Welcome back to the Deep Dive. It is great to
be back. You know, I was sitting at my desk this
morning just staring at this massive stack of
research we've pulled together for today. It's
a big one. It really is. We've got articles on
global standards. We've got these dense PDFs
about regulations coming in 2025. We've got Wikipedia
entries on methodologies from Germany and the
UK. And I had a bit of a realization. Oh. What
kind of realization? Well, think about how we
spend our lives. We work, we save, and then eventually
we try to buy assets. You know, we buy a house,
maybe a little rental property if we're lucky,
or we invest in a company that owns buildings.
We spend our entire lives chasing these things
because we think they have this solid, concrete
worth. It's the scorecard of modern life in a
way. Net worth. Exactly. But here is the thing
that hit me while reading through this stack.
That scorecard. It relies almost entirely on
an opinion. We walk around thinking the value
of our house is a hard fact. Like, I bought it
for $500 ,000, therefore it is worth $500 ,000.
It feels like physics. But today's material proves
that is actually a complete illusion. It is an
illusion. Yeah. And frankly, it's an illusion
that keeps the entire global economy from collapsing.
No pressure, right? Just the weight of the global
economy resting on an opinion. It sounds dramatic,
but it's true. Today, we are talking about real
estate appraisal or property valuation, depending
on where you are in the world. And for everyone
listening, if you are tuning out because you
think this is just about that annoying $500 fee
you paid to get a mortgage, you are missing the
massive picture. That's what I want to stress
right off the bat. The hook here isn't just buying
a home. This plays into divorce settlements.
It dictates how much tax you pay to your local
government every single year. Oh, absolutely.
It affects bankruptcy proceedings. It is the
hidden engine behind massive corporate mergers.
It really is the bedrock of financial security.
Think about it. If we don't have an agreed upon
way to look at a pile of bricks and say this
is worth X dollars, lending stops. Right. Banks
close. The stock market freezes. Without valuation,
the gears of finance just grind to a halt. So
our mission today is to move beyond the number
on the price tag. We want to understand the science
and the art of value. We're going to figure out
why the price you pay is rarely what the property
is actually worth. And we're going to answer
the question. How on earth does someone walk
into a house, look around for 40 minutes, and
decide it is worth exactly $452 ,000? And we're
going to look at the future, too. Because the
rules are changing in 2025, artificial intelligence
is entering the chat, and it might completely
overhaul how we define worth. It's a huge shift.
But let's start with the basics, the core definition.
What exactly is an appraisal? Because before
I read this, I just thought it was a price check,
like standing a barcode at the grocery store.
Yeah, and that's the common perception. It's
definitely not a barcode scan. Technically, an
appraisal is defined as the act or process of
developing an opinion of value for real property.
Now, pay attention to that word. Opinion. Opinion.
That feels a little subjective, a little squishy.
It is, but it's a professional opinion. It's
not just a guess. It's a defensible argument.
The appraiser isn't just finding a number. They're
building a case. They have to prove to a lender,
a judge or a tax board why this number is the
right number. And this explains something that
always confuses people. I've had friends tell
me. The appraiser came over. They were there
for maybe 30 minutes, took some photos of the
water heater, measured the living room and left.
And I paid $600 for that. That is the classic
misconception, that visit. That is just the inspection.
That is the visible tip of the iceberg. But the
sources highlight that the average turnaround
time for an appraisal is anywhere from 5 to 15
days. 5 to 15 days. So what are they doing for
those other 14 days if they aren't at the house?
They are in the lab, so to speak. They are doing
intense research. They aren't just looking at
your house. They are analyzing market trends.
They are verifying public records to make sure
the person selling the house actually owns it.
That's a big one. Right. You have to make sure
the title is clean. Absolutely. Yeah. They are
checking zoning ordinances. Can you actually
legally have that second kitchen in the basement?
A lot of time. You can't. Oh, right. An illegal
suite. An illegal suite. Yeah. Yeah. They are
checking flood maps and they are crunching numbers
on comparable sales. They have to construct that
defensible argument we talked about because an
appraisal isn't a fact. It's a thesis that has
to hold up in court or to a grim faced bank underwriter.
OK, let's unpack the core philosophy here, because
the biggest takeaway I got right off the bat
is this fundamental distinction between price
and value. Yes. In my head, and I think for most
listeners, those words are synonyms. If I pay
$300 ,000 for a house, the value is $300 ,000.
But you're saying that's wrong. That is often
wrong, yes. In the world of valuation, price
and value are two very different things. They
might kiss occasionally, but they are not married.
I like that image. Price is a historical fact.
It is what happened. It is the number written
on the check or the contract. Value, on the other
hand, is an opinion of what the property should
transact for under specific, typical conditions.
Okay, so give me a scenario where they drift
apart. When does price not equal value? Well,
let's look at the uninformed scenario. This happens
more than you think. Imagine a seller. Let's
call him Bob. Bob inherited a house from his
aunt. Bob lives three states away and hasn't
visited the neighborhood in 20 years. And in
his memory, Bob remembers it being a rough part
of town. Exactly. But Bob doesn't know that in
the last five years, it's become the trendy art
district. You know, coffee shops, lofts, the
works, gentrification. Right. So Bob just wants
to get rid of it. He lists it for $200 ,000 because
that sounds like a lot of money to him. And I
assume it sells instantly. It sells in 10 minutes.
The buyer's popping champagne. Now, the price
of that transaction is $200 ,000. That is a fact.
But was the market value $200 ,000? Absolutely
not. The value might have been $350 ,000. So
if an appraiser looks at that sale later when
they're trying to value the house next door.
The appraiser has to be the referee. They have
to look at that sale and say, that play didn't
count. That was a distressed or uninformed sale.
If they use that $200 ,000 price as a data point
to value the neighbor's house, they would be
poisoning the data. They have to spot the discrepancy
between the price paid and the actual value.
So the appraiser's job is to filter out the noise,
all the weird emotional or uninformed decisions
that people make. Precisely. But then you have
the second scenario, which is even more fascinating.
This is the investment value or premium scenario.
This is where paying too much is actually a rational
decision. How can overpaying be rational? That
sounds like a contradiction. Let's talk about
assemblage. I loved this concept in the notes.
It sounds like an Avengers movie, the assemblage.
It's a little less explosive, but it can be very
profitable. Imagine you own a vacant lot in the
city. It's nice, but it's small. You can maybe
build a small house on it. The market value of
that lot is, say, $100 ,000. Okay, I've got my
$100 ,000 lot. Now, right next door, there is
another lot. Exactly the same size. Also worth
$100 ,000 to the general public. But if you buy
it, you can combine the two lots. And suddenly,
because you have a larger footprint, zoning allows
you to build a 10 -story apartment building.
Ah, which is worth way, way more than two small
houses. Exactly. This creates economies of scale.
So that neighbor's lot is worth $100 ,000 to
a stranger. But to you, it might be worth $200
,000. Because unlocking that apartment building
project is huge. So I pay the neighbor $200 ,000
for their $100 ,000 lot. I overpay. You pay a
premium. That is investment value. The value
to a specific individual. The act of combining
the lots is called assemblage. The resulting
increase in value, where 1 plus 1 equals 3, is
called plottage. Plottage. That is a great word.
I'm going to use that. It is. The whole is worth
more than the sum of its parts. And we see this
in the corporate world all the time. Think about
Haskell takeovers. A company might buy shares
of a rival at a massive premium. Why? For control.
Because they want control. They aren't paying
the market price for the stock. They are paying
for the strategic value of owning the competition.
Same principle. This really clarifies why the
research sources listed so many different types
of value. I saw a whole list. Market value, investment
value, liquidation value, insurable value. It
just kept going. It's not just one number. The
number depends entirely on the question you are
asking. The definition of value changes based
on the context. Let's run through a few of those
because they actually impact regular people.
Market value is the standard, right? That's the
one we hear about most. Yes. The international
valuation standards define market value very
specifically. It assumes a willing buyer and
a willing seller. It assumes they are acting
prudently, they are knowledgeable, and crucially,
they are acting without compulsion. Meaning nobody
has a gun to their head. Or a judge breathing
down their neck. Which brings us to liquidation
value. The fire sale. Exactly. This is common
in bankruptcy proceedings or foreclosure. If
a judge orders a property to be sold now, you
don't have the luxury of waiting six months for
the perfect buyer to come along. The exposure
time is short. You have to take the first decent
offer that walks in the door. Right. So liquidation
value is almost always lower than market value.
It answers the question, what can we get for
this if we have to sell it by Friday? Then you
have insurable value. This one trips homeowners
up all the time. It does. I hear this complaint
constantly. My house is worth $500 ,000, but
the insurance company only covered me for $300
,000. They're ripping me off. But they aren't.
No. Because if your house burns to the ground,
what happens to the land? The land is still there.
The dirt didn't burn. You still own the $200
,000 lot. The insurance company only cares about
the cost to replace the structure. The wood,
the concrete, the labor. So insurable value excludes
the land value entirely. Which explains the gap.
And finally, the one everyone loves to hate,
ad valorem. Tax value. Ad valorem just means
according to value in Latin. It's what your local
government uses to figure out your property tax
bill. And I saw something in the notes about
fractional assessment. This sounded like a straight
-up psychological trick being played on taxpayers.
It is a bit of a mind game. It's a practice used
by many tax assessors. Let's say the market value
of your home is $1 million. I wish. But OK, let's
say. If the tax assessor sends you a bill saying
your house is valued at $1 million, you might
scrutinize it. You might argue, no, no, the roof
is leaking. It's only worth $950 ,000. You fight
it. Right, because that's a big number. It is.
So some jurisdictions use a fractional assessment.
They assess the property at, say, 10 % of its
value. So you get a notice in the mail saying
your assessed value is $100 ,000. And I look
at that and think, wow, these guys are idiots.
My house is worth 10 times that. I'm getting
a great deal. Exactly. You feel like you won,
so you don't appeal. But the city isn't losing
money. They just set the tax rate, the millage
rate, much higher on that $100 ,000 to get the
exact same revenue they would have gotten from
the million. It's designed to keep me from complaining.
It keeps the appeals down. It's purely psychological.
That is sneaky. I respect it, but it's sneaky.
Okay, so we've established that value is a shapeshifter.
It depends on who is asking and why. But eventually
the appraiser has to sit down at a desk and come
up with a hard number. How do they actually do
the math? This is where we get into what we call
the three approaches to value. And depending
on the scope of work, which is a formal part
of the process defined in the US Page Standards,
the appraiser will choose the method or combination
of methods that best fits the property. USP being
the Uniform Standards of Professional Appraisal
Practice, the rulebook. Correct. That is the
rulebook for the U .S. And they updated it back
in 2006 to get rid of this confusing limited
versus complete appraisal idea. And now it's
all about the scope of work, which makes a lot
more sense. So let's walk through these three
pillars. The first one is the one I think most
homeowners are familiar with. If you've bought
a house, you've seen this, the sales comparison
approach. This is the absolute standard for residential
property. If you're buying a single -family home,
a condo, or a townhouse, this is the method.
It is based on the principle of substitution.
Which basically says, I'm not going to pay $500
,000 for this house if I can buy a practically
identical one down the street for $450 ,000.
Precisely. A rational person won't pay more than
the cost of a comparable substitute. So the appraiser's
job is to find those substitutes. We call them
comps or comparables. And there is a critical
rule here regarding these comps, which we touched
on. They must be sold properties. I can't stress
this enough. I can list my house for $10 million
today. That doesn't mean it's worth $10 million.
Asking prices are just wishes. Sold prices are
reality. So the appraiser finds three to five
homes nearby that sold recently. But here's the
problem. No two homes are exactly alike. Even
in a cookie cutter subdivision, one might have
a new deck and the other has a moldy basement.
One backs up to the woods, one backs up to a
highway. And this is where the art meets the
math. This is the whole job right here. We call
it the adjustment game. This is the part that
I think confuses people the most. Walk me through
the mechanics of an adjustment. How does it actually
work on the form? Okay. So the goal is to figure
out what the subject property, that's the house
you are buying, is worth. We don't know that
number yet, but we know what the comp sold for.
Let's say the comp down the street sold for $300
,000. Okay, $300 ,000. But the comp doesn't have
a garage. Your house, the subject, does have
a garage. So my house is better. It's superior
in that feature. Your house is superior, but
we can't change the price of your house. We don't
know it yet. We have to change the price of the
comp. We have to ask, what would that comp have
sold for if it had a garage? We are creating
a hypothetical version of the comp. We are simulating
reality. If the market says a garage is worth
$10 ,000, we take the comp's sales price of $300
,000 and we add $10 ,000. So the adjusted value
of that comp is $310 ,000. Okay. That makes sense.
You adjust the comp up to match the subject.
Now do the reverse. Imagine another comp sold
for $320 ,000, but it has a beautiful in -ground
swimming pool. Your house, the subject, does
not. So in that case, that comp is superior to
my house. Right. So we have to strip that value
away to make it a fair comparison. We have to
subtract the value of the pool from the comp's
price. So we take that $320 ,000 and knock it
down to match my non -pool house. Exactly. You
are leveling the playing field across all the
comps. You do this for square footage, for the
date of sale, for location, for amenities. And
ideally, after all the adjustments, your three
or four comps will point to a very narrow range
of value for your subject property. That seems
straightforward in theory, but I bet figuring
out exactly what a pool or a garage is worth
in dollar terms is the hard part. It is the hardest
part of the job. It's not just the cost to build
it. A pool might cost $50 ,000 to install. But
in a cold climate like Minnesota, it might only
add $5 ,000 to the market value. Or in some markets,
it might even be a liability and drag the value
down because of maintenance costs. Right. I could
see that. Speaking of random value factors, I
saw a stat in the notes that blew my mind. Tree
value. Ah, yes. The tree value contribution.
It's a real thing. The notes say tree value can
contribute up to 27 % of a property's value.
That seems huge. Is that really possible? In
some specific analyses, yes. But think about
it. Imagine a street lined with mature, 100 -year
-old oak trees that create a canopy. It feels
established, cool, private. It's beautiful. Of
course. Now imagine the next street over was
clear -cut for development. It's hot, dusty,
exposed. All the houses are identical. But one
street just feels better. I'd pay way more for
the oak trees, no question. The market reacts
to curb appeal. Trees also provide shade, which
lowers energy costs. But trying to quantify that,
trying to say this tree is worth exactly $4 ,000
is incredibly difficult. That is where the appraiser's
experience and local knowledge come in. Before
we move off sales comparison, we have to talk
about shop talk. I saw the term pencil appraisal.
What is that? Oh, boy. Can you give me a pencil
appraisal? That sounds shady. It's a slang term
you hear from loan officers or real estate agents.
They call up the appraiser and say, hey, I've
got this deal. Can you just pencil it out for
me? Just give me a quick look to see if the value
is there before we order the full report. Like
a back of the napkin guess? A pre -approval.
Exactly. They want a pre -check. But strictly
speaking, under USPAP, if an appraiser gives
an opinion of value, any opinion, it is an appraisal.
There is no such thing as a pencil search that
avoids the ethical requirements. If they give
you a number, they are on the hook for it. They
need a work file. They need to follow the standards.
So if you ask for a pencil appraisal, you're
basically asking them to work for free or break
the rules. Pretty much. It's a dangerous game
for the appraiser. Good to know. Okay. Moving
to method number two, the cost approach. This
feels less like shopping and more like construction.
That is the best way to think about it. This
is the builder's perspective. The formula is
simple math. At least on the surface. Value equals
the value of the land. As if it were vacant.
Plus the cost to build the structure new, minus
depreciation. RCNLD. I saw that acronym. Reproduction
costs new, less depreciation. You're getting
the lingo down. I'm trying. But there's a subtle
distinction here in the notes between reproduction
and replacement. Huge difference. Reproduction
means an exact replica. Imagine you are appraising
a historic Victorian home built in 1890. It has
hand -carved gargoyles, plaster lathe walls,
lead glass windows. To build that today, you
couldn't even find the craftsman. You'd have
to hire artisans. The cost would be astronomical.
It might cost $5 million to reproduce it exactly.
That is reproduction cost. It's mostly used for
insurance on historic buildings. But the house
probably isn't worth $5 million on the market.
Probably not. So usually appraisers use replacement
cost. This means building a house with the same
utility but using modern materials. So drywall
instead of plaster. Fiberglass shingles instead
of slate. Standard windows. It's much more practical.
Okay. But then comes the big subtraction. Depreciation.
And this isn't just about peeling paint. The
notes talk about obsolescence. Yes. There are
three kinds of decay. Three forms of depreciation.
Physical obsolescence is the easy one. The roof
is leaking. The carpet is worn out. It's just
stuff wearing out. But functional obsolescence
is where the stories are. This is my favorite
part of the notes. Functional obsolescence means
the design itself is stupid. Right. Or just bad.
Or just outdated. It doesn't match what the modern
market wants. Like the super adequacy example.
The house with nine bathrooms. That is a classic
super adequacy. Imagine someone builds their
dream home. It has two bedrooms. But for some
reason, they put in nine bathrooms. They spent
the money. The cost is there. But nobody wants
that. It's a cleaning nightmare. A buyer with
a family looks at that and says, I have two bedrooms.
Why do I want to clean nine toilets? the market
will not pay for those extra bathrooms. So the
appraiser has to penalize that value. The cost
was high, but the value is low. That's a super
adequacy. Or the opposite, inadequacy. Right.
Think about a luxury mansion in Phoenix, Arizona.
In that market, at that price point, buyers expect
a pool. It's a given. If you build a mansion
without a pool, you have an inadequacy. And the
value gets dinged. The value is dragged down,
often by more than the cost of the pool itself,
because now the buyer has to go through the hassle
of hiring contractors and digging up the yard
for a year. It's a pain. And then there's the
third one, the tragic one, external obsolescence.
The unfixable one. This is when the problem isn't
the house, it's the world around it. Your house
could be perfect. Exactly. A paper mill opens
up next door and it smells like sulfur 24 -7.
A busy highway gets rerouted through your front
yard. Or the entire local economy crashes because
the main factory in town closed. You can fix
a roof. You can remodel a bathroom. You can't
fix a paper mill. You cannot. External obsolescence
is usually considered incurable. It's a permanent
loss of value that you, the homeowner, can do
absolutely nothing about. So when is this cost
approach actually used? It seems like a lot of
work to calculate bricks and mortar and then
subtract all this theoretical decay. It is used
mostly for new construction where depreciation
is minimal or for special use properties. Think
about a church or a marina or a public library.
Right. You can't use the sales comparison approach
for a library. Exactly. What did the library
down the street sell for? It didn't. There are
no comps. And you can't use the income approach
because a library isn't designed to make a profit.
So the only way to value it is, what is the land
worth and what would it cost to build this building
from scratch? That makes perfect sense. Okay,
let's go to the final pillar, method number three.
The income approach. This is for the tycoons,
the investors. The investor's mindset. If you
are buying an office building, a shopping center,
or an apartment complex, you generally don't
care about the wallpaper or the crown molding.
You care about the cash flow. The property is
a machine that prints money. That's all it is.
Exactly. And the fuel for that machine is NOI
net operating income. This seems to be the holy
grail metric for commercial real estate. Every
investor talks about NOI. It is. You calculate
it by taking the gross potential income. That's
if every unit was full at market rent. Then you
subtract vacancy because you're never 100 % full
forever. And then you subtract all the operating
expenses. Taxes, insurance, maintenance, management
fees, utilities. Everything it costs to keep
the lights on and the place from falling apart.
And notice what's not in there. The mortgage
payment. Debt service. Critical point. Debt service
is excluded from the NOI calculation. NOI is
debt -free. Why is that? Because the value of
the property shouldn't depend on whether you
paid cash or took out a massive risky loan. If
I buy a building with cash and you buy the same
building with a high -interest loan, the building
is the same. The NOI is the same. The financing
is a personal problem, not a property problem.
Okay, so once we have this NOI number, say the
building clears $100 ,000 a year, how do we turn
that annual income into a total property value?
We use a magic wand called capitalization, or
more commonly, the cap rate. Break this down
for me. The cap rate is always talked about,
but it's a little abstract. The cap rate is essentially
a rate of return. It measures risk. Think of
it like a seesaw. If investors in the market
think a property is very safe, like a brand new
apartment building in a great city with long
-term leases, they might be happy with a low
return, say 5%. So you divide the NOI, $100 ,000,
by the cap rate, 0 .05. That gives you value
of $2 million. Right. But what if the building
is risky? It's in a bad neighborhood. Tenants
are shaky. The roof is old. Investors will demand
a higher return to take that risk. Maybe 10%.
So you divide 100 ,000 by 0 .10. And the value
drops to $1 million. So higher cap rate equals
lower value. Exactly. High risk, low price. Low
risk, high price. It's the fundamental logic
of investing applied to a building. And for the
really big stuff shopping malls, skyscrapers,
they use something called DCF, discounted cash
flow. That is the advanced version. that projects
the income out for five or ten years, guesses
what the property will sell for at the end, they
call that the reversion, and uses complex math
to discount all that future money back to today's
dollars. It's essentially predicting the future
of the money machine. It's wild to think that
a single -family home in a neighborhood of rentals
might actually be valued this way instead of
by comparing it to other sales. It happens. If
the only reason anyone buys in that neighborhood
is to rent the house out, the income approach
becomes the primary indicator of value. The appraiser
has to follow the market. If the market's thinking
like an investor, the appraiser has to as well.
So we've got our three pillars. But the world
is a big place, and apparently we don't all agree
on how to value dirt. Let's hop on a plane and
look at international variations. This is where
cultural and legal history really shapes the
profession. Real estate is local, but valuation
principles are global, with some fascinating
twists. Let's start in the United Kingdom. They
have the RICS, the Royal Institution of Chartered
Surveyors. That sounds very official. RICS is
huge. Their red book is the Bible evaluation
there. It's respected globally. Yeah. And they
have a few methods we don't use as much, like
the residual method for development sites and
the profit method for valuing businesses like
pubs and hotels. I was really jealous of the
consumer reports they have in the U .K. In the
U .S., you get this dense PDF inspection report
that looks like a tax form. It's impossible to
read. In the U .K., they have a traffic light
system. It is very consumer friendly. It's called
the Homebuyer Report. It rates every element
of the house. Yeah. Come on. Two or three. Green,
amber, red. One, green means it's good. No worries.
Two, amber means defects that need repairing
but aren't critical. Three, red means serious
impediments, needs attention and now. That is
so much clearer. Red light means stop. There's
a problem here. It creates clarity. And they
have some great vocabulary, too. The notes mention
the term froth. Froth. I've heard Alan Greenspan
talk about market froth like a bubble. In the
U .S., it usually just means a bubble is forming.
But in the UK valuation context, it's more specific.
It implies that the current capital value, the
price, is unsupported by the rental income. The
math doesn't work. The income can't justify the
price. The price is just air. It's frothy. I
like that. And we also have to mention the disclaimer.
In the UK, the mortgage valuation is explicitly
for the lender, not the borrower. That's true
in the US, too, legally speaking. But the UK
makes it very stark. They basically say, we are
doing this for the bank. If we miss a defect,
don't come crying to us. That's why they strongly
recommend the buyer gets their own private building
survey. Now let's move to Germany. This felt,
well, it felt exactly how I expected Germany
to be. Very orderly, very precise. Incredibly
structured. They have the committee. The Gutachterrausches.
The committee evaluation experts. Every municipality
has one. And here is the superpower of the German
system. Data transparency. How so? In the U .S.,
in non -disclosure states like Texas, we sometimes
have to guess what a house sold for. It's not
public record. In Germany, every single real
estate contract must be sent to the committee.
They collect everything in a database called
the Kaufpreisamlung. The collection of purchase
prices. So they have perfect data. But the philosophical
difference is what caught my eye. In Germany,
they treat land and improvements as completely
separate things. We talked about this with the
cost approach, but they take it to another level.
In the U .S., we value the property as a unit.
In Germany, they view land value as permanent.
It never dies. But the building, it decays. It
has a finite life. So they calculate them separately.
They even have a specific interest rate for land
use called the Liegenschaftsins. Lessee. Thank
you. It connects the land value to the income
it generates. It's a very precise, very analytical
way of looking at property. And another key difference,
German tenant laws, they're much stronger. Very
strong. Landlords bear much higher maintenance
costs there than in the U .S. or U .K. That lowers
the net income, which changes the valuation model
entirely. It's a huge factor. Fascinating. Now
let's go east to Russia. The history here is
wild because prior to 1990, there was no private
real estate market. Exactly. You can't have an
appraisal profession if you don't have private
property. Yeah. So when the Soviet Union fell,
the industry had to be invented from scratch
in the 90s. And for a while, it was the Wild
West. And then came the shock of 2017. The Great
Exam Crisis. The government decided to regulate
the industry in a very abrupt way. They introduced
a mandatory state exam for appraisers. But it
was incredibly difficult. The sources suggest
it was predicted to decimate 80 % of the profession.
80 %? That's not regulation. That's a purge.
Imagine if 80 % of doctors suddenly lost their
license because a board exam got harder. It created
a massive bottleneck, dropping the number of
valuers to just a few thousand for the whole
country. That is a shock therapy approach to
regulation. And finally, New Zealand. They seem
to be fighting a battle over words. The name
game. In the U .S., we use appraisal for the
formal legal document. In NZ, an appraisal is
just a marketing estimate given by a real estate
agent. It has no legal standing. It's what we
might call a CMA, a comparative market analysis.
So if a professional does it, what's it called?
A valuation. And it's done by a registered valuer.
They're very, very strict about the distinction.
And the market dynamic there has shifted, too.
Banks now use clearinghouses to order valuations.
Explain that. What's a clearinghouse? It used
to be if you were buying a house, you could call
up your local valuer, Joe, who knows the neighborhood
inside and out. But that created a risk of bias.
Joe might want to help you get the loan, keep
the local real estate agents happy. Now the request
goes through a random assignment system, a third
-party platform. You might get a valuer from
three towns over who was never set foot in that
neighborhood. It kills the bias. But it also
kills the local knowledge. That is the tradeoff.
Can a stranger understand the nuance of a specific
street? The good side versus the bad side of
the tracks. It's a huge debate. Which brings
us perfectly to the present and the future. Technology.
The sources mention a lot of acronyms. AVMs.
Gamma. Gamma. This is the rise of the machines.
AVM stands for automated valuation model. If
you've ever looked at a Zestimate or a similar
online home value estimate, you've used an AVM.
So how do they work? What's under the hood? It's
pure math, regression analysis and machine learning.
They look at thousands of data points, sales,
square footage, bedrooms, tax records, and spit
out a number. And the pros and cons seem pretty
obvious. They are great for homogenous neighborhoods.
If you live in a subdivision where every house
was built in 1990 by the same builder, same model,
same materials. The AVM is probably 95 % accurate.
But if I live in a converted barn on a hillside
with a unique view? The AVM fails miserably.
It can't see the view. It doesn't understand
the charm of a 200 -year -old beam. It just sees
old structure, weird shape. It might value your
luxury barn as a teardown shack. And governments
use this too, right, for property taxes? Yes,
that's comma computer -assisted mass appraisal.
It's how the tax assessor values 50 ,000 homes
in one county. without visiting the mall. They
run the algorithm. JAMA just adds a geographic
layer to it. But the big news is 2025. The notes
mention the UA and UR overhaul. What does that
mean for a regular person? This is inside baseball,
but it's huge. The Uniform Residential Appraisal
Report, the UR, the form every appraiser has
used for decades, is dying. The static PDF is
going away. Right. It's being replaced by a dynamic
cloud -based data set. Instead of just checking
boxes on a form, the report can adapt to the
specific property. And it's integrating AI. The
sources mention AI handling the data crunching.
Right. The vision for 2025 and beyond is that
AI handles the science. The AI scrapes the MLS,
cleans the data, runs a regression analysis on
the comps. It does the heavy lifting on the math.
Leaving the human to do what? The art. The judgment.
The appraiser verifies the data. There are the
boots on the ground. Does the basement smell
damp? Is the traffic noise louder than the map
suggests? Does the floor slope? Things an algorithm
can't detect. The goal is faster turnaround and
better consistency. Ideally, yes. But it raises
questions about the human element, which leads
us to the darker side of valuation, ethics and
bias. Yeah, we have to talk about the gap. This
is a critical issue facing the industry. Major
studies, including data from Freddie Mac, have
shown a persistent valuation gap for minority
-owned homes. And this isn't just an issue of
income disparity or something. No. The studies
control for credit score, income, and house size.
Even when you compare apples to apples, the valuation
often comes in lower for homes in minority neighborhoods
or owned by minorities. So where is the disconnect?
What's causing that? That is the fierce debate.
Some in the industry argue it's neighborhood
quality, which is really a byproduct of historical
redlining and systemic underinvestment. They
argue the appraiser is just reflecting the market
and the market itself is biased. But others say
it's the appraiser's subjectivity, the art part
we just praised. Correct. Implicit bias. Remember
those adjustments we talked about? Or the quality
ratings. If an appraiser marks a neighborhood
as declining instead of stable, that tanks the
value. Is that choice based on hard data? Or
a feeling. If it's a feeling, bias can creep
in. It's a massive challenge for the profession
to solve. And we also have the conflict of interest
issue. This goes way back to the savings and
loan crisis in the 80s. The Wild West of valuation.
Back then, banks would just hire their buddies
to appraise properties. They called Jerry and
say, make the deal happen, Jerry. And Jerry would
write whatever number was needed to make the
loan go through. Exactly. And when the market
turned, the banks realized they held collateral
that was worth half. of what the paper said it
was worth. That collapse led to the creation
of the Appraisal Foundation and USPAP. It created
the ethical wall between the loan officer and
the appraiser. A loan officer today isn't even
allowed to call the appraiser and talk numbers,
right? It all has to go through a third party.
They have to be very, very careful. They certainly
can't say, we need this to hit 400K. That is
a massive violation now. So we've covered a lot
of ground. We've unpacked the three approaches,
sales comparison, cost, and income. We've seen
how a nine -bathroom house might actually be
worth less than you think. We've traveled from
the traffic lights of UK surveys to the strict
committees of Germany. And we've looked at the
future of AI and how it's changing the game.
So what does this all mean for the listener?
What's the final takeaway? It means you need
to stop looking at an appraisal as just a hurdle
to get a loan. It's not an obstacle. It's a protection
mechanism. It protects you from yourself, from
your own emotions when you fall in love with
a house. It protects you from paying market price,
an emotional number, for something that doesn't
have the market value to back it up. Whether
you are a buyer, a seller, or just a homeowner
paying taxes, understanding how that number is
built gives you power. You can appeal a tax assessment
if you understand the cost approach. You can
negotiate a better purchase price if you understand
the sales comparison. Knowledge is leverage.
Always. So here is a provocative thought to leave
you with. As we move into this world of 2025
where AI takes over the math of valuation, will
the art, the human judgment, become more valuable?
That is the billion -dollar question. Algorithms
can crunch data better than any human. But can
an algorithm walk into a house and feel that
the layout is awkward? Can it smell the dampness
in the basement? Can it sense that the neighborhood
vibe is shifting because a cool coffee shop just
opened up down the street? Or will the algorithms
eventually get so good that they decide what
our homes are worth without ever stepping inside?
If that happens, we lose the nuance of human
life that is built into our homes. I hope we
keep the human element. The art is what makes
a house a home, and I think it's what makes a
valuation truly accurate. Something to mull over
the next time you look at your property tax bill.
Go check your assessment method. You might just
save yourself some money. Indeed. Thanks for
diving deep with us. We'll see you on the next
one.