Process:  Current appraisal practices are controlled by the quirks of each ‘valuation’ industry:  appraisal by obsolete assumptions of data difficulty, AVM ‘automated’ models by industrial secrecy, and other non-appraiser products which are under-regulated or over-regulated — depending on original intent.

In order to fully consider the place of appraisal—we have to look at the entire spread of valuation services.  Appraisals done “by appraisers” comprise only a small part of the valuations in the market.  Other valuations include AVMs (Automated Valuation Models), bank ‘evaluations’ and other opinions provided by unlicensed individuals.  We consider alternatives only relative to their impact on our initial question:  “is appraisal obsolete”?

We also note that there are really only three types of user needs:  collateral assurance, investment potential, and fairness. Each really only cares about uncertainty.  Collateral lenders are most concerned by downside risk.  Investors are most concerned by upside potential.  Equity enforcers are most concerned by the sureness of a fair result.

Traditional appraisal as taught and as enforced focuses on the experience and good judgment of the appraiser.  This is epitomized in the process of data selection.  The appraiser picks a handful of ‘comps’ from what is available and “necessary” for believability.  These are used to illustrate the market, and ‘support’ the appraiser’s opinion.  “Adjustments” to the illustrative comps are also based on the appraiser’s experience. Subjective methods (such as ‘pairing’) are applied to the limited data analyzed.

Personal, professional opinion provides a point value.  The accepted process is subjective from its start – in the data selection.  And this ‘judgment selection’ – is vulnerable to three kinds of bias:  1) personal intentional, 2) personal non-intentional, and 3) analytic.  In turn, analytic bias can come from both personal bias in model selection or from lack of competence in factual, objective data selection.  In any case, the result is not really what is needed in the world.

                You can’t get objective results from subjective data.

Traditional judgment-based appraisal provides a subjective point value opinion.  And what users want is help in probability estimation, to solve a probabilistic decision:

  • Lenders want to know risk. Risk of loss, or risk of losing a deal.
  • Investors want to know reliability of current value, and potential gain.
  • Tax assessors and the legal system wants decision fairness and reliability. Probability

Reliability is the obverse of risk.

A point-value opinion provides no analytic measure of reliability nor risk.  Worse yet, it provides no real possibility of measuring the sureness of the result.  And It is an opinion.

What the market needs and wants is a measure of risk and reliability.  What is given is a double prevent:

  • There is no real attempt to reflect reliability level.
  • The point-value analysis provides no real possibility of reliability measure.
  • The combination of subjectivity and no measure of probability distribution is terminal.

In coming Analogue Blog issues, we will consider the sources of friction ensuring appraisal obsolescence: standards, education, client expectation, and regulation.  We will also consider the effects on the three societal impacts:  consumers, taxpayers, and social justice.