Communities of color struggle to thrive in part because real estate appraisals are marred by racial bias, ossified methodology, and industry practices, according to an expert panel at ULI’s Fall Meeting in Dallas.
With homeownership a key to building wealth in the United States, systemic inequity in appraisals can undermine a family’s ability to get ahead.
“Appraisals are really a gatekeeper to wealth. Appraisals can size your loan and they can size how large your exit from the home might be,” said panel moderator Charu Singh, director of portfolio management at Emergent Capital Partners.
Deeply held opinions about neighborhoods can affect an appraiser’s opinion about a location and limit a developer’s ability to borrow, said panelist Carlton Brown, CEO and principal at Direct Invest.
Brown, speaking on a panel titled “For What It’s Worth: Addressing Valuation Challenges in Communities of Color,” cited two questionable appraisals in his recent efforts to develop two commercial properties, one in Atlanta and one in New York City.
This discussion also builds off the ULI publication of 10 Principles for Embedding Racial Equity in Real Estate Development available on Knowledge Finder.
In the New York case, the appraiser lowered an opinion of value on a property that was about eight city blocks closer to predominately Black neighborhoods. If the property has been eight blocks to the west, the appraisal would have been much higher, Brown said.
In Atlanta, the value assigned to a 14-acre (5.7 ha) parcel of land for future development was downgraded in the eyes of an appraiser, possibly because it is on the north side of North Side Drive, nearer some historically Black colleges and universities, Brown said.
Reducing Appraisal Bias
Homes in black neighborhoods are consistently priced lower than those in other neighborhoods, said Andre M. Perry, a senior fellow with the Brookings Metropolitan Policy Program and a scholar in residence at American University. He is the author of the book Know Your Price: Valuing Black Lives and Property in America’s Black Cities.
Automation of appraisals should be considered because valuation algorithms would reduce some of the bias that seeps into standard appraisal methods, Brown said.
In a growing number of cases, Black homeowners prove their cases by removing Black-oriented artwork and other items—an approach Perry calls “whitewashing” a home—then obtaining a second appraisal. The second appraisal typically results in a higher valuation. “You’re seeing the intrinsic value of whiteness,” Perry said.
Lawsuits against appraisers are becoming more common, Perry said, and the trend may result in fairer appraisals in the future.
“Appraisers are appraising scared,” said panelist Jillian White, a New York appraiser and head of growth for Aloft Appraisals. “There’s been a higher level of pushback about this than there has ever been.”
White, formerly an executive with digital mortgage firm Better, agreed that automated appraisals might offer some solutions to bias in the future. Property data is more widely available today, she pointed out, unlike decades past when appraisers acquired much of the pricing data and viewed the role of information provider as key to their services.
Property price trends can evolve very slowly in the appraisal industry, where professionals rely on completed transactions to deliver opinions on current valuations. With traditional methodology, appraisers factor in proximity when evaluating transactions, and the long-term repetition can make it difficult for an area with depressed prices to achieve headway in a neighborhood upswing.
“We need to change the practices, and we need new models,” Perry said.
Recruiting the Next Generation of Appraisers
The appraisal industry has launched a recruitment program to build more diversity in its ranks and generate equity in property appraisals.
“The Appraisal Institute knows that bias is human and exists in various forms (whether conscious or unconscious), and no profession is immune from that,” Rodman Schley, 2021 president of the Appraisal Institute, wrote in a letter to President Biden last year. “We believe that it is important to continue educating ourselves about the situations and circumstances that can potentially lead to bias. I think that the conversations happening in this country are critically important and necessary for challenging and finding solutions to inequities and discrimination faced by communities of color. Ensuring racial bias does not play a role in appraisals and seeking solutions to equity, diversity, and inclusion in appraisal are top priorities for the Appraisal Institute.”
The Appraisal Institute has launched recruitment initiatives and a scholarship program, organized in conjunction with Fannie Mae and the National Urban League, to enhance recruitment of diverse talent.
However, recruitment progress has been slow as of late, White said. Few firms are hiring appraisers because of the downturn in real estate sales in this era of rising mortgage rates and less home refinancing activity.
The demographics show stark homogeneity. White, quoting U.S. Bureau of Labor Statistics figures, said 96 percent of the nation’s real estate appraisers are white and 70 percent are male.