Is This Discrimination?

As a child, many of my best friends had darker skin than mine. Fortunately, I grew up in a family whose view is that all people are equal, and that differences in race, skin color and background, are what make humans so beautiful. Sadly, there are some that do not share that view.

As a teenager, my friends would describe to me experiences they had in retail stores, in which they were watched uncomfortably closely by store clerks. Perhaps some felt that because of my friend’s skin color, they were more likely to do steal something. Who knows? At first, when my friends would describe their experiences, being a lighter skinned person, it was hard for me to believe. That is, until they pointed it out when I was with them. They were right! While not an everyday occurrence, my friends said that it was a regular occurrence.

Discrimination is a disgusting plague that is driven by ignorance and pride. Sadly, it takes place a lot. This year, we have seen examples of discrimination recorded on video that are shocking. How can people treat each other so terribly? Racism is a diseased way of thinking that hurts good people every day. In my profession, the matter of discrimination has recently come into question. For this reason, I thought that I would write about it. Like my experience as a child taught me, sometimes discrimination can be right in front of us, and we don’t see it unless we are the victim, or it is pointed out to us. There may be some appraisers who suffer from this diseased way of thinking. However, I do believe that most appraisers are not racists, and do not discriminate in their work.

Even so, because the nature of our work is to provide our opinion of the value of a property, and because sometimes our opinions can disappoint some parties involved in real estate transactions, it might be easy to jump to the conclusion that the appraiser has developed their opinion of the market value of a property with racial bias when their opinion of value is lower than the expectation of some. Especially if the home being appraised is in a neighborhood that is underserved.

A REAL-LIFE SITUATION

Let me share a real-world situation with you. In times past, I would not have thought about being accused of discrimination in the following situation. And to be clear, I have not been accused of discrimination in the following situation, nor have I been accused of being so in the past. Nonetheless, because it is on the minds of so many, which is understandable, and something we all need to be sensitive to, I find myself thinking about discrimination when I am appraising homes in neighborhoods that might be considered to be under-served.

I was given an order to appraise a property for a purchase. This was a small ranch property, located in an urban neighborhood. This area has suffered economically for many years, though market conditions are improving. In fact, based upon my research, home prices in this neighborhood were increasing by around 10% annually. By the way, I did apply market adjustments in my report to reflect this.

The property had been purchased for a price in the mid 50’s by an investor, two months prior to my appraisal. This property had no basement, no garage and only two bedrooms. The driveway is an asphalt driveway that is crumbling to such a degree that it was more gravel than asphalt. I was told by the investors, in an email that they sent me, that since they purchased the property two months ago, they updated the kitchen and bathroom, installed new flooring, a new furnace, and a new roof. When the home had sold previously, it was listed in the MLS and was an arms-length sale.

When I made my inspection, I measured the property. The property was smaller than public records reflected. I also analyzed the prior listing of the subject, from when it had sold two months ago. The interior photos clearly show that the kitchen and bathroom had already been updated when they purchased it in the mid-fifties. And, while updated, it looked like the updates were not new. They appear to have been updated several years ago. The investor did some cosmetic work, installed a new exterior door, a new roof, and a new furnace. The driveway was still in poor condition. There was still no garage and the interior offered only two bedrooms. The property was now being sold in the mid-nineties. The MLS reflected it as a pending sale with zero days on the market. So, it does not appear to have been exposed to the market. With a shortage of inventory, it was not hard to imagine why this might be the case. Perhaps the sellers had a pool of buyers looking for homes to buy in this area.

I searched for some comparable sales. While limited, I did find sufficient comparable sales that had sold within the same neighborhood as the subject property, within the past year. In addition to finding some comparable sales, I also noted a very comparable pending sale. This pending sale had no basement, like the property I was appraising. It was superior in terms of having a one car garage and three bedrooms. It was pending at $75,000. After adjustments were made, it adjusted to $67,000, which is around where several other sales had adjusted to. Therefore, my opinion of value was in the mid-sixties, which was far below the contract price. I could not find a single sale that supported an opinion of value anywhere near the purchase price.

WHAT SHOULD AN APPRAISER DO?

Is this a case of discrimination? Was my opinion formed with some neighborhood bias? Not at all! My opinion of value was reflective of what comparable sales were selling for in that neighborhood. My market analysis was reflective of what was taking place in that neighborhood as of the date of the appraisal.

My research and analysis showed that the buyer was about to spend a much higher price than the true market value of this home. If the buyer moves forward with this loan, choosing to ignore my research and analysis, they will likely have wasted tens of thousands of dollars, while the investor who is selling the property pockets a lot of cash for doing relatively minimal work. Now, don’t get me wrong. I work with many investors who find homes that they buy in distress, and then improvement them and resell them for a profit. Whether or not the seller makes a lot of money on the deal is none of my concern. What I am concerned with is whether my opinion of the market value of the property is supportable. Is it worthy of belief?

I always find it suspicious when I catch someone telling me that they performed work on the property I am appraising, only to find out by looking at prior MLS photos, that they really did not. This is one of the reasons why appraisals are so important, even if the information they reflect does not make some in the transaction happy. What if I had been a dishonest appraiser? What if my appraisal report, mysteriously came in at the same price as the contract price?

I would have had to ignore all the relevant market data from the neighborhood, that pointed to a much different value. What if I had used sales down the road in a completely different neighborhood because they were selling for more than homes in the neighborhood of the property I was appraising? Maybe to justify this, I tell myself that I am trying to “help” prices, and by extension people in this neighborhood, by inflating the value of my opinion of value to make this sale go through. That in turn, will turn this sale into a “comparable” sale that other appraisers may use in future appraisals? That would begin to artificially inflate values in this neighborhood. Would this really help the buyer and the real estate market in this area? Let’s walk through it, because this has happened before.

LET’S NOT LET HISTORY REPEAT ITSELF

What if the sale went through because I stretched the value to match the purchase price? The buyer would immediately be upside down on their mortgage. Of course, they wouldn’t know it for a while. At first, everyone would be happy. I would have collected my appraisal fee, the new homeowners would have moved into their home and the bank would have closed on the loan, making money in the process. Everyone is happy, happy, happy! That is, until something happens.

What if, down the road, the market makes a turn and prices began to depreciate? Or what if something happens and the owner now needs to sell their home, but cannot because they owe more than it’s really worth? In this scenario, this seemingly once happy situation becomes a nightmare where the home is foreclosed upon, and the owner loses their home. That’s bad for the borrower, and bad for the neighborhood. All because the appraiser mysteriously came in at the purchase price in their opinion of value, even though it was not supportable.

I saw this exact same scenario play out in the years leading up to 2008. In fact, some of my slowest years were the years just up to 2008 because I could not compete with some appraisers who would hit any purchase price, no matter what the data pointed to.

Appraisers who provide appraisals that hit the purchase price, when there is no solid market support for doing so, appear to be the heroes to the buyer and seller. They appear to be the ones who really know their stuff. Conversely, those whose opinions of value are below a contract price because the market really does not support the price, are the ones that are despised and looked at by some in the transaction as the appraiser who didn’t know what they were doing.

That is, until the facts come out. During a careful review of the appraisal report, some appraisers originally viewed as heroes, ended up being frauds who really didn’t know what they were doing after all. Those types of fraudulent appraisals contributed to the decimation of the some of the very neighborhoods in which appraisers may now be accused of showing bias in today.

The good news is that many of those dishonest appraisers are gone, thanks to changes made to our profession. But now, some are accused of being biased for doing what they are supposed to do. Namely, to accurately reflect what is going on in the neighborhood where the home being appraised is located. So, what may look like discrimination, might really be appraisers just being honest. Granted, there may be some discrimination taking place by some appraisers. If that is the case, it would be relatively easy to prove. Just look at the data from the neighborhood. The data speaks the truth.

In the situation that I described earlier, what was really taking place is what I would call predatory selling. We’ve all heard of predatory lending. What is predatory selling? In my view, it is selling a home based upon a false pretense. For instance, saying that they updated the kitchen and bathroom, when in reality they did not. Or sellers who try to use sales of homes that are superior to theirs, to try and support a higher sales price, when in reality, those sales are not comparable. Banks hire appraisers to protect them from this kind of thing. To their credit, the bank for which I completed the appraisal, appreciated my report and never questioned it. That’s because the market data clearly did not support the purchase price, and I demonstrated that in my report.

CONSISTENCY AND THE TRUTH

There are two things that will protect both the appraiser, and the public, from appraisal discrimination. First, as appraisers, we must consistently appraise properties the same way, no matter what neighborhood we are appraising in. Secondly, we must always report the truth. The data doesn’t lie. When we analyze the market, we reflect the truth. When we use data, we use it from the neighborhood where the property we are appraising is located. Consistency and the truth are what protect both the appraiser and the public. If an appraiser is consistent and truthful, one thing is for sure. In every neighborhood, there will be times when our opinion’s of value are higher than some expect, and times when they are lower that some hope for. That is the very nature of appraising.

Appraisers analyze neighborhood data, not neighborhood color.

I think we all need to be humble enough to admit that discrimination may be taking place right in front of us, and yet we may not realize it. And, clearly, discrimination is what led to the inequality that exists today. So, we all need to be sensitive about this. On the other hand, we must be honest enough to admit that not all things that feel like discrimination, really are.

I do believe that one day, discrimination it will be gone. But for how, we all must be careful that we don’t catch this plague in our thinking and work. At the same time, appraisers should not be judged as being biased simply because our opinions of value do not meet the expectations of some.

If an appraiser’s opinion of value is less than what is expected, and if there is support for a higher opinion of value, than, please give the appraiser the data that supports this! We want to get it right!

We develop our opinions on facts, not feelings. We do not drive markets with artificially inflated opinions of value. The appraiser’s work is not to change markets, it is to reflect them. Appraisers are not in the business of telling people what they want to hear. We are in the business of telling our clients what they need to hear. Namely, the truth! Doing otherwise would be, well, biased!