Big Data, Big Promises

Appraisal 101 teaches us that appraising is part art, part science. In some cases during the boom years, appraisers might have gotten just a little too artistic. That explains, in part, why we have tremendous scrutiny today on our appraisals.

In my heart of hearts I know we need to bring more science into our business practice. Other industries are leading the way- Amazon, FaceBook and Google are masters of the universe when it comes to big data and analytics. I personally know the lead actuary at Dunn Humby. They analyze consumer behavior at the grocery store. They know more about what kind of peanut butter you prefer and where to position it on the grocery shelves than anyone knows about the universe of real estate.

If you take pause and ponder that, it all is a bit frightening. Residential real estate is the largest asset class in the world yet we know so little about it. That is a paradox that is astounding especially in light of the recent crisis and the risk to the global economy.

We have lost our way. There are three approaches to value. We have systematically devolved into a single approach to value, the Sales Price Approach. We have dumbed it down, way down. I have heard all of the excuses… “appraisers didn’t do the Cost Approach correctly so we got rid of it” or “there isn’t enough rental data so we don’t need to do the Income Approach”. Nonsense. There is value to developing all three approaches. If you had access to reliable data the exercise would be fruitful.

We have an expanded scope of work and insane assignment conditions. Fees are getting thinner; appraisal reports are getting fatter. But appraisal reports are not getting any better. That is not sustainable.

So what is the solution? I do not think it is possible to take the current appraisal forms and leap frog into a world of data and analytics. I know there are many who would argue with me but I do see the future for real estate appraisers as being bright; but if and only if we make some structural changes to our profession.

Let’s reengineer the appraisal process. Let’s find a path where art meets science. The hard side of business, the data and analytics, needs to marry with the softer side- the art side of real estate or the subjective elements. A machine will never be able to report on the condition of a property or the orientation on the lot or the marketability and appeal.

Let’s seek a holistic solution that satisfies all stakeholders so that we may gain confidence once again in homeownership.

If you have any comments or would like to submit content of your own email comments@appraisalbuzz.com

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About Joan Trice

Joan Trice
Joan N. Trice is the founder and CEO of Allterra Group, LLC, publisher of Appraisal Buzz, and host of the annual Valuation Expo, the largest conference for the valuation community. Joan also hosts the Collateral Risk Network, a members-only group of more than 500 dedicated chief appraisers, collateral risk managers, regulators, and valuation experts who are focused on resolving the many challenges facing our profession.

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33 comments

  1. Avatar

    It will always be art and science. The regression analytics only work when there is plenty of data. As a rural appraiser, I could never get enough data to “credibly” have regression analytics do my job. We are told to not fill forms, and yet there are more and more forms, and more and more software, that we have to pay for, to fill out the forms for us. We could never do all 3 approaches and ever expect to produce the volume still wanted by lenders, today. We are just off a 5 month roller coaster with tight turntimes and high volumes. We already felt the inability to get many reports out since the last big swell in 2010. It truly takes an entire day to do most reports. I can’t get over that anyone could have ever gotten three $250 appraisals out in one day. I’m lucky to get a $345 appraisal out in one day. Talk about a pay decrease! And no one is really in our corner to help. It’s truly helpless. Once the AVMs take over our jobs, I’ll go work somewhere else. Until then, my educated opinion will have to suffice.

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      Tori, you are my hero. Very well said particularly your last sentence. Thanks for your realistic analysis of appraiser plight.

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        I agree with Kevin and Tori. The lenders have been fixing prices for over 30 years. Where is the Sherman Act. What about restraiint on trade? I’ll use big data when the GSE’s are private companies not on the tax payers teat. As for the melt down, why doesn’t any one look at who caused it, Dodd and Frank. It was a good PROFESSION until the lenders colluded with politicians. The amazing thing is with all the regulations and laws, nothing has change on the lending side. There still price fixing thru AMC’s. This JOB is almost as bad as piece work. Only piece workers get paid.

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      I basically agree with Joan on this topic. She’s been writing about ‘reengineering’ the appraisal process for years – and has two “white papers” under her belt on that topic. Plus has engaged people at the CRN to ‘reengineer’ report forms. But nothing has happened in either effort. Personally I don’t see any real reform or structural change occurring until something drastic happens with Fannie/Freddie.

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      I know that the lenders and FNMA want the AVM’s to work, but it never will. Zillow has been at this for a decade and still cant figure it out. AVM’s can be manipulated if the person running the data is biased. Even the CU needs appraiser data to be able to rate the reports. If they got rid of appraisers, there would not be any unbiased entities in the loan process regarding home value (Which is the most important part of the loan)

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    Articles like this remind why I want out of this business even more. For decades this “largest asset class” had no problem functioning through the overly “artistic” methodologies and good old boy and handshake activities e.g. wink-wink and a nudge (not to mention a lack of licensing). Never during all of those decades did we have the problems with devaluation of real estate until lenders began utilizing practices that varied from their historical norms. I firmly believe valuations could have been 5-10% inflated and we still wouldn’t have had the meltdown we did if lenders used time tested lending practices. The youth, and this writer, will unnecessarily press for more garbage than you can shake a stick at. Analytics my rear end. My kids can appraiser a house in my subdivision with a little help. We have made the world we live in far more complicated than it needs to be. Appraisals will be overly and unnecessarily analyzed in the years to come. Our industry is now run by the “dragon con geeks” of appraising. Hope ya’ll have fun with all that.

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      Glad I retired in January. I want no part of this profession today. Far too much Government regulation. The people setting the rules do know even have a clue. The profession is doomed, good luck to you who stay in it.

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        Never understood the cries against “government regulation” in the appraisal realm. In many ways “government regulation”, even from GSE’s like fannie or freddie, assures our employment.

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    Russell Jakubauskas

    The very first step that needs to be taken is to remove FNMA from the appraisal process. We have reached a point in this profession(that I’ve been in for over 45 years)that even appraisers who apparently have some “stature” in this business believe that FNMA rules, guidelines and nomenclature are appraisal principles. FNMA is a SECONDARY MARKET LENDER, not an appraisal organization nor a regulator. The people who run this organization are in the LENDING business, not the real estate appraisal profession. When lenders rule the appraisal profession, it’s a recipe for disaster. It’s time to get them out of appraising. If the Institute and other appraisal organizations had just one ounce of moral courage we might have had a chance, but based on the lack of courage and leadership among these groups as long as I’ve been around, it would appear that we are doomed. I thank my lucky stars that I’m too old worry about this much more, but I pity all of those who planned to be appraisers for the next 10 to 20 years.

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    I doubt the small-shop or work at home appraiser can ever compete on the Big Data playing field, even with the tools that will be built in to the forms packages. Freddie/Fannie will always have more data, especially since they will cream all data from all appraisals. That’s if the average appraiser could even be trained to understand F-statistics and confidence intervals. I think a lot of the aging cohort will give up, retire early, maybe work as agents. Condition, marketability, and appeal will be evaluated by moonlighting agents who will drive by, take a photo, make sure the siding is up and the freeway isn’t next door, and fill out a checklist on their tablets for $25. I don’t understand the idea of a bright future for residential appraising; it is a trade in its death throes. I assume Collateral Underwriter identifies comps of interest based on least-squares regression. It’s just a small step from there to spitting out a conclusion from the model.

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    I love your optimism, Joan, but to say that the appraisal profession needs some “structural changes” is like the record industry saying “we just need to figure out this downloading thing”.

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    We need to be completely independent and free from pressure by Lenders, AMC’s, Homeowners, FNMA, FHA, etc. All of them think they can do our job better than us. Next thing you know we have 15 page SOW (Which should also be banned). We need to be the “Gods” of value. We determine it and that is your value. The Appraisal Board job is to review random samples of each appraiser and determine if they are in compliance with USPAP. That is good enough for Doctors, Lawyers, Pharmacists, Police, Firemen, etc.

    As it is now, EVERYONE can try to take us down, without repercussions. AMC’s can blacklist us, FNMA can blacklist us, FHA can make us take classes and then file a complaint, Homeowners can sue us or make our lives miserable by turning us in to the board, just because our value doesn’t coincide with Zillow. This profession has pressure that is unheard of by any other profession. It used to be Air traffic Controllers that had the most stress, I think it is now Real Estate Appraisers.

    SOLUTION:

    When a home needs to be appraised, give the assignment to three appraisers (Randomly). Each appraiser gets paid 1/3 they typical appraisal fee. They look at listings and sales, get a tour of the home, then each one submits an “Offer.” After the three offers are submitted, the middle offer is the value. If two are the same, that is the value. No 30 page reports, no 20 photos, no repercussions. Of course this can be easily policed by computer. Since the middle value is always going to be used, when someone tries to complain, your value is easy to defend, because you will always be bracketed!

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    Yes, let’s do something. But, what?

    As for employing the three approaches, “If you had access to reliable data the exercise would be fruitful.” We don’t have access to nearly as much data as Amazon, FaceBook and Google and what we have just isn’t as reliable. I attended a session the other day where the speaker revealed she has spent the last three years working on a state committee tasked with discovering why appraisers don’t recognize energy efficiencies in their appraisals. After three years she has made her point that the data just isn’t available. And kudos to her for her service to the profession. I suspect before Gore invented the Internet and the term “big data” was coined, the appraisal industry adapted to filling in the gaps with imaginary hypotheticals.

    And as for the forms, what was part or even mostly “art” is now a parody for the convenience of the lenders and their reviewers.

    The change, if it is to be, must be systemic and deep (like throw the baby out with wash water deep), and the time for it is now. Right now! We must exchange our culture of viewing what we do primarily as a business and that we can compete via ever more vicious “gotcha.” More and better education is the key and a very different system of oversight is required. Designation is obviously not effective and the use of hypothetical examples to illustrate and teach economic principles must be banned. If the confidentiality rule is implicated as an obstruction to educating appraisers with real life examples, change it.

    And please, please teach appraisers to think critically and to be articulate in their communications.

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    Let the banks run with their “bid data;” what does that show? NOTHING. No maintenance, upkeep, improvements. Only the appraiser on the street can provide that. If the banks, credit unions and/or lenders believed Realtors to begin with; we would not be needed in the first place. More this, more of that, more overall work time, more scrutiny, more questions, more reconsiderations, more scope creep, more testing, more background checks, more continued education. Now comes the PRESSURE for “Flawless Appraisals”, FASTER TURN TIMES; More of the AMC stealing your fee AND taxes go up, fuel goes up, Cost of Living goes up.
    x
    I know that “They say” it’s illegal; but every appraiser should stop working for a month until fees actually went up. But there are those that say go ahead, I’ll take your business more volume for me, Me MEE MEEEE!!!! We are our own worst enemies. There is no solution until appraisers actually “unionized” but THAT WILL NEVER HAPPEN.

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      So true. And now lenders hide behind their fancy delivery portals that regurgitate a set fee with any order. I just declined a purchase for a 3,800sf house on 6 acres with enormous horse barn with contract price of $1,000,000, for which there were no comps in the area. Fee…$400! And you just know that some other lacky, who has no business in appraising a $1,000,000 equestrian property, will snap it up, glad for the work. The truly diligent are the ones making less…myself included. I care…I do a lot of analysis. I add all of the extras that I can to the report. Rarely do I get less than a 40pg report out the door. But, I get the same fee as the one who rates everything “C3” and slaps it together in a few hours. I have never worked in a field where excellence is not rewarded. After 12 years in another field, I would have had a pay raise and a promotion. I guess I hang my hat on that I’m here for my son when he gets home from school. Face it, a lot of us are in this field because we needed a home based solution to family life. I’m certainly not in it for the money. I gave up a Graphic Design career to do this job. Not sure how my 4 year degree in Graphic Design, makes me a better appraiser than a high school grad with either a ton of construction experience or realtor experience and yet the 4 year degree is now required, at least in Illinois. When no one is dependent on me being home when they get home, I will look for something with benefits. Working at an assessor office would pay better and have better benefits. That’s a very sad state for appraisers who have such fiscal accountability! The loan processors make more than we do, to pick apart our reports over silliness.

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      If the problem were only fees, and they are a problem, boycott would work. I think you are right that in the current environment appraisers have to shoot themselves in the foot to get a fair shake.

      Face it, as George Hatch wisely observed, appraisers are an unwanted tax on secondary mortgage lenders who are in competition to get the quasi-governmental entities to assume the risk of long term loans. And consumers of those loans are OK with never knowing the character quality of the loan originator.

      Two pervasive economic features of our culture that are ingrained even into our industry are fast and cheap. And reliable appraising simply cannot be adapted to either despite the efforts to make it conform.

      I am convinced the mortgage end of appraising will continue the pressure until they have access to collateral value that is instantly available on their desktop at little or no cost. At that point any risk can be easily absorbed since the cost of lending will be insignificant.

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    Pretending that the cost approach and income approaches are relevant and contributory to value will make reports more complicated yet less reliable. Yes, there are cases when the cost and income approaches do have relevance, but this this is a rarity. An experienced and skilled appraiser will know when the other 2 approaches are relevant and when they are not. In the current appraisal atmosphere, making reports more and more complicated is equated with it being a better and more reliable report, but it is not. Also, there is great pressure to quantify the unquantifiable, which leads to false confidence and more, not less misleading reports.

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    When “big data” tells us with regression analysis that the carport in that $100,000 neighborhood should be adjusted at $35,000 and the GLA should be adjusted at $92 a foot– is that when the “art” enters the picture and it’s our cue to apply logic and judgment? Or am I naive to believe that clients even value “logic and judgment”?

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      I have seen that a lot from regression analysis. AMC’s get upset when we got more than 1/2 mile and over 6 months and exceed 25% GLA difference . . . yet regression analysis will use a 5 mile radius, 3 years dated and no GLA limitations and provide crap data because they need that many sales to appear legit.

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    Russell Jakubauskas

    Gus gets it! Lawyers are policed by lawyers, doctors by doctors, educators by educators, etc., but appraisers are policed by the lenders & AMC’s for whom we cause problems by not telling them what they want to hear. “We don’t like your report because it doesn’t fit our lending guidelines.” is not a valid criticism of an appraisal. BTW, Gus, “bracketing” is not an appraisal principle, it’s an underwriting guideline created primarily by secondary market LENDERS. Lenders is the key word. The inmates are running the asylum even more than before HVAC and now our fees are being confiscated by these same people. Arise, peasants and throw off this yoke of tyranny!

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      Amen Russell. So tired of being forced into perfect little boxes to meet lender requirements. I hate our Forms too. Who cares how many parking spaces are in the driveway in a market that does not care. In the city where it may be a coveted commodity, yes, but here in the South if you have 4 or 6 spaces in the drive in addition to a garage, who cares. That is just one small item that bugs the hell out of me. Aggregates, which Fannie finally recognizes CAN be exceeded, bracketing both adjusted and unadjusted sales prices…these also drives me nuts…on and on…..

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    It is clear that big data will sweep over the appraisal world and render us among the “reeks and the wrecks” of the world unless we totally and enthusiastically embrace the evolving technology. We need to step up as Joan suggests and take control of our destiny by embracing the basic techniques of appraising (the three approaches) and marrying them with the vast and unlimited resources the internet has put at our fingertips. From assessor data, on line cost manuals, MLS and Zillow and Trulia, to on line flood maps and aerial imagery, to video tours of homes and drive-around access by Google street, to the mathematical joys of multiple regression analysis and fool proof review masters: It is all good. But it is only the beginning and it is moving like lightening and may have already have left us at the altar.
    So lets make the most of our situation and enjoy the ride.

    Vonnegut depicts the ‘reeks and wrecks’ as a mass of the formerly employed who
    have lost self respect. Player Piano

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      Where do you think Zillow and Trulia get their information from? The MLS and the county records EXACTLY from where you do.

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      You cannot train the “newer” appraisers to complete all three approaches properly, it just won’t stick. We’ve become an industry of the sales comparison approach, mostly because that’s what the lender wants. Welcome to the future of appraisal, what little of it there is left.

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    Data is not the problem. We are controlled by Amc’s, Lenders, FNMA, ASB, FHA, VA. None of which want a real appraisal and none of which have a clue what a true appraisal is. I am very glad I am nearing retirement. Appraisal has become to scientific. True appraisal is an art always has been and always will be. However there will come a time and not to long from now that a lender will plug in an address a value will pop up and that will be their appraisal if it is a property in a conforming area. The only properties that will need an appraisal will be in non conforming areas.

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    As for regression analysis…forget about it. Unless you know what you are looking at, how to property apply it and are confident that the data is GOOD….you will not be producing credible and reliable reports. Trust me the lenders do not even pay attention to the 1004 MC…they certainly will not review all the charts and explanations we put forth in our reports. We cannot even get them to READ our reports in full.

    As for our Appraisal Forms they are Crap! Lenders and Fannie are forcing us into compliant boxes with all of their crazy requirements. Fannie Mae, while they have removed those crazy aggregate requirements are now trying to force us into adjustments that CU and other stats tell us to use. They are also forcing us to comply with the masses of other appraisers. What if the masses are mediocre and the one Appraiser is actually correct in their analysis. Should they comply in order to fly under the radar?….NO!

    How about the years of experience in the market and the many SUBJECTIVE market issues that drive value. They are basically telling us with their crazy CU warnings that years and years of intimate market experience are worthless and they want us to fit into a clean, neat little box so they can continue to steal our data and then throw that data back in our face saying that it should be applied across the board. Sorry that does not compute in my book.

    I agree major changes need to be made and major respect needs to be given back to appraisers who deserve it. I recently “fired” a large Client/Bank because they have decided to waste my time with Fannie CU warnings that have already been addressed in my report. Fannie says HUMAN interaction is a part of CU….well that is B.S. because lenders and their inexperienced underwriters DO NOT READ our reports and choose to regurgitate the CU warnings to the appraisers and waste their valuable time.

    Can you tell I am mad as hell and not taking it anymore….well we have thousands in this profession who feel the same way. As someone else stated why are we not policed by our equals…instead by inexperienced underwriters or reviewers out of State or the Country. Gimme a Break!

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    All that BIG DATA is full of MANIPULATED DATA. ALL we need is ACCOUNTABILITY for appraisers to be credible. There were plenty of rules and a good system in place before 2008 – but nobody was ENFORCING them. They still are not…. AMC’s only care about low fees and more redundant data which is constantly manipulated to bypass reviewers- nobody is checking for the accuracy of the data. The CU is literally full of CRAP.

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    Some of the areas in which i work have very few similar sales in a 12 or even a 24 month period. The sample set does not lend itself to regression analysis unless you just pool all the sales in one basket and create a garbage statistical model…that actually would fly with lender/AMC’s because you just show the math. Junk data is what they’re buying when employees of AMC’s and lenders seek to pigeon hole properties with criteria that means nothing in most cases. I have an AMC that thinks that you need to report the set backs and front footage allowed in the zoning district and insist that it be called non conforming…it typically is conforming and legal based on when it was created and only becomes an issue if changes are required, but that still requires time and in some small municipalities, you can’t even talk to the codes/zoning guy easily since he/she is part time and doesn’t get paid to talk to me.

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    Let’s face facts, most of the appraisals are completed in a manner that will pass lender scrutiny. It doesn’t matter that the old ways included the three approaches to value, lenders only want to see one in most cases. Regression analysis will muddy the waters for a while, CU will and has placed undo panic among many appraisers, but in the end the lender just wants to see the sales comparison data. Pair that with the fact that most of the appraisers I know never pick up the phone and call the agent of a comparable home they’re using in the report, and you have the recipe for the further decline of the industry. I try to relay to my colleagues the importance of speaking with the agent, that the MLS listing isn’t there for the benefit of the appraiser but instead is there to sell the home, but they don’t care. If we’re relying solely on the sales comparison approach, and that data is compiled from the listing, we’re doomed to failure for a number of reasons. The final nail in the coffin is the new requirements to even get into this industry. If I have to get an AA just to become a licensed level appraiser, I would seriously think about what other trades might work better for me with a college education. The industry looks bleak, and I for one wish I was a little closer to retirement, but like many of us I’ll push on until they won’t let me anymore.

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    Excellent article Joan. The larger problem that I’ve seen at the street level are numerous though. The issues are broken up into categories and sub-categories that include such direct issues impacting “big data” analytics like: horrible MLS (missing or highly inaccurate GLA) and PRD. Bad enough that deriving a credible result is overwhelmingly time consuming and therefore has no cost benefit at all. There are also areas of the country where number of sales just simply will not “feed the machine”.

    Then we have the talent pool. There are a significant number of appraisers who see big data as horse hockey. There is another contingent that will attempt to grasp the statistical concepts and then move on to tell you why everything about it is wrong because they’ve been in the business for 10 years and the results are crazy. Ad nauseum. Then you’ll finally get to the ones that get it or want to and will work toward the educated. Of those some will continue to educate and use the technology and the others simply will give it up. The percentage of adopters, anecdotally, is small. The number of naysayers is large.

    Unless the GSE’s, or some organization in a position of power – even a large user – buys into big data and demands it be a part of the process nothing will change. I realize how cynical that sounds and I’m still a vocal proponent of data analytics but from my experience it’s not promising in large numbers without a clear demand from users that it be implemented into the valuation process.

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