Buying a home should be an exciting time for a family looking to start over or put down roots.
A prospective buyer should be able to purchase a home knowing their hard-earned money is building a lasting investment. On the other hand, home sellers should be able to transfer their memory-filled dwellings into new hands, knowing their spaces are valued for their worth.
Unfortunately, this isn’t the case for all Americans.
Some communities face discrimination when buying, selling, or applying for loans. Their homes are undervalued, leaving them in losing battles for asset building.
This article will address how Black families, in particular, face housing discrimination from the home appraisal gap. We’ll explain appraisal discrimination and how it negatively affects homeowners and buyers of color.
What Is a Home Appraisal?
An appraisal is an opinion of a home’s value.
A homeowner may seek an appraisal to determine their home’s sale value or gain estate planning insights.
If a homebuyer needs a loan, the bank will hire and coordinate the appraisal to know how much to loan. In this case, the bank is the appraiser’s client. However, the prospective buyer will cover the appraisal fee of around $400 to $500.
A licensed appraiser then visits the property and determines a value based on several factors, such as current housing trends, the local market, and the home’s interior and exterior qualities.
How Does the Appraisal Process Work?
The Appraisal Foundation is the nation’s regulatory body and authority for professional real estate appraisers. The foundation implements qualifications for certified appraisers and sets standards for the profession by assessing the ever-changing real estate market.
The foundation lists the following steps in a credible appraisal process:
- The agent visits the property and conducts an interior inspection if the lender or real estate agent requires one. Appraisals don’t always require interior inspections. Otherwise, the appraiser will visit the property and inspect the exterior.
- The appraiser analyzes local public records to understand the market around the property.
- The appraiser uses the sales comparison approach to start formulating a property value. They look at listing prices and sale values of comparable properties with similar ages, amenities, qualities, and utilities.
- They may also use the cost approach to determine how much the existing property would cost to build. This method helps appraisers evaluate newer homes that have only slight depreciation.
- Lastly, the appraiser uses the data, local statistics, and inspection insights collected to form an opinion of value. They’ll submit their final appraisal value to the lender or homeowner as a report.
A credible home appraisal report includes:
- The home’s market value with evidence to support the opinion.
- The effective date of the decided value.
- The property’s characteristics that determined the value.
- Any regulatory notes from the appraiser or lenders.
What is Home Value Discrimination?
Home value discrimination is when an appraiser undervalues a property based on discriminatory biases about the homeowners or surrounding communities.
Housing discrimination isn’t just morally wrong – it’s a violation of federal law.
The Fair Housing Act of 1968 forbids home sellers, financers, and renters from discriminating against prospective purchasers based on race, sex, family status, religion, or national origin.
Despite this mandate and the Appraisal Foundation’s regulations, home value discrimination still impacts buyers of color.
One example of real estate discrimination is redlining.
Redlining is when a lending institution denies an individual’s loan application simply because of where the applicant lives. Redlining gets its name from the idea of a lender marking red lines around the areas of a map they do not want to work with. This practice often results from racial biases and is illegal.
Another practice called lowballing occurs when an appraiser develops an unwarrantedly low valuation far below what the homeowner paid for the property.
Lowballing is a common form of appraisal discrimination affecting people of color. Luckily, the current surge in housing prices has brought the appraisal industry to the forefront of mortgage market scrutiny.
During an appraisal, a red flag to look out for is if the appraiser asks questions about the homeowner – not the home.
The appraiser’s job is to inspect the property and comparable homes, not the individual or family living in the space. If an appraiser addresses items in the home, like family photos or decor choices, biases might be at play.
Broker and REALTOR® Daniela Jewell, says that the homeowner or buyer needn’t be present for the appraisal because the appraiser is inspecting the home, not the people living there.
“The appraiser is supposed to be there looking at the house and nothing else,” she says. “They’re inspecting the construction of the house, the details of it, and whether it looks structurally sound.”
What a Low Appraisal Means for the Homeowner
Home value discrimination can negatively impact homebuyers, sellers, and loan borrowers in various ways.
According to the Consumer Financial Protection Bureau, a house is one of the most important financial assets someone can own.
Homeownership is a crucial component of building intergenerational wealth. In this way, the process affects both the current buyer and generations to come.
If a borrower’s property is undervalued and can’t get the necessary loan, they’ll most likely have to continue renting instead of buying a permanent home. This prevents them from building credit in the long run.
If a borrower’s appraiser lowballs their valuation, the homeowner might either have to cancel their loan contract or make a larger down payment to account for the difference.
Jewell weighs in on this aspect of the loan process.
“A lender will evaluate how much money you have in the bank, what you can afford monthly, and if you have money saved up to put toward a down payment. That’s where the big issue comes in,” Jewell says. “On top of all that, if your house doesn’t appraise and the bank won’t cover the amount you offered, you have to come up with the difference in cash.”
Home sellers also suffer from lowballed appraisals.
Imagine trying to sell a home that you bought for $300,000. The appraiser conducts an inspection, researches the area around you, and reports that the home is worth $200,000. Now, you’re $100,000 in the hole and will have difficulty profiting from your home sale.
Situations like these make it harder for families to build wealth.
“Once people buy a house, their next home is usually of higher value,” Jewell notes. “That’s how they’re able to build equity over time.”
If a family’s house appraises for less than it’s worth, they’ll never make back the money they put into the house and likely be unable to move into a more valuable property.
In this way, discriminatory housing practices impact communities, creating a distorted housing market and a never-ending cycle of inequity.
How Black Homeowners Face Appraisal Bias
A 2020 New York Times article illuminates the racial discrimination Black families face during the appraisal process.
Abena and Alex Horton wanted to refinance their Florida home, so they called in a professional to perform an appraisal.
The house sits in a predominantly white neighborhood of homes typically valued at $350,000 to $550,000.
The family’s first appraisal came back at $330,000.
Abena, a Black lawyer, removed family photos from the walls and took African American art and books from the shelves. Her husband, Alex, who is white, stayed home to greet the appraiser.
The second appraisal came back at $465,000.
Another Black couple in California faced a similar situation in 2021.
Tenisha Tate-Austin and her husband Paul Austin suspected appraisal discrimination when their house was valued at half a million dollars lower than its worth. =
The couple had a white friend stand in for a new appraisal, and the number came back at over a million dollars.
As more stories like these surfaced, real estate organizations began analyzing appraisal trends to parse out systemic biases.
In 2021, Freddie Mac conducted a study to analyze the racial valuation gaps in home appraisals. The study found that homes in predominantly Black neighborhoods are more likely to appraise for less than the contract price.
Over 12% of Black-owned properties receive lowballed appraisals, compared to only 7.4% for white-owned properties.
Consider the earlier example where the individual’s home was valued at $100,000 less than they paid. This situation is a reality for some Black homeowners looking to sell. They’re unable to profit from their home sales, leaving them stuck in undervalued houses and unable to make back what they spent. This perpetuates the racial wealth gap between white and Black Americans.
According to the Brookings Institution, Black families’ net worths are approximately 10 times lower than those of white households. The institution’s research found that Black people with high-paying jobs, degrees, homes, and asset building habits still have much lower wealth than white peers.
Andre M. Perry, a senior fellow at Brookings Metro, commented on the 2021 Freddie Mac report, saying: “It’s going to force the appraisal industry to really reckon with its members and reckon with racism. If you have an authority like Freddie Mac issuing this report, there should be some type of follow-up and guidance on how to hold people accountable.”
How Homeowners Can Fight Appraisal Discrimination
If you think an appraiser has undervalued your property, you can take a few steps to retrieve a new report.
You can combat an unfair appraisal by requesting a reconsideration of value from your lender. In this case, you’d present the appraiser with an argument against the number they supplied, along with data on other comparable properties.
If the appraiser is unwilling to negotiate their first value, you can order a second appraisal. You’d go through the process again with a different appraisal professional.
If you opt for a second appraisal, you’ll have to pay an additional appraisal fee of up to $500.
If you suspect discrimination in your home’s appraisal process, consider filing a complaint against the appraiser. You can also contact the Office of Fair Housing and Equal Opportunity for assistance.
How the Government Is Addressing Real Estate Inequality
The recent media coverage of skyrocketing home prices has illuminated appraisal discrimination more than ever before.
Luckily, with significant sources like CBS, CNN, and The Times covering the topic, the appraisal industry is more likely to improve its standards and increase penalties for racially discriminatory practices.
In 2021, the Biden Administration and the U.S. Department of Housing and Urban Development (HUD) launched an initiative to combat home appraisal inequity.
Through this interagency plan, the Administration vows to “aggressively combat housing discrimination” and address inequity in the appraisal industry.
Last year, the House introduced the Real Estate Valuation Fairness and Improvement Act of 2021.
Stakeholders from multiple federal agencies will build the task force to:
- Address underwriting standards for home valuation processes.
- Compile data to understand the extent of racial biases in the housing market.
- Identify and report root causes of home value discrimination.
- Analyze qualifications to enter the appraisal profession.
- Promote funding for diversity and inclusion in the appraisal space.
These steps, along with the Appraisal Foundation’s efforts to combat home value discrimination, will hopefully build a fairer appraisal industry.
Luckily, the country is already taking the first step towards a more equitable housing market by bringing discriminatory practices and systemic biases to light.
Moving forward, policy implementation and accountability will be the key drivers in creating a more equitable housing market for all Americans.