Appraisal Bias and Undervaluation?
Those of you who know me, know that I am a very straight shooter. I am often told that I am 'honest to a fault.' If you would please allow me a few minutes of your time, I would like to shed some truth and light on some horrific headlines that have been spread in the media for far too long now; appraisal bias and 'undervaluation.' These malicious lies are becoming more frequent and hurt real people. They destroy credible businesses that took a lifetime to build. They bankrupt hardworking, innocent people by burying them in legal fees. As we all know, there are two sides to every story. Oddly enough, as appraisers, our side of the story is silenced, twisted to cause rage in the media, and grossly misinterpreted. We are guilty until proven innocent. Bankrupted until proven innocent.
Thanks to the media, the current pulse of the nation is that if you are unhappy with your appraised value, it must be bias; attack the appraiser. I'm sure by now everyone has heard the screams and fist-pounding toward all appraisers as being racially biased. We are being attacked as a whole as being horrible people who intentionally 'undervalue' homes based on the ethnicity of the occupant. May I share some secrets with you? I follow these cases when I see them. As of this time, since the beginning of the media chatter, I have not seen one case proven to be bias, yet the headlines taunt everyone into believing we are all bad and all doing this freely. One case was said to have merit, but proven to be negligence/lack of training; not bias. That appraiser was forced to take additional education. However, even in that case, I saw no specific evidence shared to prove how, or where said appraiser was deficient. Not one case has been noted to take both appraisals and properly review them by actual appraisers or parties with appraisal training or experience; if they did, that data was hidden. Not one case shared any knowledge of being handled by parties qualified to properly review and dissect the quality, data, and methodology utilized in the appraisals in question; if they were, this was hidden as well. Not one case presented verifiable facts, proven to be rooted in bias.
Would you risk going to jail over receiving one payment of $350 just to be spiteful to a complete stranger? Would you risk never being able to work again over receiving one payment of $350 to spite a complete stranger? What sane appraiser would risk everything, just to 'come in low' on an appraisal? Any appraiser committing true bias is foolish and deserves whatever they get thrown at them.
Two of the more recent media appraiser-hate blasts are so ignorant it is almost laughable. The parties being attacked for their bad appraised values aren't even appraisers! They are assessors! Assessors are NOT appraisers. An assessed value is not an appraisal. These appraiser-hate-bait articles are complete gibberish. But all it takes to make a guilty party these days is a claim, no matter how fake it is. This is the insanity appraisers are forced to deal with. It is a witch-hunt with appraisers being the scapegoat for any unhappy party.
Ready for some more truth? Does bias exist? Absolutely. It exists in every job, every profession, everywhere. But guess what? In appraising, it is much harder to accomplish bias and more unlikely than in most other fields out there. It would be foolish to say any profession has no bias. I am sure there are a few jackwagon appraisers out there that may be guilty. I just want to clarify that it is not the norm in our field. It is not rampant. As appraisers, we are one of the most, if not THE most heavily regulated and scrutinized professionals in the field of real estate. And we are well known as the only party in a transaction that is unbiased. Unbiased is literally written into our job requirements and every appraisal certification that we sign. Appraisers do not make the market data; we analyze the market data that already exists. Our appraised value comes from this analysis as well as other data and methods that we present in each appraisal.
As many may already know, in real estate, rule one is 'location location location.' It seems pretty clear what that means, but for those still unclear, that basically means the closest proximity/same immediate area/same location/same part of town/same development/same subdivision, etc. Town ABC should be compared to Town ABC, not Town DEF. To illustrate this further, with a broader stroke for illustrative purposes only, if you have a home in Tampa and want to know its value, do you want it compared to a home in Texas? California, perhaps? No? If you want to know the value of your home in Tampa, a similar house on the same block or the same street is likely the best place to start. The best available comparables are what they are; they have no color or ethnicity.
Here is a big key to many of the reactions I've seen by homeowners on the basis of their bias arguments. "There were homes outside our neighborhood that sold for more. The appraiser didn't use them" Though it's not what those parties would want to hear, what happens elsewhere, in other market areas, is not directly relevant to their market. I think it is important to share that if there are similar homes right on their block, or on their street, or close proximity to theirs, that are not a distressed sale.....if an appraiser ignores those key, relevant data points, the appraiser has committed fraud. Yep, the F word. To intentionally overlook the closest, most recent, most similar sales and go outside the market area with the intent to cherry-pick a higher value is FRAUD. This is handled the same in appraisals for everyone, everywhere. Also, on that note, to intentionally go outside the neighborhood to cherry-pick lower-priced sales to hit a lower value is also fraud. To pick a lower-priced, non-competing part of the market, just to come in at a lower opinion of value would not be comparing apples to apples. If that is what happened to a homeowner in question, it is likely to have been bias and there is merit to warrant further discussion and action. In general, an appraiser would not and should not go outside the Subject's market area for comparables unless there are none similar that sold within the prior twelve months, or there is a unique feature to the Subject. When there is a unique factor or feature, such as only one bedroom, an inground pool in an area with few inground pools, a private tennis court, etc, the banks/lenders often require the appraiser to add an additional sale that shows this, even if it is not the best comparable, just to show a sale with that matching feature. It does not necessarily mean the appraiser used that sale to arrive at the opinion of value.
The terms and phrases 'undervaluing' and 'coming in low' are offensive and show a lack of knowledge. Market value is market value. If a home is assumed/guessed to have a higher value by someone untrained in the art and science of valuation, or if the sales price is higher than the appraised value, that means the expectations were wrong; not the appraisal. There are exceptions to everything of course. In all of the cases I have personally done or have been a party to where the home appraised below the contract price, the contract price was listed at or had multiple bids taking it above market value. It happens. Especially during Pandemic markets. The Realtor's job is to best serve their client. The appraiser has a different role; to remain fair and unbiased. These situations are why a certified or licensed appraiser is so important. Can two appraisers arrive at different values? Yes. But if done the exact same day, without any upgrades or changes, they should be in reasonable tolerance of each other in value. In this day and age, post-Covid, we all see and know markets and values can change drastically in a short time. For this reason and many others, appraisals completed a few weeks apart, or even less, could potentially have different appraised values. With the media-boosted bias cases, not enough data was shared to form an educated opinion as to why there was a range between appraised values. I hope someday we are all privy to these appraisals and able to see if what happened was truly bias.
As do all appraisers, we hope getting some information out there can help to put things in a more accurate perspective. I hope this blog helped clarify some of the hot ticket items and demonstrated that the appraiser has nothing to personally gain by intentionally valuing a property lower than market value. We analyze, observe, and report. Unhappy clients are bad for business. No one intentionally wants unhappy clients, but since we must stay unbiased and report what is, it is an unfortunate part of our profession at times. No one wants to be threatened, sued, or belittled, so why would we do it on purpose, with motive? Appraisers remain a very valuable asset to the real estate community and protect you while you are making your largest investment. One bad egg does not spoil the whole dozen. If you need to know, ask an appraiser.