Low appraisals can kill a deal — dead on appraisal. They are most common in a rising price environment, when comparable properties (comps) fall behind market momentum.
Here in California, the share of homes with an appraisal below the contract price agreed to by the buyer and seller escalated during 2020-2021. More recently, this figure fell back in 2022 alongside cooling home prices.
Chart update 07/20/23
| Share appraised below contract price | Share appraised equal to contract price | Share appraised above contract price | |
| 2022 | 11% | 43% | 46% |
| 2021 | 18% | 45% | 38% |
While market trends are a major influence on appraisal dynamics, homes are more likely to be appraised at below the contract price when they are located in minority neighborhoods, not just during periods of excess pricing lead by buyer FOMO, as in 2021.
For example, nationally, a neighborhood with a minority population comprising 50%-80% of the community will see 15% of appraisals below the contract price. When the minority population is over 80% of the community, this share jumps to 18%, according to the Federal Housing Finance Agency (FHFA).
In contrast, a neighborhood with less than 50% minority population sees just 12% of properties appraised below the contract price.
Related article:
The votes are in: Appraiser discrimination is rare — here’s how to spot it
An opinion of value
Despite all efforts to make appraisals fair, equitable and based on facts, the racial appraisal gap persists, and has a measurably adverse impact on homeowners of color.
A report conducted by Freddie Mac found that appraisers’ opinions of value are more likely to fall below the purchase price in majority Black and Latinx neighborhoods than in majority white neighborhoods. As expected, this the gap widens as the percentage of Black and Latinx people in the neighborhood increases.
This phenomenon contributes, via the appraisers’ subjective opinions, to a widening wealth gap between racial groups in the U.S., including here in California.
These appraisal gaps are not driven by a small number of appraisers who are willfully discriminating. Rather, this is a deep-rooted, systemic problem that impacts access to wealth, the ability to refinance into lower rates and being able to sell for a fair price.
Part of the problem lies in the subjective nature of appraisals, including each appraisal’s:
- comp distance, the distance between a subject property and its comps;
- comp reconciliation, a metric gauging how far away the appraisal value is from the lowest comp; and
- comp variance, a metric capturing the variation in sales prices for comps.
In other words, appraisers determine the value of property characteristics by pulling from a range of prices, rather than one singular, easily defined price point. It’s the appraiser who determines whether that valuation will be in the upper or lower part of that range, leaving room for implicit bias to sneak in and affect the appraiser’s valuation.
Implicit bias is more likely to occur in the appraiser population simply because it lacks any measure of diversity. Nationally, 59% of the general population are white, non-Hispanic compared to 82% of real estate agents and brokers. However, a massive 92% of appraisers are white, and of those, the majority are male and older than 45, according to the U.S. Bureau of Labor Statistics.
Related article:
To combat the potential for implicit bias in appraisals, beginning in 2022, the California Bureau of Real Estate Appraisers (BREA) began collecting demographic data alongside low appraisals.
Now, a check box is included within the BREA’s complaint form, asking the complainant whether they believe the appraisal is below market value. Complainants have the option to include their demographic information on the form. The BREA studies this demographic information and reports their findings to the state legislature by July 1, 2024.
A broker price opinion as a check
What happens when your client’s property is undervalued by an appraiser?
When an undervaluation is suspected, the broker will conduct their own broker price opinion (BPO), or comparative pricing analysis, a study of market data on sales prepared by a broker or agent.
The real estate licensee develops a BPO by first downloading a property profile — title condition — on the property and a printout of recent sales in the surrounding area from a title company website.
A broker’s BP0 is documented by preparing a comparative market analysis (CMA). The CMA is a worksheet used when establishing a property’s value based on prices recently paid for comparable properties. The CMA reflects observations on a visual inspection of the comparable properties, noting in each property’s column itemized features distinguishable from the subject property, and the dollar adjustment needed to correct for its greater or lesser value than the subject property. [See RPI Form 318]
In contrast, an appraiser licensed by the California Bureau of Real Estate Appraisers (BREA) writes an appraisal report to arrive at a property’s appraised value.
While the person and delivery are different, the astute broker ought to arrive at a similar figure as the licensed appraiser. They are gathering the same data and applying the same analysis for an evaluation of the subject property.
However, when the evaluation figures differ significantly, this raises a red flag about the appraiser’s valuation.
Then, the broker rebuts the appraisal through a formal letter which identifies the false or missing facts in the appraisal.
