Process: Current appraisal practices are controlled by the quirks of each ‘valuation’ industry: appraisal by obsolete assumptions of data difficulty, AVM ‘automated’ models by industrial secrecy, and other non-appraiser products which are under-regulated or over-regulated — depending on original intent.
In order to fully consider the place of appraisal—we have to look at the entire spread of valuation services. Appraisals done “by appraisers” comprise only a small part of the valuations in the market. Other valuations include AVMs (Automated Valuation Models), bank ‘evaluations’ and other opinions provided by unlicensed individuals. We consider alternatives only relative to their impact on our initial question: “is appraisal obsolete”?
We also note that there are really only three types of user needs: collateral assurance, investment potential, and fairness. Each really only cares about uncertainty. Collateral lenders are most concerned by downside risk. Investors are most concerned by upside potential. Equity enforcers are most concerned by the sureness of a fair result.
Traditional appraisal as taught and as enforced focuses on the experience and good judgment of the appraiser. This is epitomized in the process of data selection. The appraiser picks a handful of ‘comps’ from what is available and “necessary” for believability. These are used to illustrate the market, and ‘support’ the appraiser’s opinion. “Adjustments” to the illustrative comps are also based on the appraiser’s experience. Subjective methods (such as ‘pairing’) are applied to the limited data analyzed.
Personal, professional opinion provides a point value. The accepted process is subjective from its start – in the data selection. And this ‘judgment selection’ – is vulnerable to three kinds of bias: 1) personal intentional, 2) personal non-intentional, and 3) analytic. In turn, analytic bias can come from both personal bias in model selection or from lack of competence in factual, objective data selection. In any case, the result is not really what is needed in the world.
You can’t get objective results from subjective data.
Traditional judgment-based appraisal provides a subjective point value opinion. And what users want is help in probability estimation, to solve a probabilistic decision:
- Lenders want to know risk. Risk of loss, or risk of losing a deal.
- Investors want to know reliability of current value, and potential gain.
- Tax assessors and the legal system wants decision fairness and reliability. Probability
Reliability is the obverse of risk.
A point-value opinion provides no analytic measure of reliability nor risk. Worse yet, it provides no real possibility of measuring the sureness of the result. And It is an opinion.
What the market needs and wants is a measure of risk and reliability. What is given is a double prevent:
- There is no real attempt to reflect reliability level.
- The point-value analysis provides no real possibility of reliability measure.
- The combination of subjectivity and no measure of probability distribution is terminal.
In coming Analogue Blog issues, we will consider the sources of friction ensuring appraisal obsolescence: standards, education, client expectation, and regulation. We will also consider the effects on the three societal impacts: consumers, taxpayers, and social justice.
December 8, 2021 @ 7:43 am
The market for the Subject property is supposed to be presented in its entirety and analyzed as a whole so as to provide a proper context in which the Subject’s potential market value can be determined. The appraiser is supposed to be aware and knowledgeable of the macro trends that are affecting the market in the general vicinity as well as the micro trends that are present in the Subject’s particular market. Also, awareness of the economic trends that influence buyer’s effective demand is also required of the appraiser and should be addressed in the report. The market activity during the preceding twelve months for the Subject’s neighborhood and vicinity should be presented as part of the report (Excel Spreadsheet) so as to provide the proper context for the micro analysis of the sales of the properties that are the most similar to the Subject that would result in an Estimate of the Subject’s potential market value and probable selling price.
The above is the duty of a professional and required of those who are members of RICS in compliance with the International Valuation Standards as found in the RICS Red Book.
Sadly, property appraisal has been converted into an industry in which professionalism is no longer respected but only the lowest bid so as to assure the “cost-effectiveness” of the mortgage process. Nine years was required by the Uniform Appraisal Data Set to render the individual appraiser obsolete and unnecessary (9/2010 – 9/2019) so now the unpleasant consequences of preferring machines above competent and professional humans are making themselves known. Valuation should never have been an opinion, as opinions are subjective and qualitative in nature and scope. Valuation should have been an Estimate as numerical values and objective quantities are being addressed and analyzed. We are now thirty years on from FIRREA, I wonder if we have finally learned our lesson.
December 8, 2021 @ 7:55 am
This is absolutely spot on. Academic writers in the appraisal space have been arguing for expressing value in probabilistic terms for decades . . one of the first to succinctly do so was Richard Ratcliff back in the 1960’s. Even if appraisers don’t deal with risk and market uncertainty in quantitative terms, doing so qualitatively would still be a great improvement over what we have now – this is the value, but here is the upside/downside risk. Examining societal issues is also a great idea. I’m quite interested to see where this new series in the Analogue Blog leads.
December 8, 2021 @ 12:46 pm
FROM THE EARLIER VERSION OF THIS POST: The question should be, are appraisers perceived to be obsolete? Fanniie and Freddie think so. First, remove the appraiser from the home because the appraisers inspection is not worthwhile. Reduce the appraisers role to an office job. Do not let the appraiser go to the neighborhoods because the expertise gained there is insignificant. Do not drive by the comps because that is insignificant. Let the real estate agents or the Groundworks employees do the inspection for $18 – $25(actual fees per Groundworks and agents) because they do a fine job. The appraiser will run off-the-shelf statistical software or self developed spreadsheet programs to help determine values. A couple of years later Fannie and Freddie will announce that the appraisers values are inferior because the programs they use and their interpretation of the data is inferior. The GSE’s will explain that their own software is far superior as are their analysts. So, as of 1-1-2026 appraisers are no longer needed.