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Overcoming Appraisal Bias

There are two systemic problems with home appraisals that may never be fully solved –the fact that every home is unique and that they’re subject to human bias. Appraisals establish the value of a given home, making them extremely important to lenders, tax authorities, the housing industry, the economy, builders, buyers, and sellers.

Every home occupies a location that can’t be duplicated anywhere else. The condition of each home goes a long way toward making it more or less valuable than its identical or near-identical neighbor. Because homes are not commodities like gold or silver, valuations are somewhat subjective.

Appraisals are integral to home equity and wealth-building, giving advantages to some and disadvantages to others. Housingwire.com explains that appraisals are part science, driven by hard data and analytics, and art, derived from the expertise of the appraiser. A recently sold home will be taxed based on its most recent selling price, but a home that hasn’t been sold in many years will have a lower tax basis, so even hard data can be misleading. The art, of course, depends on the integrity of the appraiser.

Despite licensing and extensive training, appraisers have been known to contribute to low valuations in majority black and ethnic areas for decades. Real estate professionals routinely advise home sellers to remove personal photos and memorabilia from the home that may influence or distract homebuyers, but those items can also influence appraisers, whether consciously or unconsciously.

One reason prejudice could be perpetuated is that the appraisal industry requires appraiser candidates to undergo apprenticeships that are notoriously hard to get. The result is that valuations are in the hands of a few professionals. According to AppraisalInstitute.org, as of the start of 2019, there were just over 78,000 active licensed appraisers, and they have been decreasing at an average of 2.6% annually for five years. Just over 40% of appraisers are residential specialists. Forty-nine percent are between the ages of 51 and 65, says Kapre.com. In a survey, 77% of appraisers said they have no apprentice trainee and have no intentions of mentoring one.

Many lenders use automated valuation models to save time and money more so than to limit bias, but that doesn’t solve the problem because the data the software relies upon comes from previously recorded historical numbers. Because of the shortage of appraisers, much of the historical data used by

appraisers from the multiple listing services are frequently gathered by - themselves.

New innovations in analytics could make a difference, notes Housingwire. Data augmentation could include other variables besides the concept of neighborhood. Algorithms could search for patterns of bias and focus on more relevant data. Artificial intelligence can assess a home visually, like a human appraiser but with absolute objectivity.

There are ways to fight appraisal bias. Check the comparables used in the appraisal for relevance and that they’re not too far out of the area. Draw the appraiser’s attention to improvements made in the home. Ask for a second opinion and make sure the appraiser has geographical knowledge of the area, as well as knowledge of nearby comparable homes that have recently sold or are on the market.