Establishing Market Reaction to Homes with Green Features
Updated: Aug 14, 2020
The market for green homes is expanding in Florida and throughout the Country. This article attempts to guide agents in supporting value for solar panels, and other types of alternative energy hardware from the standpoint of market reaction, which is the most common method of supporting adjustments in Residential Appraising.
This is part of our "Green" series of articles, and we will cover many aspects of "green homes" and features, but this article specifically addresses determining market reaction using the MLS for typical residential home loan appraisals using the sales comparison method. If you have not read our articles on Bracketing and Adjustment Guidelines, you may want to take a moment to read them first. Our Real Estate Terminology post also has many relevant terms for agents that want to know more about green homes.
In order to apply an adjustment for an item, appraisers must be able to reliably show a measurable market reaction. Just as you would usually develop a contributory value estimate for a pool by comparing homes with pools and without pools. Determining market reaction to green features is done in the same way.
Searchable "green" fields in the MLS allow users to identify homes with similar green features and use them for market analysis. In my local MLS system for example, there are fields for solar water heaters, and for solar as a general field.
We suggest that you begin looking for market reaction to a green feature by searching the sub market area using the green fields that are available in MLS. Look at each of the comparable sales that have the same green feature and look for patterns showing a value difference from their expected base line value without the feature. This is basic market extraction and is the most common method for developing a value estimate for market reaction to a given feature.
Did the comparable sales with the feature consistently sell for more than comparable homes without the feature? If they did, then you can show a market reaction. If they did not consistently sell at a higher price point, then that feature might not have a significant market reaction. For example I am typically not able to prove a market reaction to solar water heaters in many of the sub markets in my area, however this will vary from location to location and sub market to sub market.
If your search for homes with "solar" MLS field entries yields zero results in the sub market, then you really cannot reliably prove any value associated with that feature from a market extraction analysis through MLS. It is important to note that if the agents are not using green fields on a regular basis, they are limited in their usefulness.
Consider that if the feature is a significant driver in the sub market, then the MLS would include applicable entry fields, agents would be filling in those fields, customers would be searching by those fields, and the data would be there as a result. In the same way that a $100,000 pool could be an over improvement in some markets, a green attribute may have a contributory value that is far less than the cost of the item.
If you ran into a roadblock trying to use the MLS to market extract a value, there are still other options. One example is using discounted cash flow analysis which we will cover in a future post, but for typical homes and appraisals for standard loans, you are going to have a much harder time proving your case to the appraiser without good market data in support.
We hope you found this article to be informative. Our team of LOCAL appraisers throughout Florida are career specialists. Please consider contacting us for your next appraisal need.