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The Charges Against Us: A Look into Biases

by Tim Andersen, MAI

Many claiming and concluding that appraisers are racist bigots is very much consistent in the news today. However, it has become clear that, while some appraisers are racist bigots, this blanket accusation has no basis in fact. Those who criticize us are doing so out of their own racially and politically motivated agendas. Unfortunately, because there has been no organized and concentrated pushback from any real estate appraisal industry sector, the scenario of our opponents, as false as it is, is gaining traction.

Therefore, the appraisal industry must begin to push back. One of the fastest and most visible ways to begin this process of bringing the truth to the public is to require appraisers to understand what bias is. This means appraisers must understand bias in all its forms, not merely the one pernicious stain of racial bias. Our opponents have carefully framed their questions to bring to the forefront any potential racial biases on the part of appraisers and real estate appraisal in general. Appraisers must, therefore, frame their response within the matrix of avoiding any of any and all types of biases, not merely racial biases. In addition, real estate appraisals must rid itself of the language and any practices that suggest bias in the appraisal process.

The Cognitive Bias Codex claims there are over 180 types of biases in which any researcher can engage. For the sake of simplicity, this article touches on merely three such biases: anchoring bias, selection bias, and confirmation bias. Again, these are not the only biases in which an appraiser can engage however, they are common biases. Once appraisers understand what they are, it may become possible to avoid them.

In a recent Google search, I entered the term “bias in real estate appraisals”, just to see what the results would yield. There were 6.01 million hits in less than one-half of one second. Therefore, it’s clear “bias in real estate appraisal” is a hot topic as of this article. It was interesting, however, to note that on the first three pages of the search results, almost every search result had to do with racial bias. This is potentially biased since my search was merely for bias in real estate appraisals, not racial bias in real estate appraisals. More on this later.

So, while racial bias is a hot topic today, in this article I’m going to present information on other types of data that can pollute a credible real estate appraisal. This is not to say racial bias is trivial or unimportant. Simply, these are not true. However, in addition to racial bias, there are other biases of which appraisers need to be aware. Unfortunately, it is far too easy to engage in them. This engagement is typically a function not of desire, nor of intent. Instead, it is an engagement rooted in an innocent ignorance of the type of biases there are, thus the types of biases in which appraisers can engage. This innocent ignorance aside, however, appraisers must understand that bias, of any type, at any time, for any reason, is an unacceptable part of a credible real estate appraisal and a non-misleading real estate appraisal report.

One type of bias in which real estate appraisers regularly engage is known as anchoring bias, or simply anchoring. According to The Decision Lab, anchoring bias is nothing more than a “…cognitive bias that causes us to rely too heavily on the first piece of information we are given about a topic.” Note this definition does not condemn someone for the mere act of anchoring but states that condemnation is oriented to someone who relies too heavily on a specific piece of information. An example of this in real estate appraisal is the purchase and sale contract.

When a property goes under contract, that is an excellent sign of what the buyer and seller conclude the property is worth. However, in a larger sense, the sense with which an appraiser must consider it, it is nothing more than another data point to be analyzed and then weighted appropriately in the appraiser’s final value opinion. Despite what some highly placed authorities in the GSEs mistakenly would have us believe, the contract price, in and of itself, is not indicative of a property’s market value. This purchase-and-sale price is nothing more than one sign of what one buyer is willing to pay and what one seller is willing to accept. In and of itself, it is not market value.

Part of the problem we appraisers have when it comes to anchoring bias is that we look at the purchase and sale contract at an inopportune time in the appraisal process. If you study USPAP, the ethical requirement to analyze any recent sales of the subject, any current listings of the subject, and any contract for sale and purchase encumbering the subject, comes at the end of the appraisal process, not the beginning. If appraisers were to analyze the purchase and sale contract toward the end of the appraisal process, it would not be possible to anchor to it. Thus it would not be possible to engage in anchoring bias.

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Therefore, the easiest way to avoid anchoring bias is to view the purchase and sale contract on the subject at the proper time in the appraisal process. This is toward the end of that process. This means you do not study the purchase and sale contract until after you have formed a preliminary value conclusion based on all the other available market data. Then, the purchase and sale contract becomes a data point to analyze, not a market value to hit. Since the appraiser already has formed a preliminary value opinion, the appraiser is also able to figure out if the market supports the contract price.

If the market supports the contract price, then give the purchase and sale contract on the subject the weight it deserves in the final value conclusion. If the market does not support the contract price, then give it the proper weight it merits in the final value conclusion. In any narrative of a tender, it is perfectly acceptable to explain to the client and intended user why the market does or does not support the purchase and sale contract.

Despite what some of our friends in real estate brokerage would have us believe, it is not our job to rubber stamp their listing and contract prices. Appraisers are not direct participants in the mortgage lending process. It’s our job to figure out if the purchase and sale contract on a property is one the market does or does not support. If we are merely rubber-stamping the broker’s purchase and sale contract, we have abandoned our ethical responsibilities to be independent, impartial, and objective. This abandonment, therefore, makes our value opinion impotent. In turn, this impotence gives lenders reason to go to AVMs, evaluations, and/or appraisal waivers because they will see no need for us and what we do.

Another bias in which it is all too easy to engage is known as selection bias. Selection bias, according to Wikipedia, is “…the bias introduced by the selection of individuals, groups, or data for analysis in such a way that proper randomization is not achieved, thereby failing to ensure that the sample obtained is representative of the population intended to be analyzed.”

One example of selection bias in real estate appraisal is the appraiser’s dependence on MLS data for rentals, sales, and statistical analysis of the data, etc. Without a doubt, the multiple listing service is probably the greatest repository of real estate listing and sales data available to the contemporary real estate appraiser. Thus, the appraiser must be able to use this data source. Nevertheless, it is not the only source for data out there.

Therefore, the appraiser who is ready, willing, and able to employ other data sources is the appraiser who is not engaging in selection bias. It is common to hear appraisers disparage such websites as Zillow®, Open Door®, Redfin®, and so forth. This article is not to champion their use. Instead, it is to clarify that these sources of data are available to the appraiser who is willing to research data that did not necessarily pass through a multiple listing service. Some appraisers claim these data sources are unreliable. When it comes to supporting a property’s market value, this may be true. However, when it comes to providing data on properties that are available for sale, or properties that have recently sold, especially if they did not go through the multiple listing service, sites such as these supply a service to the appraiser.

Then, as with any data the appraiser receives from any source, it is up to the appraiser to figure out how accurate and reliable these data sources are. If the appraiser, via his or her analysis of the data, concludes they are not reliable, then the appraiser rejects them. On the other hand, after proper analysis, if the appraiser decides they are accurate and reliable, the appraiser chooses to use them. Then, as with any other data, the appraiser also chooses the proper weight to give them in the final value opinion.

Therefore, using other data sources in addition to the multiple listing service is the easiest way to avoid engaging in selection bias.

Another common type of bias in real estate appraisal is confirmation bias. Confirmation bias is simply looking for information that supports your thesis, while failing to look for information that may disprove your thesis. A slightly more academic description from Psychology Today shows that confirmation bias “…occurs from the direct influence of desire on beliefs. When people would like a certain idea or concept to be true, they end up believing it to be true. They are motivated by wishful thinking. This error leads the individual to stop gathering information when the evidence gathered so far confirms the views or prejudices one would like to be true.”

True, confirmation bias and selection bias are related. But this relationship does not mean the two are synonymous. They are clearly separate biases in which appraisers can engage all too easily. Unfortunately, there are those in the mortgage lending industry who, daily, actively advocate that we engage in confirmation bias. The evidence of this is that they provide us with “comparable sales,” which, after proper analysis, prove not to be the least little bit comparable.

Then, when we reject them for all the logical and proper reasons, somebody in the process (the broker whose deal we showed to be bogus?) urges the borrower to file for a reconsideration of value (ROV). The claim, without any basis in fact, is that their sales are more indicative of the property’s value than our sales. Typically, they are more indicative of the contract price. Therefore, what they are asking us to do is confirm their bias. Ethically, this is something we must avoid.

Anchoring bias, selection bias, and confirmation bias are all biases appraisers can avoid. By avoiding them we take ammunition away from those who attack us. By understanding what these biases are, thus avoiding them, we accrue ammunition to ourselves to demonstrate that, indeed, we as appraisers are developing and communicating our “… analysis, opinions, and conclusions…in a manner that is meaningful and not misleading…” and that, as well, we accept our ethical “…responsibility to protect the overall public trust…” by promoting and maintaining “… a high level of public trust in appraisal practice…” by following the appraisal development and reporting requirements in USPAP.

About the Author
Tim Andersen is retired and, in addition to teaching, writing, consulting, and podcasting, does whatever his wife tells him to do. He helps Barry on Mondays with Appraisal Trainee Talk. On Tuesdays at 4:00 PM EST, Tim and Barry host Tuesdays with Tim on Clubhouse. Contact Tim at tim@theappraisersadvocate.com.

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