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Modernization means bring in modern methods.

What are they? Why aren’t they here? Is it really that hard?

We have big financial resources. We have motive. We have huge organizations in place.

And we have regulatory clout!

Appraisal is just one type of valuation, done by super-regulated, licensed appraisers. Competing valuation products, like AVMs (Automated Valuation Models), ‘evaluations,’ broker price opinions (BPOs), and a myriad of exempted products — are not appraisals. These are mostly unregulated. But all are valuations. So, what’s the difference?

Let’s look at the similarities and differences.  All valuations comprise four parts:

  1. Identify the problem, the property, accept assumptions
  2. Identify the relevant data: the competitive transactions
  3. Develop estimation with relevant competitive elements
  4. Deliver point-value results, and other potential findings

Real variation between valuation products is only the level of data quality and model appropriateness!

An appraiser judges the scope of work needed, picks four or five ‘best’ comparables, makes adjustments, and sends off a fixed standardized report of recent market price.  Judgment  prevails.

An AVM accepts the property is as declared, assumes standard assumptions, and accepts that yesterday’s price is good. The data selection is a proprietary secret.  The estimators and algorithms are a proprietary secret. The ‘confidence score’ is also a proprietary secret. If the result is bad it refuses to provide any predicted value. (A convenient way to “outperform” appraiser opinions!) AVM algorithms are programmed by programmers.   “One size fits most.”

Other valuation products vary in each of the items 1-4 above. They replicate the above four valuation steps, but with lower requirements of personal competence. They reflect the benefits of no fees, less education requirements, required bi-annual book-purchases, E & O insurance costs, replicated data costs, Realtor® and appraiser professional dues and licensing fees. (Note that these added appraiser costs dramatically and negatively dis-advantages real appraiser product, as it creates an artificial competitive advantage for every other valuation type.)

So, what interferes with “appraisal modernization?”

  • Habit. Lenders, Fannie Mae-Freddie Mac, and other government clients require traditional, judgment-based, standardized appraisal reports.
  • Appraisal standards require traditional, judgment-based valuation product.
  • State licensing boards test for and require recertification in traditional methods
  • Evidence-based, data driven methods require change, contrary to human resistance.
  • Appraiser organizations persist in education in traditional, judgment-based methods.
  • The top government regulators, such as the OCC, focus on bank risk, not appraisal methodology.

The attention-focus on appraisal obscures the larger modernization valuation problem.  1)  Almost all product differentiation in the industry is a conceptual regulatory construct.  2) The needed solution is not a historical point-value – it requires integrated measure of risk.

We have a cultural, macro-systemic problem.  It may not be solvable solely by ‘free-market’ concepts, nor by ‘social engineering.’

The only possible solution requires top-down, carefully crafted regulatory enactments. The solution must also recognize the integration of personal motivation “invisible hand” advantages, in a fair market for valuation services.

The solution must recognize the real tradeoffs of risk, short-term vs. long-term. Valuation must consider forecast factors and trends as well as history of sales prices. Regulation must level the field of business competitiveness. Appraisers currently pay significant fees, dues, taxes and administrative overhead.  Attitudes must change.

The solution must recognize that the valuation process is universal.  The only variable is the level of risk/reliability desired (or acceptable) in each case.

It requires recognition that appraisals substantially reflect any systemic market-behavior bias, they do not create it.  Appraisers measure market bias (racial or otherwise), not create it.  (Recognizing that individual bias may exist.)

Modernized valuation requires change. An upheaval.

Modernized appraisal requires data-driven methods moderated by field-related competence.

Data Science.  The recognition that all solutions are modeled by humans, calculated via computer algorithms, communicated via visual and summary methods.

Valuation needs to be market analysis, not comparing comps. Risk measurement, not history.

Modernization is stymied because our thinking is boxed in by current expectations and peers’ actions.