Train Us and Trust Us
Please accept the following comments in regard to Question A1.4. The response also includes comments on several additional questions. Thank you for taking the time to review these thoughts.
Technology has made so many improvements in the last decade and we now have the chance to truly improve our home valuation system. With that being said, the last piece of the quality puzzle starts at the beginning of the home selling process and the word we like to talk about so much: Data. The answer is partially big data, but more importantly the solution requires “better data.” The appraisal industry has been reviewed, reformed, and is now considering modernization past the point of benefit. From an appraisal perspective, the objective doesn’t appear to be so much the improvement of the industry, but only a shifting of the pieces to decide who profits from the appraisal process.
I’ve always thought that if only someone with an appraisal license could profit from the appraisal process, all the talk of reform would disappear. I hear so much talk about appraisers explaining every adjustment so all readers of the report can understand. Appraisal is an art form and subjectivity is often a requirement of the process. Imagine asking other professionals to explain every thought and decision. If a surgeon explained their every move or decision, not many would understand it and it would be a total waste of time. With appraisers, my suggestion is to train us and trust us.
I have to ask, what’s the goal of this process? From outside it appears to be more about making the appraisal process so simple that anyone can understand it and therefore “dumbdown” the job. No one seems to want to spell out the cold hard truth. Buying and selling real estate is an emotional process, time sensitive, and local information plays a major role in understanding every valuation. Real estate is not a data perfect industry, far from it. It’s not like keeping up with 2x4s or widgets. There is information that impacts values that cannot be selected and interpreted by any computer program.
In my opinion, using alternative workforces to gather information would only serve to lessen the overall quality of the appraisal report. Appraisers will spend the same or even more time reviewing this data and if it’s not going to save anytime for the appraiser (as so many claim it will), what’s the benefit? If any change is made, using a Trainee is the most logical solution. They have been trained and taught by the most qualified people, and if you were going to allow anyone other than an appraiser to do an inspection, that would be the most logical solution. It would also bring new people into the appraisal profession instead of helping to reduce appraiser numbers. The risks of using third-party inspectors (without nationally mandated training, a license, and insurance) is a Pandora’s Box waiting to open.
For such a complex topic we are moving far too fast to understand the changes that are happening now. What’s ahead for the appraisal industry appears to be almost certainly profit driven change and that is never a good reason to make change. Once we finish this current refinance bubble, what will we be left with? No matter what else is said and done, a quality appraisal can only be understood by another professional. The thought process and adjustments require hundreds of influences on property values. No one wants to talk about the “judgment” required from an appraiser. This “judgment” is a requirement of the appraisal process and it will continue to be a significant factor as long as homes are bought and sold by human beings. Real estate pricing is influenced by much more than a specific set of fields that are easily determinable by a computer.
Portfolio monitoring or risk management is one thing, buying someone’s largest lifetime investment is another purpose altogether. I certainly agree AVMs have certain functions and utility; but, in my opinion, loan origination is not one of them.
Most innovation typically comes from within an industry, not outside factors with different focus and motivations. Appraisers focus on making appraisals better and everyone else focuses on how they can slice the appraisal pie to increase their share of the proceeds. I hear so much talk about the sophistication of AVMs that work within the mortgage arena, but the most influential formula in most AVMS comes down to a price-per-square-foot formula, no matter how complex the algorithms.
It’s obvious I am a fan of allowing well trained professionals to do their job and not be treated like children having their homework checked. I also have to wonder why no one oversees Realtors® and the MLS. They have the most influence on real estate values, the least training, and basically no oversight. They simply cannot provide a quality product without quality information. In MLS, bad data in, means bad data out. However, I understand there is a strong need for automated products when mortgages do not require a traditional appraisal. Many times a full appraisal is simply overkill. We just have to accept the fact that the use of these products allows for a certain margin of error. Without quality data being utilized, no finished product can be consistently credible. Between 10-30% errors are guaranteed and it’s easy to find these errors. With the price of real estate these days, errors can be significant and that impacts peoples’ financial futures.
The most weighted technique in most automated valuation programs comes down to one over-simplified formula, based on a guesstimation from an outside source that has no interest in the real estate system. Price-per-square-foot drives the real estate valuation industry. Agents use it, the URAR uses a mandatory price-per-square-foot adjustment, and most automated valuations use this same formula. Most systems use the square footage numbers taken from tax records, where the assessors do not enter any house and have no interest in the real estate valuation process. They have no standards, over fifty different names for finished square footage, and the errors in square footage are easy to find. I’m enclosing just a few examples to show the differences between the numbers in MLS, tax records, and those reported through appraisal reports.
If you look at the vast majority of valuation products, they place the largest weight on the price-per-square-foot formula. So does the real estate industry. Walk into any real estate office and review ten CMAs. You’ll find that same price-per-square-foot formula used in every pricing decision. Agents create home prices and then appraisers are expected to validate those numbers. Look at online CMAs and you’ll see this formula over and over again. Look at the classes that teach agents how to create a CMA. They talk all about how to use this formula, but never mention the “source” of the square footage numbers they depend on.
If you pull the curtain back on most automated valuations, no matter how fancy the system or complex the algorithms, it still comes down to one formula most often based on inaccurate square footage data. If we are going to use a price-per-square-foot formula to drive values, then those square footage numbers have to be accurate or the entire system is flawed, without the possibility of improvement.
Square footage typically comes from three main sources. #1 is from tax data or public records. The “Official Record” for square footage is a myth. There is no such thing. Especially from a data source that never enters a property.
Public records have no measurement standard, no common list of names for finished space, they do not do inside inspections, and assessors have no need of precise square footage data. It’s not their job or responsibility to provide data for the real estate industry. No one has ever discussed with the tax department permission to use their data.
#2 is the MLS and Realtors. Depending on the state, their numbers can be taken from inaccurate tax records, measured by someone using a local measurement method with no formal standard and little training, or from a previous MLS listing where the source is unknown (without any verification).
#3 is from appraisal data. However, using appraiser’s own data you can have the same property measured four different times, all with different square footage counts. Without a mandatory standard, the measurements really depend on their location and training, which is often minimal. Of course, the overall quality is better with appraisal data, but without a mandatory measurement standard, it’s never consistent.
The ANSI standard has been out almost 25 years and is only mandatory in one state. The fact is ANSI contains only sixteen pages. This might have been sufficient in 1950 (with basic ranch style homes) but not with today’s complex designs. The current director of ANSI states that it was created to be simple enough so it could be understood by teenagers, and was not designed and/or intended for real estate agents or appraisers. Even when people claim to adhere to ANSI, they can measure completely differently. Out of sixteen pages within ANSI, there are three pages of rules and six sketches, with two pages of an “Annex,” which says it is not an enforceable part of the standard. This leaves too many measurements subjective and cannot unite an industry it was not created to serve.
Then we have the “name game.” There are over 100 different names for what appraisers call GLA. Tax records and MLS have so many different names, a national search is basically impossible.
Until 2021 there have been few options. After almost twenty years studying square footage, tax records, MLS, and online valuations, I finally came up with the “Home Measurement Standard” (HMS). One-hundred pages created for real estate professionals that solves three problems. First, it allows all real estate professionals to communicate in one language of real estate. Every component of a single-family home is measured by a standard. But, once these parts are joined together to create a home, no standard of measurement is required. It’s time for the real estate industry to join the rest of the standardized world. The HMS also provides a formal list of measurement categories for naming all square footage data; for agents, appraisers, architects, assessors, builders, insurance adjustors, etc.. This would allow everyone to use the same terminology when discussing square footage and real property data. There is also a formal “disclosure form” within the HMS that allows agents to provide a form for square footage like they do with every other possible situation related to the sale of real estate. It can protect agents and consumers alike. With the HMS, it offers three tools in one that could change the “quality” of an entire industry.
This new “standard” would dramatically improve the communication of all real property data. And, at the same time it could solve several problems, all which would help to better the big data available within the real estate industry. Better data starts with one industrywide square footage standard. And, with Realtors inputting a higher quality data. The current MLS could change from being more of a marketing tool to a database that drives real estate prices across the country. This new technology some AMCs are promoting that can draw floorplans and do sketches, could be much more effective if used in MLS listings at the start of the process.
Create better quality data from the beginning to build a better quality database. Accurate square footage in MLS and true picture representations (not those created to put the best foot forward of the property), would change CMAs, appraisals, and automated valuations. Big data can be more efficient if allowed to have access to credible real property information. It’s nothing more than logic… better data in, better data out.
It all starts with each listing in MLS being professionally measured (technology, well trained agent/other, or appraiser (HMS), etc., and using one industry-wide standard of measurement and one language of real estate. With the adoption of a formal measurement standard, the “data” we all rely upon would change for the better immediately, and the future of Big Data would have the opportunity it needs to succeed on a much greater scale.
Thank you for the opportunity to offer one opinion and I would be happy to answer questions or submit more supporting data. Please find enclosed several examples of the square footage differences between the MLS, tax records, and appraisals; the differences between the names used in MLS and tax records for finished square footage; and, a new Home Measurement Standard created to help modernize the real estate industry as a whole. Without one language of real estate, Big Data can never reach its full potential.
Certified Residential Appraiser / Realtor / CDEI / ABR / GRI / MNAA / PSA / HMS / Author