An Appraiser's View

It's been documented that a business that puts forth an opinion on a political hot topic is committing suicide. I believe that CAN be the case, but I also believe being silent on an important issue that is within your area of expertise can also be detrimental to that business. For me, racial bias in appraising falls in the latter category. So lets dive in. 
First of all, let me be transparent. I have not yet taken the course on racial bias that I will need to take before I can renew my license. I am purposely venturing an opinion prior to taking the course, because I am curious if my opinion and approach will differ once I have the required education? I am open minded but as of now cannot see how it could change. Here's why. 
Appraised values have been required by federal law to be unbiased since 1983.  Additionally appraisers are required to use the most relevant comparable sales or they are also in violation of both appraiser bylaws and federal law. The State of California also has laws against appraiser bias. Yes, I realize that just because there is a law doesn't mean everyone abides by it and that bias doesn't exist. It just means that a biased appraiser would need to be diligent in preparing a biased appraisal that would not raise red flags so as not to get caught. I'm sure bias happens, but not in my reports. I always report my opinion of MARKET VALUE which ensures I do not have bias or prejudice. What do I mean by "Market Value" and how does that keep me from being biased? 
Market value, as defined for federally related transactions, is what a TYPICAL buyer would pay for a home. The determination of a typical buyer includes location, size of home, size of site, age and condition of home, quality of home, etc.. Market value does not include a neighborhoods make up of race, religion, sexual orientation, etc. . Think "If I found a house I wanted to buy, who else would be looking to buy that home?" Those are the typical buyers for that house. Using comparable sales from outside the defined "typical buyer" market throws up a red flag that the appraisal needs to be reviewed which cause the appraiser more work. I think it's important to also understand what exactly is a comparable sales. 
A comparable sale is just what it sounds like. It is a sale of a home that you and other typical buyers would considered similar to the home you are wanting to refinance or buy. It is rarely an exact match, but should be similar in some of the following. Location (think things like School district, near freeway, rural area, etc), living area, bedroom count, bath count, stories, amenities, and site size. ie; If you are buying a 2500 square foot, 5 bedroom, 3 bath home, would you pay the same price as you would for a 1500 square foot 3 bedroom 2 bath home on a similar sized lot in the same neighborhood? Of course not. Similarly, you probably would not pay the same price for a home that is located in an neighborhood that has industrial and commercial uses as you would for one that is in a quieter neighborhood. Basically, comparable sales are sales that have the features most similar to the the home you are wanting to buy or refinance. A neighborhoods racial or religious profile should have no influence on which comparable sales an appraiser uses. In fact, I believe it has no place in any industry.  
I am not racist or prejudice. I have seen it and it's both disgusting and confusing. I like talking to people, especially those who have culture. How can someone judge a person without getting to know them? Do they not realize what they are missing out on? I have been invited to many family Bbq's of people I have just met and the celebration itself is the only reason I remember what race or religion they were. 
Anyway, I digress from the point of the post. (Climbs down off soap box) The point is, I understand racial bias exists in appraising, it just doesn't exist in mine. 
 
Have a great day everyone, talk to people you don't know, and enjoy life! 

  

Ok, now that I have your attention, no, the market is not declining in most areas, but I guarantee you it will. When? Well, if I knew the answer to that I would be sipping a beverage on the beach of a tropical island instead of trying to help people prepare for the coming market decline. That said, when asked, my magic 8 ball responds with "Without a Doubt" and "You may rely on it" instead of the  "Cannot predict now" it was coming up with just a few months ago. Given the accuracy of the 8 ball I myself have decided to prepare for the decline. I recommend you do the same. 
But how do I "prepare" for a market decline? I recommend three things. #1 Refinance out of a variable rate 1st mortgage. #2. If you have a HELOC balance either pay it off or refinance it into your 1st *Note* If when refinanced you will not be able to afford payment do not refinance. and #3. If you are considering investing in distressed sales by tapping into your home equity, increase the value of your home so you can get the lowest rate possible on monies borrowed. 
Which brings us to the meat and potatoes. How do you increase the value of your home in a declining market when with a few exceptions, remodeling currently  increases home value by only 70%-85% of the cost? Yes, I have seen all the tv shows and even know a few contractors who specialize in flipping properties. They have a spreadsheet that shows what they paid, what their costs were, and how much they sold it for, usually showing a 15-20% flip profit. But they are leaving out two important parts of the formula, their own labor costs and the time factor of an increasing market. (The home would have increased in value during the time they were remodeling whether they remodeled or not). Plus, if they are acting as the real estate agent they leave their 3-6% sales commission out as well! When these are added profit usually drops down below 10%. Which means the exception is, if your home is in need of repairs and/or significant updating, taking care of your home maintenance, finishing those projects, and updating your home can increase the value by as much as 10% in a declining market!  
My magic 8 ball says the market decline is coming "Without a doubt" so my advice is don't wait. Prepare your home today. 

Did you know? In mortgage lending you are never the appraiser's client? That doesn't mean that you are not someone's client. You are the client of your lender/loan officer, the lender/loan officer is the client of a 3rd party, and the 3rd party is the appraisers client. Confused? Wait until I get into intended users! Maybe I'll save that for another day.... 

My point is, even though you are not our client, you are the client of a client, and without you we would not have the income from appraising your house, nor the pleasure of meeting you. So even though you are not OUR client, we want you to know we will treat you and your property as if you were our client, to the extent the law allows, and that we appreciate you . ??

Fannie Mae recently announced they are testing a change in the appraisal process which would involve having appraisers rely on a 3rd party data collector for the data elements they normally collect when they inspect a property. 
One can surmise the idea for this came about through a meeting between Fannie Mae and the CEO of a certain large property acquisition company who pioneered a similar idea during the last market downturn. The meeting happened at the suggestion of President Trump who is a huge proponent of technology and innovation. One can also then surmise that this is not the only change that is planned. When you consider that Blackstone used automated valuation models coupled with their property inspection data to make decisions on how much to pay for a foreclosed property, the intellectual partnership would surely be planning a similar move in the future. The only question that remains is will it actually work? 
I could bore you with the reasons it would work in tract homes that have typical updating, no deferred maintenance, no view, and typical locations, but would be marginally to highly inaccurate in all other instances, but instead let me state simply that data collected by 3rd parties that have zero liability is unreliable. Real Estate agents will stretch photo's to make a room look bigger, exaggerate views, quality, and condition just so they can get a buyer to look at a house. 3rd party photographers are more likely to get more work if the pictures they take make a house look better than what it is. And 3rd party data collectors are likely to miss many critical value details as they rush through a property because they have no liability for the missed item and they have 10 more inspections booked that day (using Blackstone's data collection model a 3rd party inspector will make $25-$35 per inspection, you do the math on how long they can spend on a property and still earn a living).  Based on this, in my opinion, the answer to whether this will work or not is "Not a chance." But that won't stop them from implementing it. 
Big Data is here. How it is used will not only determine the fate of the appraisal, real estate, and loan industries, it will determine the size of the next bubble, and the people affected by the fall when it bursts.