At a moment when roughly half of all agents and brokers say their homebuying clients are interested in sustainability, according to a recent National Association of REALTORS® Research Group survey, accurately and comprehensively factoring home performance improvements into property valuations should be a key piece of any appraisers’ job description, right?
Of course. But are they actually up for it? The answer is more mixed than you might think.
With that in mind, here’s a quick deep dive into the sometimes stunning disconnect between high-performing homes and the valuations appraisers often give them, followed by evidence for the critical role that third-party certification can play in the solution.
The Disconnect Between Appraisers, Real Estate Agents, and High-Performing Home Value
From the outset, it’s worth pointing out that significant safeguards exist to ensure that appraisals are carried out by professionals with expertise relevant to the task at hand. For example:
The training and expertise of real estate agents is one part of it, as are issues of access and visibility to data.
The former is simple: Many real estate agents may be reluctant to market the high-performing features of a home on account of the fact that they aren't building science experts. As a result, Realtors might shy away from marketing these features so they don’t run the risk of misrepresenting them.
Understanding where the data goes awry during home valuations is slightly more complex: Data pertaining to sustainable home features is sometimes left off of or improperly entered into MLSs (“multiple listing services” — the private databases that real estate professionals use to document, manage, and facilitate transactions), which makes high-performing home features invisible to appraisers. If home performance features aren’t recorded in the appropriate, and critically searchable, MLS fields, from the appraiser’s perspective it's as if those investments were never made.
It’s a big problem, one that happens all too often and can be vexing for homeowners who invested in their home’s performance. Underscoring that vexation, what’s more, is the fact that the problem remains unsolved even though it has been widely acknowledged for a long time — it’s part of the reason Fannie Mae and Freddie Mac have been working on a redesign of the Uniform Appraisal Dataset (UAD), which defines the required fields for appraisal submissions, for at least the past five years. And even if information related to energy-efficiency home improvements isn’t left out or input incorrectly, it still just “doesn’t stand out” on these forms, as one real estate professional put it.
So that’s a rough overview of where things stand right now, together with a partial accounting of why appraisers and the owners of high-performing homes sometimes don’t seem to be quite on the same page — and that’s because, extending the analogy to issues of data, they’re actually looking at two different books that happen to have the same jacket cover.
What can be done about it?
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Certifications Improve the Appraisal Process and Deliver Value — For More than Just Appraisers
In light of the challenges mentioned above, certifications have a major role to play in not only enhancing the appraisal process from end to end, but also ensuring that appraisals more comprehensively factor energy- and cost-saving performance improvements into home valuations across the board.
Why? Perhaps most importantly, because it’s a win-win-win, with important benefits for stakeholders on all sides.
From a homeowner’s POV, for example, the advantages are fairly obvious: third-party certifications enable them to document home performance improvements (and therefore invest with greater confidence) while capturing increasing resale value and saving money on energy bills in the short run.
Meanwhile, homebuyers can assess prospective purchases with more detailed and accurate information, including insights into the kinds of sustainability measures already in place, the upgrades they’ll likely need to make, and the potential timeline for those investments.
For agents, home energy efficiency certifications add a layer of transparency around — and thereby decrease their accountability for — documenting high-performing features and home performance investments.
As for appraisers, certifications mean they can get on with their jobs — which, if this past summer’s congressional hearings are any indicator, will likely be subject to greater regulatory oversight under the Biden administration going forward — confident that they have all the information they need to deliver home valuations that are fair, compliant, and accurate.
Certifications are a linchpin in solidifying the credibility of energy-efficient upgrades. State Energy Officers should be deeply invested in them because they are third-party validated for evaluating the true worth of such enhancements. When a home’s high-performing features and energy performance are certified by a third party, it sends a resounding message to the broader market, signifying that these investments hold substantial long-term value.
Furthermore, certifications provide a standardized metric to gauge the effectiveness of energy-saving endeavors, ensuring that the impact of initiatives like the Inflation Reduction Act is accurately assessed and documented. If the investments made through the Inflation Reduction Act are not properly valued by appraisers, then a huge opportunity to create long-term consumer demand for efficiency that can transform the market for high-performing homes will be missed. This proactive stance not only guards against missed opportunities for market transformation but also sets the stage for a more sustainable and economically viable future.
All of the ways in which certification can help resolve process gaps and disconnects between appraisals and high-performing home valuations is something we’ve been studying for quite a while at Pearl Certification, and we’ve been taking action as well.
How are we doing it? On multiple fronts. For example:
Pearl Home Certification Reports: We specifically designed our Pearl Home Certification Reports with the needs and challenges of appraisers and lenders in mind, including components that can directly support the valuation process for high-performing homes. The Pearl Home Certification Report also includes a pre-populated copy of the Appraisal Institute's Residential Green and Energy Efficient Addendum. This is an important resource for appraisers because it includes the data on the efficient features of a home, which in turn helps them properly value those features.
Pearl’s Lender Letters: In each home’s certification Lender Letter, Pearl highlights the requirements that are necessary to be considered competent to value a high-performing home. We also direct the lender to the Valuation of Sustainable Building Professional Development Program Registry.
Pearl’s Appraiser Letters: Pearl’s Appraiser Letters empower appraisers by clearly outlining for them the basis for Pearl’s Certification standards and calling out relevant Fannie Mae, Freddie Mac, and FHFA guidelines. Both steps ensure that the appraisal takes into account the higher value attached to a home’s high-performing features.
Plus, we’re at the forefront of the conversation around certifications and real estate appraisals in other ways as well. Take our Appraisal Advisory Council, for example, a dedicated body of appraisal professionals that meets quarterly with numerous goals, including: educating and increasing awareness among appraisers, homeowners, home builders, home improvement professionals, real estate brokers, lending institutions, and other key audiences. As part of that effort, we’ve been continually evolving, refining, and disseminating best practices as well, with a related goal in mind: ensuring that high-performing homes receive the competent and fair appraisals they deserve.
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Next Steps: Certifications, Appraisals, and More
Certifications have a critical role to play in ensuring that appraisals comprehensively document and accurately reflect the impact of home performance improvements in valuations. As a panacea for long-standing, recognized issues in appropriately documenting home performance features, and sharing that data with appraisers, certifications can mitigate key risks in the overall appraisal process — and hopefully, finally, get sustainable home upgrades in sync with appraisers’ valuations. No less importantly, increasing the awareness of energy-efficiency home certification can help reinforce the message that green investments can be a form of financial planning, which should incentivize more homeowners to make sustainability upgrades in turn.
To learn more about how Pearl Certification works for public-sector entities like state energy offices and more, visit our Pearl for Public-Private Partnerships homepage. It’s filled with insights on the IRA, market transformation, the value of certification, and more — and it’s all designed with public-sector professionals in mind. Alternatively, just click this link to send our team a message, and we’ll be in touch soon!
