Hey, I’m Danny, the ethical realtor. How much does our unconscious bias cost us or cost others? Does it cost $1,000, 10,000? 50,000? $100,000? $200,000? There were some cases not too long ago in real estate appraisal.
So there was a situation where a homeowner in the East Coast, I think in the new Jersey area. They got an appraisal on their home and the appraisal came in lower than they expected. It came in at about $475,000, and they felt like that seemed a little bit low based on the other homes that had been selling in the market nearby. And so they had a suspicion of what might be the problem.
They did a little experiment. They went through their whole house and they removed all of the pictures of their family, and they put up pictures of their friend’s family who was a different race. Then they had their friend stand in the home and pretend that they were the homeowner when they conducted a new appraisal.
So, the new appraiser shows up. It’s different pictures. It’s a different family there. The new appraisal came in at over $700,000. This is over a $200,000 increase from the original appraisal. And like almost a 50% increase or more based on simply who was living in the home based on the race of the person who was living in the home.
So, if this happened once it’s not maybe it’s not a not a big deal. But when this was reported, there’s a lawsuit filed. They started doing tests in that area and doing similar things, getting appraisals in different homes with different demographics and doing some of these same comparisons where they tested with one family in the home of one race and another family in the home of a different race, same home, to see how those appraisals would come out. And they found a clear trend. They found that nearly 40% of the homes were being appraised very low, based on the race of the family that was living in the home.
The Residents Shouldn’t Affect The Value of The Home
Now, I don’t know how much you know about market value of homes and about material facts, but I’m going to tell you that the person living in the home has no material effect on the value of the home, the property itself. So the fact that the person living in the home was dramatically affecting these appraisal values was a very big deal.
Can you imagine losing $200,000 just because of the way you look? Wouldn’t that be frustrating? More than frustrating, wouldn’t that be devastating financially for you compared to those around you who didn’t have that same issue of loss of value?
And so other lawsuits were started in different states across the country, and they have found a similar trend in many states all over the country. Hawaii, Colorado, many of those have found a similar trend.
Why Did This Happen?
Why are the appraisers lowering the price of the home based on the people who live there now? It is possible that there was some explicit prejudice going on. But my guess is that most appraisers are trying to do the right thing by their job, which is they’re trying to come up with an objective value of the home.
They’re trying to figure out what is the value, the market price, what would a normal person pay for this property? But they go into a home and let’s say that they just feel a little bit uncomfortable and they don’t know why. They have some doubts. They’re having some unconscious thoughts and they are trying to figure out why they don’t feel comfortable in this home.
And so, while they’re in the process of looking at the state of the kitchen, what upgrades they have, the quality of the carpet and the walls and the roof, they’re looking at the quality of these things and they just don’t feel good. They start to look for things that might justify why they feel the way they do.
Unconscious Bias in Appraisal
And so, my guess is that many of these appraisers, even though they were intending to do a fair analysis, they were responding to the way that they feel. There are some studies that have shown that we get a kind of a physical reaction when we feel uncomfortable around somebody that we’re not familiar with. Somebody of a different race, or sometimes between men and women.
We feel differently when we’re around those people, and in this case, around the home owner. And so based on how they felt about the homeowner, they were starting to appraise the value of these physical properties in a way that was unfair, in a way that was lower than it should be because they didn’t feel good. This is my theory.
How Widespread Is The Issue
And so this type of thing, on a small scale, is a problem. But it’s maybe an individual problem. But they did these studies and found that it was industry wide all across that market on the East Coast, and in these other locations like Colorado and other states, they found that these were a prevalent problem. It was happening all the time, and in big numbers. This example, I gave $200,000 this homeowner was going to lose out on only because of how an appraiser felt when they walked through their home.
So I think most of us are trying to do the right thing, and we want to have a market that’s free and fair, right? And so what we need to understand is the way that our own feelings and comfortableness affect the way that we do our job, affect the way that the way we evaluate value, the way we appraise the likelihood of somebody purchasing a property and at what price.
And if we become aware of that tendency in ourselves, of how we feel in these situations and how that might affect our judgment in ways that we’re not conscious of, in the ways that we’re not familiar with, then we can do a better job of being objective. A better job of creating a market that is fair, and creating a market that gives that same opportunity to everybody to have that fair evaluation so that they can sell their home, take advantage of their equity, and use that to move on to a bigger and better home for their family.
This is not an isolated incident. This is not a few bad apples out there. These are ordinary people doing ordinary things with ordinary human biological biases. All of us have these. We need to be aware of it.
The Importance of Awareness
And now that we are aware of it, every time that we come into a situation where we feel uncomfortable, we need to remember that this person we’re interacting with, even though we don’t know them yet, they are human like us. They do have a life like us. They probably have a family like us. They’re probably working a job in a career like us. They probably have some of the same goals, to travel, to relax, to build wealth for their family so their kids can be better off.
All these people that we’re meeting for the first time, if we feel uncomfortable, you shouldn’t always ignore that, obviously, but we should look for what’s really going on. If the discomfort is just because we don’t know a person, then maybe we can give it a second chance and give that person an opportunity to participate in the market the same as the rest of us. So let’s work on that together, shall we?