Disclaimer: I know this is a very controversial subject. And the last place to wrestle with complex controversial things is online. Nevertheless, I wanted to share my thoughts about this subject with you, in hopes that you’ll read it honestly. Even if in the end you disagree, I hope you’ll read with an open mind and come away with an understanding of another point of view. Thanks!
Let’s be honest, if you’re an appraiser, the recent and increasingly frequent stories of minority homeowners receiving discriminatory appraisals has you rattled. If you are a user of appraisal services, you’re probably shocked, indifferent, or not surprised at all. I believe the public perception of racial bias in appraisal practice stems from a lack of knowledge of how the appraisal process actually works. The charge of racial bias is a serious offense. And it particularly strikes at the heart of appraisers whose primary task is to be an unbiased third party in real estate transactions. So how did we get here? And is the appraisal industry plagued with racist (intentionally or unintentionally) appraisers robbing minority home owners of their equity?
A Highly Educated Profession
I’m willing to wager that very few users of appraisal services could actually explain how an appraiser comes up with an opinion of value. In fact I’ve encountered a number of people who think appraisers come up with a value off the top of their heads minutes after observing a property. Many have never heard of the principle of substitution, USPAP (Uniform Standards of Professional Appraisal Practice), the three approaches to value, or any of the regulatory guidelines that dictate how appraisals are developed and reported. This is, of course, not the fault of the appraisal user. Appraisal practice is too shrouded in mystery and unfortunately this deficiency lies at the feet of the appraisal industry. In order to gain and maintain public trust, the public needs some basic knowledge of the workings behind the curtain.
Many people don’t know that to become an appraiser requires A LOT of work. When I began the journey, the requirements to become a certified residential appraiser included: a bachelor’s degree (I majored in political science/pre-law), 200 hours of additional appraisal education, 2,000 hours of supervised training under a certified appraiser who has been certified for at least 3 years (to be completed in no less than a year) and finally a 4 hour proctored appraisal examination. It took me about 19 months to complete all the requirements, which was pretty typical (according to other appraisers I talked to, 18-24 months was pretty standard). The only reason I was able to do it in 19 months was because in the middle of acquiring my experience hours, the number of training hours was changed from 2,000 to 1,500 for certified appraisers. I had completed about 1600 when the rule was changed in 2019. So becoming a certified residential appraiser was about equivalent to having a post graduate degree with 5-6 years of schooling and training required. And I had already obtained a post graduate degree (an MA in political science) so it was a total of nearly 8 years of schooling and training for me.
Let’s look at other requirements of real estate professionals.
Real Estate Attorney: I think the only professional that has certified appraisers beat is a real estate attorney, as a JD typically requires 3 years of post graduate (about 7 years total) schooling and then sitting for the bar exam.
Real Estate Agent: 90 hours of pre-licensing education plus 6 hours of introduction to contract writing. Pass a proctored school examination at an ADRE approved real estate school, then pass a state exam (approximately 3 hours). On average it take about 1-3 months to get your real estate license (but this depends on your particular pace).
Home Inspector: 84 hours of classroom training. Pass the National Home Inspector Examination (about 4 hours). And complete 30 in-training home inspections
Mortgage Loan Originator License: 20 hours of NMLS approved pre-licensure education courses which must inclue 4 hours of Arizona Law. Pass the National and Arizona State components of the SAFE Test (approximately 3 hours).
All of these professionals require some sort of background check, fingerprint clearance, etc. The point I’m trying to illustrate here is that appraisers are highly educated, highly trained professionals within the real estate industry. Outside of being a real estate attorney, the certified appraiser requires more education and more training than other real estate professionals for their initial licensure*. So now let’s look at what appraisers actually do and how we come up with an opinion of value.
What Do Appraiser’s Actually Do?
The bulk of residential appraisers value homes for lender clients. But, about half of mortgage transactions happen without an appraisal (49% as of February 2021), because many transactions happen with appraisal waivers where the risk is low. So, appraisers only account for about half of the market share for lender transactions. Many appraisers never do lender work at all. Instead, they appraise property for private parties such as for estate or tax purposes. Most people (i.e. homeowners) only see part of the data collection portion of the appraisal process. That is when an appraiser comes to your house, measures it, walks around and takes notes about the condition and type of materials used in your home, takes photos, and then leaves. Depending on the size of your home, you may only see the appraiser for 20 minutes. But, this is only the beginning of the appraisal process.
Appraisers are charged with solving a problem. The problem (typically) is trying to figure out the market value of a particular piece of real estate. The first step is figuring out what it’s going to take to solve this problem (i.e. what sources you’ll need to refer to, what data you’ll need to analyze, etc.). The next, and arguably the most important, step is data gathering. Analyzing data is a tricky thing. It requires a high level of attention to detail and the wisdom and knowledge to discern what is and isn’t reliable data. As it is said, “garbage in…garbage out”. Now, in graduate school, I was trained to look at data. I know how to work with data to isolate certain variables to determine correlative impacts on another variable. (yay for transferable skills!) So, I know that if you don’t have accurate data, and if you’re not looking at the right variables, you will NOT have accurate results.
Unfortunately, there are many foibles along the way that can impact the reliability of data. Maybe the appraiser encounters a home where they can’t physically see the walls because it’s covered with the homeowner’s personal property or landscaping. Maybe the agent listed a home as a condominium when it was really a townhome resulting in missing a relevant sale. Maybe there are discrepancies about the zoning of a home from multiple reliable sources. Maybe the appraiser read the measuring tape upside down and wrote 52 feet instead of 25 feet (guilty). The list goes on. Appraisers are human and humans make mistakes. While unintentional, they can impact the final value if they are not caught and remedied. This is why many appraisers have their own in-house reviewers to catch inconsistencies or errors. Many lender clients also use Appraisal Management Companies (AMC’s) with their own staff of reviewers and appraisers to review reports. There are also lender underwriters who review the reports after the staff appraisers and reviewers have gone over it. Then there are third party participants (agents or borrowers) who may receive a copy of an appraisal report. Then there is the possibility of a report being randomly selected by Fannie Mae or FHA for review. The point here being, there are a lot of “eyes” on an appraiser’s report. So, the potential for catching and correcting errors is pretty high.
But once data about a home has been gathered and information verified (to the best of the appraiser’s ability). Appraisers start to analyze the data. We ask questions like: how much are people paying per square foot in this area? How much value does a bathroom contribute? Does converting a garage into an additional bedroom really add to the value of the home? Has the market increased in the last year? We are taught that the best way to answer those questions is to look at data, both large and small. We look at broad data like the average days on market for all single-family homes in a particular area, the median sale price for all homes, etc. We also look at data that is not quantifiable by talking with other professionals in the real estate industry which helps us to get a better sense of a neighborhood or market, or what a “typical buyer” in that market is looking for. And then there is small data: a subset of that broader data, usually what we call “comps” or similar, recent sales in that home’s market area (i.e., two-story, single-family homes with a pool, or one-bedroom townhomes in age restricted communities). So, let’s stop right here.
The Push Back
This is where appraisers, I think, get the most push back. In fact, this very process of selecting comparables, I’ll argue, is the crux of understanding the disagreements of appraisers and appraisal users. Nearly all of the reconsideration of value requests I’ve received rested on calling into question the sales I used in my report. Not my condition rating. Not the square footage I measured. In a nutshell, the charge is “My house was undervalued because you used poor sales that do not reflect my home’s true value!” In fact these authors (here and here) claim, the very nature of the sales comparison approach (selecting recent similar homes that sold in a particular neighborhood) is itself fundamentally racist, and that racial bias (conscious or unconscious) when using this approach is the fatal flaw in the analysis and reporting of market value for people of color. This is what has led to the persistent under-valuing of homes in areas where people of color live. The fact that most appraisers are older, white men, probably doesn’t help the optics for negating this argument either (just saying).
Getting Rid Of The Appraiser and The Appraisal Process?
One of the solutions offered to reducing appraisers’ racial bias appears to be AUTOMATE EVERYTHING: the data gathering, the comp search, even the definition of the neighborhood or market area in which the house is located. So now we’re talking algorithms; algorithms that can select the best sales, apply the most precise adjustments and accurately define the appropriate location, all without the yoke of racial prejudice. If you see a problem here, you’re not alone. If not, let me flush this out for you.
Algorithms don’t create themselves. Like any human-made thing, the hand of the human is inherently embedded. In creating an algorithm, the human sets the parameters of what is and isn’t relevant. So how does the human decide what is relevant? And what kind of humans are involved in creating these parameters? People in the tech industry: data analysts, software engineers, etc. And just what are the demographics of this high-tech industry you ask? (I’ll let you look here for some insight).
So, is it possible for a predominantly white and male tech sector (with its own racial history) to create racially neutral algorithms to predict fair and accurate home values of people of color, but not a predominantly white and male appraisal sector? What data would be used? Would the designers of the algorithms draw from data gathering systems and companies like UAD or CoreLogic? Isn’t this the same data gathered by appraisers? What variables would be considered and how would it be different from the variables typically selected by appraisers?
Algorithms tend to rely on publicly available information, so what if you recently installed a pool and this amenity wasn’t reflected in public records? (I’ve seen this happen before). How would it know the impact of a home next door whose topography is different allowing for amazing views of the city? How would it know the impact of the smell of excessive animal urine in a home? I have found that many valuation algorithms do not take into account local market factors. They apply broad variables that are not always appropriate for a particular market and aren’t very good with keeping up to date with new data.
Finally, how would an algorithm define a neighborhood or market area? I mean, I grew up in South Los Angeles (formerly known as South Central). I’m sure houses exist with similar physical characteristics as my family’s home (similar design, age, condition, updates, etc.) that are in Santa Monica or Beverly Hills. Should the algorithm include those sales in the valuation of my family’s home in South L.A.? If so, what happens to the price of homes in South L.A.? Could other blue collar and working-class folks like my family afford the homes in my neighborhood any longer? Where does that lead?
Racism IS Real
Look, I am NOT saying that racism hasn’t shaped the real estate industry as well as the boundaries of our neighborhoods. In fact, I believe the EXACT OPPOSITE. From realtors steering people of color away from white neighborhoods even though they could afford to live there, to racial covenants barring homeowners from selling to people of color, to red-lining and zoning practices by governments to keep lower income people out of certain neighborhoods, to discriminatory lending practices where people of color are charged higher interest rates on their loans even with the same or similar credit as a white borrower, and yes, even a racist manual from 1936 that instructed appraisers to value homes based upon its racial composition. A lot of racist policies were enacted in the interest of keeping racially homogeneous neighborhoods intact. And the impact of these policies is still felt today.
At the same time, I also know that the first rule of real estate is: Location, Location, Location. And therein lies the tension which I’ll illustrate with an example:
Everyone knows that the buyer who is looking for a house to purchase in South L.A., is not the same buyer who is looking to purchase a house is Beverly Hills. YES there is a racial element to that, cultivated by centuries of oppressive policies. But I don’t believe today’s appraiser is contributing to that inequality. I’d argue, today’s appraiser is reflecting that inequality. No matter how hard I wish, I cannot make the data say that homes in South Central are worth the same as homes in Beverly Hills. Not because the people of South L.A. don’t deserve higher values, or because the houses are inferior in some way, but because that is the pattern driven by YOU the purchasers of these commodities. YOU (consumers) are willing to pay more to live in Beverly Hills, and my appraisal report is going to reflect that. If it didn’t, and I used sales from Beverly Hills to appraise my family’s home in South Central, how credible would that be to you? What use is a multi-million dollar home in South Central to a buyer looking to buy in an area that is still (relatively) affordable?
What an appraisal report will not do (or should not do) is tell you why the value difference exists in these two neighborhoods (i.e., the racial, political, and economic underpinnings that have shaped these neighborhoods). The appraiser is just stating the reality of the market. Beverly Hills homes sell for more than South Central homes, even if homes in both places were identical.
And this is where, I think, the interpretation of the data differs. Aggregate data showing lower values in areas where people of color live and higher values in white neighborhoods controlling for house quality, condition, etc., tend to be interpreted as a racist appraisal industry hell bent on keeping wealth out of the hands of minorities. Instead, I’d argue aggregate data showing these differences has more to do with consumer preferences (and biases) and that the appraisal industry is simply confirming the facts of those preferences in the market. No ethical appraiser completing appraisals for lenders has any incentive to be intentionally, negatively biased in their reporting. If anything, the constant pressure on appraiser independence is to appraise homes for more than their worth, or at least at the contract price, because the appraised value directly effects whether a loan goes through, impacting the loan officers’, brokers’ and agents’ slice of the pie. The appraiser on the other hand has a standard fee based on the complexity and time it will take to complete their assignment.
Racism if anything is not just about prejudice and power, it’s also about money. For an individual appraiser to intentionally undervalue a house, regardless of the protected class with which the homeowner identifies, for a standard fee not contingent on the price of the property, does not make rational sense to me. Now, someone who is a foaming-at-the-mouth racist or an insert-whatever-class-here-phobe, probably wouldn’t care and therefore isn’t rational. But for most appraisers, we know what happens when a value is contested by a reviewer, a staff appraiser, an underwriter, an agent or borrower, etc. We know the painstaking hours we put into combing over every sale they’ve suggested, analyzing and explaining why the sale is or is not relevant. Oh and by the way, appraisers don’t get paid any more for the extra time to do this.
I’ll say one thing about unconscious bias. Namely, We ALL have unconscious bias. But if my unconscious biases lead me to choose the worse sales and ignore all indicators of value for a home, than I’m making a conscious decision to be unethical AND incompetent. But it does not follow that unconscious or implicit biases always leads to direct or explicit discrimination. Because if it did, every single industry, institution, and person would be guilty of discrimination all of the time.
Hopefully you have seriously considered my alternate reasons for why we see and continue to see differences in home values for black and brown neighborhoods compared with white neighborhoods and that the function of the appraiser is to report what is happening in the market not to drive what is happening in the market.
Conclusion
Listen, the sales comparison approach isn’t perfect. None of the approaches are. Even the cost approach, which was another suggestion to curb racial appraisal bias, will require the development of an estimate of land value. And seriously, if you tell me that land in Santa Monica next to the beach is worth the same as land in South L.A. next to an interstate, I don’t think there’s any hope in reasoning with you. You know those values are going to be vastly different, and my appraisal is going to reflect that difference. Again, not because I despise the folks who live in South L.A. next to the interstate, but because of the past and recent history of YOUR purchasing habits. YOU, the buyers (yes even the progressive, color-conscious folks), have told ME, the appraiser, that YOU are willing to pay more to live close to the beach and less if you had to live next to an interstate. (I’d also suggest you look up the concept of “NIMBY-ism” which is tangential, but related to this point).
Let’s close with this: the goal of an appraisal isn’t the production of a perfect report with the absolute true value of your home. And, I’m sorry, but it also isn’t intended to right the wrongs of racist policies that shaped our segregated neighborhoods. If you ask me for a fair market value of your home, I’m going to give you the most probable price your home should fetch given a certain set of parameters (see definition of market value here). My opinion of value is not the exact amount your home is worth. A buyer of your home could pay more or less than my opinion of value because some buyers see some features as being worth more to them than others, despite the data. Appraisers are analyzing and reporting what the market is doing, not shaping how the market is constructed. And it’s hard for me to see how that is inherently racist, but it is easy to see how that reflection of the market projects back the centuries of racist policies that shaped where we live. The appraisal industry has room for improvement for sure. Inconsistencies abound in appraisal practice that could be solved by uniform standards for data collection and analysis. But a poor appraisal doesn’t necessarily mean a racist appraiser. It could mean a geographically incompetent appraiser who doesn’t understand the local nuances of certain markets and neighborhoods.
Advice For Homeowners
If you suspect you’ve been subjected to a poor appraisal I’d advise that you first, check for any factual inaccuracies. Are all the bathrooms and bedrooms accounted for? Does the square footage seem correct to you? Are major amenities referenced such as a pool, garage, or guest house? Then look at the comparables the appraiser selected. Are they similar in size? Do the adjustments seem reasonable? Are they close to your house? Finally READ THE APPRAISER’S ADDENDUM. For most appraisers this is where they explain why they did what they did. Here they will explain why they used certain comparables and not others and why and how the features and amenities of the comparables were adjusted. Afterwards, if you can find better, more recent sales that are closer to you, more similar in size to you, etc., then by all means, call your loan officer and tell them you’d like to submit a reconsideration of value request.
I’ll leave you with this; contrary to popular belief, appraisers relish the opportunity to talk with you about what they do and what they look for when appraising your home. So, ask them when they are in your home. I promise, we are NOT out to get you, or kill your deal, or make your life miserable. Frankly we just don’t have that much skin in the game to invest that kind of vitriol. We’re just trying to do our job honestly and ethically, using the best data we have with the tools we have, to provide a professional opinion about your home’s value.
*Recently, the requirements to become a certified appraiser was lowered in order to encourage more people to join the profession. The experience hours were reduced from 2,000 to 1,500, and the bachelor’s degree requirement could be waived with other alternative options (such as being a licensed appraiser for 5 years or having an associates degree in a real estate adjacent study like economics or business). The licensed appraiser has fewer education requirements. Nevertheless most certified appraisers appraising today have at least a bachelor’s degree.