Train Us and Trust Us
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…
Dear FHFA:
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.
Respectfully submitted,
Hamp Thomas
Carolina Appraisers
Certified Residential Appraiser / Realtor / CDEI / ABR / GRI / MNAA / PSA / HMS / Author
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Well done! Well done!!
Bravo
Thank you, Hamp – The Voice of Reason.
Brilliant and well done Hamp. Great explanations as well.
Your article assumes however that ‘the art’ or real estate appraisal is not under direct attack, as it is by such organizations Black Knight and their nifty new hybrid. In their new product, a computer program selects all the comparables to be used. One explanation recently offered to an appraiser was “it uses FACTS, and doesn’t rely on appraiser opinions.”
Their advocates of this new ‘system’ also reportedly told an appraiser this is the future. You have to get on board. It wasn’t mere hyperbole. It was intended to be coercive.
I bring this up because it demonstrates an automation direction already being seen in the “valuation” of property; and its potential for having already been strong-armed out into the appraisal world. Anyone remember the article on Abena Horton and alleged racism producing a ‘low’ value on her property?
Other posters wondered about her employment as an attorney for Black Knight and whether it had anything to do with her (as yet) unsupported or undisclosed support for her allegations. For Black Knight to be in the process of a major marketing push for their new online hybrid product that ELIMINATES the appraiser’s judgment in comp selection stretches coincidence credibility.
I think a uniform GLA policy is brilliant. Ultimately, it should be adopted by all. Unfortunately in the interim, I think valid data verification is playing second fiddle to self-serving automation shortcuts that seek to eliminate professional judgment by appraisers, in favor of computerized valuations.
Valuations that have proven themselves to be abysmal failures in all forms tried to date. Let us all know how/if we can help you.
I’ve been an appraiser for nearly 25 years now. First doing residential work, then commercial, and finally as an appraiser in a tax office.
What the public needs to understand and licensed appraisers as well, is that tax cards and tax records are not “official” records or documents. They do not certify anything. All they are is a representation of how your property was valued using the data presented on the card. The tax records are provided mainly in an effort to be transparent to the public and so that the users can view and correct any incorrect or wrong data. It should not be relied on by anyone except for the purposes of tax assessment.
The reasons why tax data often differs from MLS data is because of how and why it is collected in the first place. No tax appraiser will ever go into someone’s home to measure it because of the legal liability to the county. The only exceptions are for tax disputes that are elevated by an appeal from the owner.
The greatest differences usually arise due to the CAMA computer software that tax offices use. The oftentimes legacy software, which was probably initially designed in the 1970s or 80s, limits the data and the formats that it can take. That is why there are no national standards, nor should there be since many individual counties cannot afford to continuously upgrade this very expensive software.
If companies like Zillow and AVM providers use this data as their primary source, then they should explain its limitations to their customers and how it could degrade the accuracy of their products. Simply put, it was never intended for this type of use.
If you are an appraiser or real estate agent, you should not rely on this data either without doing proper due diligence, because ultimately, it’s your license on the line. Tax offices are exempt from liability if they get the area of a dwelling wrong or miss various features, you might not be so lucky.
Great info Thomas! Thank you for clarifying it so well.
The problem is that state regulatory agencies have and still do cite tax cards as ‘official sources’. I have seen state complaints in which the regulators have said (cited individuals) “You should have used the tax card data for the comparable sales. MLS is not reliable.”
Experienced appraisers know to dig deeper when we have an apparent discrepancy. Often a simple phone call resolves the issues. The next problem being the misguided notion that we are forbidden from talking to agents due to some completely misunderstood application of confidentiality obligations.
I use commercially supplied “tax” data to unofficially confirm my own measurements; and absent inexplicable disparities with comparable sales to reinforce (or refute) my belief that I have the correct data.
When my County (Los Angeles) used to sell daily data tapes in the early days of PCs (before hard drives) the data was pretty reliable with respect to documentary transfer stamps. Originally built GBA/GLA was also pretty reliable.
It was unpermitted additions and remodels not picked up that resulted in problems. Along with outdated zoning predating city incorporation, multiple parcel sales, site areas and frequently land use codes conflicting with actual property uses. Im not faulting the County. Just pointing out a need to accept all data with a grain of salt until it is credibly confirmed.
Like everything else, County records (and CIty records too) are only tools to be weighted & used only to the extent they are reasonbaly deemed accurate.
[ The problem is that state regulatory agencies have and still do cite tax cards as ‘official sources’. I have seen state complaints in which the regulators have said (cited individuals) “You should have used the tax card data for the comparable sales. MLS is not reliable…..”]
All I can say is “Wow”. That’s how government works. Government agencies trust other government agencies over competent professionals who work in the private sector, even though those same agencies don’t really understand the how and whys of what each sister agency is doing. Maybe they should just call and talk to someone from their local tax administration who could fully explain what we actually do and what our data is used for.
I realize that I have a unique perspective due to my dual career as both a self-employed appraiser and as a tax appraiser. Until I started working for the county, I assumed, incorrectly, that what is listed on the tax card was “official” and usually right. I quickly came to realize how wrong I was, but the reasons why are what suprised me the most. I’ll give you a specific example.
In one particular county they would list the size of a homesite as a decimal. Say, .45 acres. Now as an appraiser, you would calculate that as 19,602 sf. It wasn’t until I reviewed the actual legal description that I began to see discrepancies. The actual site size might be .58 acres. When I brought this up with my supervisor, he revealed to me that the site size on the tax card was generated by the CAMA software based on a formula which would adjust for size, depth, and shape of the lot. Nowhere on the card was the actual lot size shown, however real estate agents and other appraisers (including myself) would use the lot size presented on the tax card and not bother to verify the size by the only real official document, the legal description in the recorded deed.
In an even funnier case, a national company which provided tax data to everyone, including Zillow, would incorrectly list every house in the county as having a basement. This was because they could not understand the tax card and the CAMA software codes. What they mistakenly saw as BASE M on the card was our internal code for Base Unit which was tied into our sketch program to determine above grade areas. Frustrated realtors and appraisers who used that data would call our office to tell us that “you show this property as having a basement when I was just there and I know it does not”.
My advice to both appraisers and real estate agents who might read this is to read the documentation provided from your county tax office which explains what is on the tax card and how to read them. In my state of North Carolina, it is provided in a document called the “Schedule of Values”, but it might differ from state to state. After reading that, if you have any questions, then call and talk to an appraiser in the tax office and ask questions. Most tax appraisers are very nice people and will gladly answer any questions you might have. Remember, they are public employees and they work for you. As long as you are polite and courteous, they will help you.
It completely differs from State to State. While I currently do primarily lending and litigation work, I was a Certified Assessor in Wisconsin for 17 years and can cite Chapter 70 of the State Statutes forwards and backwards.
First, Wisconsin is one of only 3 States that statutorily mandates interior inspections for ad valorem purposes. While this effectively means one would think GLA measurements would be relatively accurate, nothing could be further from the truth. The Assessment manual states ” a 1/2 story is 75% of the first floor footprint and an attic is 50% of the first floor footprint”. Kind of a “facts over truth” thing.
I’ve spent hours explaining this to local real estate practitioners to no avail. The major issue here is most still rely on this information as “accurate”. And with liability issues over the past decade or so, most Realtors simply cite GLA as derived from assessment records as opposed to literally measuring the property themselves. Either way, no uniformity.
So, the HUGE issue here is, when completing an assignment where you’ve personally measured your subject to ANSI Standards, what are you comparing it to? Apples to apples? Typically not. While a lot of site data is more accurate these days due to GIS systems, even that isn’t always accurate and can conflict with assessment data and legal descriptions. I typically pick one of the three and maintain throughout the report for as much consistency as is reasonably possible.
Standardized data relative to GLA seems a little “utopian” to an old geezer like me, but I agree we need to start somewhere. And it would sure make life a heck of a lot easier in dealing with parties that believe real property value is always tied to price-per-square-foot. To date, I guess I’ve just been trying to complete perfect appraisals in an imperfect world.
Are manufactured home structure requirements of HUD certification changing? Are IBTS verifications to be unnecessary when HUD Labels (red tags) are missing from the structure?
The no qualified appraisal needed will invite problems including mh quality fraud.