4 Reasons for Bias in Appraisals

As much as we’d like to turn appraisals into an exact science, they are ultimately one person’s opinion based on experience, training, and guidelines to determine a property’s value.  However, as with any subjective opinion it is open to bias.

Bias is the unavoidable demon that lurks within even the most rational appraisals.  We know it’s there; we can detect it after the point of sale when the valuation does not match the value the property is sold for.  Bias is something that experienced and professional appraisers work to exorcise from their valuations.  In order to do this, we should look at the root causes of bias in appraisals:

1. Limitations on the Computational Capacity of the Human Mind – Before delving into the application of bias in the appraisal process, it’s worth first looking at where bias comes from as explored by cognitive-psychologists, Allen Newell and Herbert Simon.  Basically, the normative appraisal model involves so much data that it contends the limits of human capacity.  To compensate for this “bounded reality” the appraiser uses heuristics or cognitive simplification mechanisms involving the selective and undemanding use of readily available information.  Or to put it simply, bias rears its ugly head.

2. Purpose of the Appraisal – The initial purpose of an appraisal often sets an inherent bias that permeates throughout the appraisal process.  One example is appraisals for lenders can be biased depending on whether they are done for a refinance or for a new purchase.  A refinance often comes out higher because the bank doesn’t care so much about the home’s real value and is more interested in having a tool to help evaluate the level of risk associated with the loan.  Since there’s already equity in the home, the risk is inherently lower and appraisers are less conservative.

3. Relationship Between the Client and Appraiser – A study on New Orleans foreclosure data revealed some interesting patterns in various appraisals.  Ultimately, appraisers tend to give valuations that are biased in favor of their clients.  This makes sense as they want their clients to be pleased with their work.  The study shows customer employed appraisers tend to give more favorable valuables than court-appointed counterparts.  Court appointed appraisers tend to go against client wishes while a real estate agent is more likely to give a more positive value.

4. Inexperience and Untrained Appraisers – The same study on New Orleans foreclosures also revealed a hopeful pattern about the role experience plays in bias.  Namely experienced and licensed appraisers tend to give less biased valuations.  In fact, unlicensed or inexperienced appraisers have an error rate approximately four times worse than licensed or experienced appraisers.

AllState Appraisal has the time-tested experience to mitigate the existence of bias in appraisals so that they best reflect the actual value of a property.  We know how to detect it and how to overcome it.  If you are seeking an unbiased appraisal or suspect bias has played a role in an appraisal and you would like an appraisal contact us today at 866.799.9009.