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In May, REALTOR® Magazine published an article by the authors addressing steps the industry is taking to investigate claims of bias in the appraisal process and to address the causes. The topic made national headlines in December when the Federal Housing Finance Agency released a report saying it had found examples of valuation bias in an examination of millions of appraisal reports. The Biden administration is soon expected to release a report of its interagency task force on property appraisal and valuation equity. Meanwhile, the industry’s efforts to root out bias continue; in this follow-up to their May article, Gregoire and Molitor-Gennrich look at how the use of common marketing terms and vague phrases can lead to bias claims.
Searching for a home in northwest St. Petersburg, Fla., produces listings with neighborhoods described by the agent as “quiet family neighborhood,” “neighborhood beams with pride of ownership,” “much sought after Tyrone area,” and “one of the most desirable areas of town.” Just about 2,360 miles away, in Walnut Creek, Calif., a search for a similarly sized home yields agent descriptions of neighborhoods like “quiet and desirable neighborhood of Walnut Creek,” “located in a prime area of Larkey Park,” “in the much sought after heart of Carriage Square,” and “affluent Northgate neighborhood at the base of Mt. Diablo.”
Use of these types of subjective terms or phrases to describe a neighborhood for a residence offered for sale in the multiple listing service or in advertising is common and expected. More than likely, most agents do not think twice about using superlatives in their marketing campaigns. Nor do their clients because it’s expected.
Appraisers, however, must realize the purpose of their neighborhood or market area identification and description, which is to identify the pertinent factors that have a direct influence (both positive and negative) on marketability and value. When doing so, appraisers need to exclude these subjective words and phrases unless they are supported by factual information and explanation. Doing so avoids undermining the credibility of the appraisal and improves the defensibility of the report. It also avoids implying demographics influenced the opinions and conclusions reached and stated in the appraisal report.
The Uniform Standards of Professional Appraisal Practice require appraisers to identify the characteristics of the property that are relevant to the intended use of the appraisal. Among the relevant characteristics are the location, legal, and economic characteristics. Depending on the type of mortgage loan, it might be necessary for the appraiser to follow agency guidance published by Fannie Mae, Freddie Mac, the Department of Housing and Urban Development, or the Department of Veterans Affairs in developing the value opinion and writing the appraisal report. Meeting the expectations of parties who are regularly intended users of such mortgage lending–related assignments is necessary to comply with USPAP.
None of these agencies require appraisers to rate or rank a neighborhood. Fannie Mae requires the appraiser to perform an objective neighborhood analysis. Its guidelines suggest this is done by identifying neighborhood boundaries, neighborhood characteristics, and factors that affect the value and marketability of properties in the neighborhood. Boundaries may include streets, waterways, legally recognized neighborhood borders, or natural features. Relevant characteristics may include types of structures (attached, detached), architectural styles, land use (single-unit residential, commercial, industrial), site sizes, and street patterns. Factors affecting marketability might include proximity to employment and its stability, amenities like parks, access to public transportation, and potential adverse environmental influences like landfills, trafficways, and nonresidential uses.
The purpose of identifying neighborhood boundaries, characteristics, and factors affecting marketability and a property’s resulting value is to inform the client and other intended users and enable them to understand the report properly. The client and intended users are not informed when the neighborhood conclusion is described only with ranking or scaling terms such as high, low, average, typical, good, strong, weak, close, near, adequate, most, and the like. Such terminology, without support and explanation, is imprecise. It doesn’t provide enough information to draw an opinion or conclusion. It may lead the intended user to misunderstand the report. It allows others to fill in the meaning from their own perspective, as opposed to what the appraiser actually meant. And it may open the door to accusations of bias or illegal discrimination that is unintentional.
A proper description of a neighborhood and market informs the appraiser where to search for comparable properties for use in the sales comparison approach, for land sales and cost information in the cost approach, and for rent data in the income approach. In situations when there are insufficient market transactions to develop an approach to value, the objective, fact-based description of the neighborhood and relevant facts affecting value and marketability allow the appraiser to identify locations with similar characteristics for data collection and analysis. Personal characteristics like race, religion, or ethnicity of the neighborhood occupants are not relevant and are not factors that affect the value of marketability of the property.
Published guidance for appraisers from Fannie Mae and Freddie Mac includes a section describing “Unacceptable Appraisal Practices.” Both agencies identify unacceptable practices, including the use of unsupported assumptions, interjections of personal opinion, or perceptions about factors in the valuation process and the use of subjective terminology, including, but not limited to:
- pride of ownership, no pride of ownership, and lack of pride of ownership
- poor neighborhood
- good neighborhood
- crime-ridden area
- desirable neighborhood or location
- undesirable neighborhood or location
Fannie Mae also warns appraisers to avoid language that could be perceived as commenting on the type of families or individuals who live in the neighborhood and to avoid using words that are subjective in nature and lend themselves to biased judgments. The Appraisal Standards Board, in Advisory Opinion 16, published first in 1997, makes the same warning.
Appraisers, unlike real estate agents, need to understand that under USPAP, such phrases are conclusions. Conclusions or opinions need to be “worthy of belief,” language used in USPAP’s definition of a credible assignment result. How do appraisers decide if their results are credible? By definition, USPAP says, “credible assignment results require support, by relevant evidence and logic, to the degree necessary for the intended use.”
How, then, is an appraiser to identify a region described by agents as “one of the most desirable areas of town?” The narrative should list the features and amenities of the neighborhood in factual, objective terms, including the proximity to the subject property. The list could include a newly constructed shopping area, existence of a park or recreational facility, public improvements such as a library or museum, or easy access to public transportation.
It is never the appraiser’s job to advocate for any cause or issue or to perform an assignment with bias. It is always the appraiser’s job to credibly develop an appraisal, to clearly and accurately communicate the appraisal report in a manner that is not misleading, and to ensure the report contains sufficient information to enable the intended user to understand it properly.
The views and opinions presented are those of the authors and do not represent those of organizations with which they are affiliated.
