New Measures Combat Home Appraisal Discrimination

A Realtor Doing Home Appraisal Process

A home appraisal can be a nail-biting part of the real estate transaction process. An expert, someone you don’t know, comes to look at the home and says it’s worth XYZ dollars. You might feel it’s too high, which means paying more in property taxes, or too low, which means negotiating a lower sales price.

Home appraisals usually return numbers similar to those expected by the buyer, bank, or homeowner, and the sale process proceeds smoothly.

However, some people feel the home appraisal process can be unfair in other ways. According to a report by NBC News, many homes in primarily African-American neighborhoods are appraised at 23% less than other homes. The situation is known as “home appraisal discrimination.”

It creates tangible challenges for homeowners who want a fair appraisal reflecting their home’s true value. Owning real estate is one way of building intergenerational wealth. Even with fair housing laws, some communities, including black communities, are still facing discrimination in housing. Real estate appraisals are one avenue through which families of color are impacted.

The Biden administration aimed to protect owners from home appraisal bias. The administration says it will support a series of reforms to reduce biased home appraisal, such as new regulations requiring banks to use artificial intelligence algorithms with no hint of racial bias.

Other reforms appear to be in the works as well, like making the race/ethnicity of homeowners receiving those appraisals public and asking states to reduce racial barriers to becoming real estate appraisers.

Biased Appraisal Value

About Home Appraisals

Why do home appraisals matter? There are typically a few times during which someone might seek an appraisal:

Before selling a home. Homeowners sometimes have a pre-listing appraisal valuation to price their home appropriately or find ways to add value. A reasonable price listing is paramount for homeowners who want to sell quickly. But suppose the appraisal is low because it’s in a specific neighborhood. In that case, the results can often be disappointing for homeowners. That’s especially true when they expected to have more money from the sale to go into their next home.
When refinancing a home. Because a refinance technically establishes a new mortgage loan, it often requires an appraisal of the home’s current value. A home refinance can be critical to make living in a home affordable by reducing monthly mortgage payments.
Taking out a HELOC or home equity line of credit. Someone’s borrowing power in a HELOC will depend on several factors. The home’s value sets the baseline for the HELOC’s borrowing power. A low appraisal can then diminish the homeowner’s line of credit.
Applying for new loans. New loans often create new opportunities. To secure a loan, a homeowner may need to put a house up for collateral. This requires an appraisal. If the appraisal comes in at less than its full value, it again impacts the homeowner’s borrowing power.

With just one appraisal, a home’s value can swing tens of thousands of dollars in the wrong direction. Even slight disparities in how homes are appraised spells missed opportunities and disadvantages for that owner.

Why Bias in Appraisals Matter

On the surface, a home appraisal doesn’t seem like an opportunity for discrimination or racism. The appraisal industry has taken many steps in how it trains its professionals to ensure homeowners have a fair valuation. The standards for appraisers are high. In many states, the credentialing of appraisers is a multi-year process requiring an apprenticeship phase and anti-bias training.

For many homeowners, the home appraisal is just another step in securing a mortgage or selling a home.

But it’s important to remember that appraisals deal with some of the most expensive assets people will ever own. Even a slight bias in the valuation process can drastically affect homeowners of color.

Combating Home Appraisal Discrimination

According to one source, homes in white neighborhoods are appraised at three times the value of homes in communities of color. Another Freddie Mac study found up to 15% of homes in communities of color had appraisal values below the contract price. The consequences of appraisal bias mean these communities have less equity to help them secure home loans and refinancing.

To help, the Interagency Task Force on Property Appraisal and Valuation Equity (PAVE) launched in June 2022. The mission: rooting out discrimination in appraisals. The task force operated under the Housing and Development (HUD) agency.

It’s easier said than done. For example, many financial institutions use algorithms based on factors like local housing prices to help produce their appraisals. These algorithms can be challenging to sift through. Ideally, an algorithm will be blind to the racial background of the homeowner.

However, studies have shown that AI can be subject to bias and produce discriminating results. If some aspects of these algorithms lead to a biased appraisal report, the Biden administration is looking to address that.

What Home Buyers Can Do

A man writing an unfair appraisal

Ideally, these proposed changes will lead to a more equitable system. But what if you feel you’ve received an unfair appraisal based on your appearance or background? What are some consumer-facing actions?

Bring any concerns about the initial appraisal to your real estate agent, mortgage lender, and appraisal company. You may highlight somem features of the subject property or its neighborhood characteristics that support a higher appraisal.
Record the nature of the appraisal, including all relevant details about your background, the property, and the appraisal paperwork you received. If you’ve received anything in writing, keep it in a separate folder for handy access when the time comes.
Work with your real estate agent to schedule another appraisal company to give a second or third opinion of the home’s value.
Contact the Consumer Financial Protection Bureau (CFPB), which can be an invaluable partner for finding information about your next steps. The Consumer Financial Protection Bureau can not only point you to the appropriate avenue to escalate the issue if need be but also provide you with information that will help determine the nature of your complaint when you reach the proper authorities. You can use the CFPB’s file a complaint link to ensure your voice is heard.
According to the CFPB, you can also go directly to the U.S. Department of Justice by dialing 1-833-591-0291. To reach the appropriate place, you can email fairhousing@usdoj.gov or even submit a report online. These Federal Agencies are committed to ensuring all regulatory agencies maintain high professional standards.

Home appraisals are nerve-racking for any homeowner. However, they can be far worse when an individual suspects they may be a victim of biased or discriminatory appraisal practices. Go into the process knowing your rights and avenues of recourse. Fair housing laws state every homeowner has a right to a fair and equitable appraisal process.

Updated July 2024