which are often more specialized.

The tax assessed value of a property is calculated by the municipality, for property tax calculation purposes. It is determined by the assessor using various methods, from market value to computerized models and assessment rates, depending on the jurisdiction. The after repair value (ARV) of a property is a projection estimating the market value of a property after renovations have been completed. Thus, comparables are not the properties in similar condition to the subject in the present, but after the projected improvements.

If the property is distressed, the purpose of an appraisal may be to determine the value of a property if it was to be sold quickly rather than after a customary exposure period on the open market (disposition or liquidation value). For an income-producing property, an investor might be more interested in its value based on cap rate than in its market value.

Interpreting the Report

Defining market value is a crucial part of any appraisal assignment as the price a property may sell for is not always its fair market value. In order to prepare an accurate report, it is important to keep in mind the purpose of the assignment, as values differ according to intent and usage. For the recipient of the appraisal, understanding the definition of market value will assist in interpreting the report and why the valuation may vary depending on the scope of the appraisal.

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