WEBVTT 00:00:00.000 --> 00:00:02.859 Okay, let's set a scene. You have finally, finally 00:00:02.859 --> 00:00:06.679 found it. The one. It's the house you've been 00:00:06.679 --> 00:00:08.939 doom -scrolling on real estate apps for months 00:00:08.939 --> 00:00:11.220 trying to find. It has that, you know, that specific 00:00:11.220 --> 00:00:13.199 bay window you've been dreaming about where you're 00:00:13.199 --> 00:00:14.939 going to sit and drink your coffee. The perfect 00:00:14.939 --> 00:00:17.760 spot. The perfect spot. The backyard is actually 00:00:17.760 --> 00:00:19.800 big enough for that vegetable garden you keep 00:00:19.800 --> 00:00:21.960 threatening to start. And the school district. 00:00:22.800 --> 00:00:27.250 It's solid gold. The trifecta. It is. And you've 00:00:27.250 --> 00:00:30.789 gone through the absolute emotional ringer of 00:00:30.789 --> 00:00:34.549 the bidding war. You offered way, way over asking. 00:00:34.710 --> 00:00:37.429 You sweated through the night. You checked your 00:00:37.429 --> 00:00:41.170 email, what, 400 times in an hour? And then finally 00:00:41.170 --> 00:00:43.469 you got the call. The seller accepted. The seller 00:00:43.469 --> 00:00:45.670 accepted. You are ecstatic. You're ready to pop 00:00:45.670 --> 00:00:48.710 the champagne. You are mentally placing your 00:00:48.710 --> 00:00:50.789 furniture in the living room. Then your real 00:00:50.789 --> 00:00:52.729 estate agent gives you that look. You know the 00:00:52.729 --> 00:00:55.619 one. Put the cork back in the bottle look. Yeah. 00:00:55.719 --> 00:00:58.240 Because you are not done. You're not even close. 00:00:58.560 --> 00:01:01.259 Not at all. Now, a total stranger has to drive 00:01:01.259 --> 00:01:03.899 by the house, walk through the bedrooms, look 00:01:03.899 --> 00:01:06.099 at the furnace, peek in the attic, and tell the 00:01:06.099 --> 00:01:09.340 bank if the number you just agreed to pay, with 00:01:09.340 --> 00:01:11.939 your own money, by the way, is actually real. 00:01:12.079 --> 00:01:14.500 The appraisal. It's the single most terrifying 00:01:14.500 --> 00:01:17.340 limbo, I think, in the entire real estate process. 00:01:17.459 --> 00:01:19.620 It's that silence before the potential storm. 00:01:19.840 --> 00:01:22.430 It is the ultimate waiting game. And I think 00:01:22.430 --> 00:01:27.109 for most of us, this person, the appraiser, they're 00:01:27.109 --> 00:01:30.530 viewed as a villain. Or at best, maybe a soulless 00:01:30.530 --> 00:01:32.590 bureaucrat standing between us and our keys. 00:01:32.730 --> 00:01:34.750 Right, just a hurdle. A hurdle, a rubber stamp 00:01:34.750 --> 00:01:36.670 we have to pay $500 for just to get the mortgage 00:01:36.670 --> 00:01:39.609 approved. Yeah. But today, we're going to completely 00:01:39.609 --> 00:01:41.609 flip that script. Oh, there we are. We have a 00:01:41.609 --> 00:01:43.489 massive stack of research here. We're talking 00:01:43.489 --> 00:01:46.870 global appraisal standards, deep dives into Wikipedia's 00:01:46.870 --> 00:01:49.810 methodology archives, the RICS Redbook from the 00:01:49.810 --> 00:01:53.930 UK, and some really heavy 2025 industry reports 00:01:53.930 --> 00:01:56.969 about AI and algorithmic bias. And what's wild 00:01:56.969 --> 00:01:58.890 is that when you start to peel back all these 00:01:58.890 --> 00:02:01.829 layers, appraisal isn't just checking boxes on 00:02:01.829 --> 00:02:05.769 a form. It's this incredibly complex. intersection 00:02:05.769 --> 00:02:09.849 of, I'd say, art, hardcore science, and behavioral 00:02:09.849 --> 00:02:12.189 economics. It basically determines the value 00:02:12.189 --> 00:02:14.729 of the biggest asset class on the planet. Pretty 00:02:14.729 --> 00:02:17.250 much, yeah. So that is the mission today. We 00:02:17.250 --> 00:02:19.770 are decoding the invisible hand. We are going 00:02:19.770 --> 00:02:21.969 to figure out how these people put a price tag 00:02:21.969 --> 00:02:25.189 on a dream. And if there's one single theme that 00:02:25.189 --> 00:02:27.629 just jumps out from all these documents, it's 00:02:27.629 --> 00:02:30.310 a phrase that sounds like a... Like a Zen cone. 00:02:30.530 --> 00:02:32.729 The price is not the value. The price is not 00:02:32.729 --> 00:02:34.250 the value. I love that. It sounds like something 00:02:34.250 --> 00:02:36.729 a monk would say on a mountaintop, right? But 00:02:36.729 --> 00:02:38.830 here, it's just pure economic. So let's unpack 00:02:38.830 --> 00:02:41.150 this immediately because this feels really counterintuitive. 00:02:41.289 --> 00:02:43.669 It does. If I write a check for half a million 00:02:43.669 --> 00:02:46.330 dollars for a house and the seller cashes that 00:02:46.330 --> 00:02:48.949 check, isn't the value of the house half a million 00:02:48.949 --> 00:02:51.229 dollars? Strictly speaking, no. That is the price. 00:02:51.370 --> 00:02:53.710 In all the professional literature, price is 00:02:53.710 --> 00:02:56.590 defined as a historical fact. It is a piece of 00:02:56.590 --> 00:03:00.150 hard data. It represents the amount that a specific 00:03:00.150 --> 00:03:03.629 buyer agreed to pay a specific seller at a very 00:03:03.629 --> 00:03:06.050 specific moment in time. It's done. It's in the 00:03:06.050 --> 00:03:08.409 past. It's history. It's a receipt. That's all 00:03:08.409 --> 00:03:10.969 it is. Okay, so price is a fact. It's what happened. 00:03:11.090 --> 00:03:13.789 So then what on earth is value? Market value 00:03:13.789 --> 00:03:17.180 is an opinion. It's a prophecy. Almost. It is 00:03:17.180 --> 00:03:19.360 an estimate of what the property should exchange 00:03:19.360 --> 00:03:22.879 for in a transaction. But assuming a very, very 00:03:22.879 --> 00:03:25.939 specific set of criteria are met. Criteria like 00:03:25.939 --> 00:03:28.159 what? Well, the industry standard usually relies 00:03:28.159 --> 00:03:30.840 on a concept that economists call the Walrasian 00:03:30.840 --> 00:03:33.280 auction. The Walrasian auction. OK, I saw this 00:03:33.280 --> 00:03:35.180 in the notes and I felt like I was back in Econ 00:03:35.180 --> 00:03:38.000 101. This is the theoretical perfect market, 00:03:38.099 --> 00:03:40.080 right, where everything is known and everyone 00:03:40.080 --> 00:03:43.819 is rational. Exactly. Leon Walrus was this 19th 00:03:43.819 --> 00:03:46.379 century economist who imagined a system where 00:03:46.379 --> 00:03:49.159 an auctioneer calls out prices and everything 00:03:49.159 --> 00:03:51.460 just clears perfectly. There are no secrets, 00:03:51.599 --> 00:03:54.240 no hidden information. A fantasy land, basically. 00:03:54.400 --> 00:03:57.840 It's a total thought experiment. So market value 00:03:57.840 --> 00:04:00.180 assumes a world where you have a willing buyer 00:04:00.180 --> 00:04:04.139 and a willing seller. And crucially, neither 00:04:04.139 --> 00:04:07.259 of them is under any kind of duress. So nobody's 00:04:07.259 --> 00:04:08.979 being transferred for work next week and has 00:04:08.979 --> 00:04:12.159 to sell their house by Friday. Exactly. Or nobody's 00:04:12.159 --> 00:04:14.060 going through a messy divorce and just needs 00:04:14.060 --> 00:04:18.300 cash now. And this is key. Both parties are fully 00:04:18.300 --> 00:04:21.160 knowledgeable about the asset and they're acting 00:04:21.160 --> 00:04:22.899 in their own best interest. That's what they 00:04:22.899 --> 00:04:25.000 call an arm's length transaction. That's the 00:04:25.000 --> 00:04:27.560 one. It's a legal term I see everywhere. It essentially 00:04:27.560 --> 00:04:29.939 means I'm not buying the house from my father 00:04:29.939 --> 00:04:32.279 for a dollar. Correct. Right. And that's the 00:04:32.279 --> 00:04:34.920 most obvious example. If you buy the house from 00:04:34.920 --> 00:04:36.899 your dad for a dollar, the price is one dollar. 00:04:37.079 --> 00:04:39.839 That is a historical fact. But the market value 00:04:39.839 --> 00:04:42.180 might be, you know, four hundred thousand dollars. 00:04:42.259 --> 00:04:44.420 And if an appraiser used my one dollar purchase 00:04:44.420 --> 00:04:47.639 as a benchmark, a comp. They'd be breaking the 00:04:47.639 --> 00:04:50.100 market. They would be using fundamentally bad 00:04:50.100 --> 00:04:53.100 data and their license would be at risk. But 00:04:53.100 --> 00:04:55.600 it gets so much. more subtle than that price 00:04:55.600 --> 00:04:58.939 and value diverge constantly because well human 00:04:58.939 --> 00:05:01.519 beings are not rational actors we are definitely 00:05:01.519 --> 00:05:03.980 not rational i bought a blender last week just 00:05:03.980 --> 00:05:05.980 because it looked cool on instagram i didn't 00:05:05.980 --> 00:05:07.920 even check to see if it actually blends things 00:05:07.920 --> 00:05:10.240 well exactly now just scale that up to a half 00:05:10.240 --> 00:05:13.319 a million dollar purchase oh boy take the classic 00:05:13.319 --> 00:05:16.319 example of the uninformed buyer let's say someone 00:05:16.319 --> 00:05:19.480 is moving to a new city They're wealthy. They're 00:05:19.480 --> 00:05:22.160 in a rush. Maybe they're relocating for some 00:05:22.160 --> 00:05:25.459 high pressure job. They don't know the local 00:05:25.459 --> 00:05:28.740 nuances. They don't realize that the school district 00:05:28.740 --> 00:05:30.839 lines were just redrawn last month. And this 00:05:30.839 --> 00:05:32.839 beautiful house they've fallen in love with is 00:05:32.839 --> 00:05:36.509 now in the. Bad zone, so to speak. So they don't 00:05:36.509 --> 00:05:38.329 have that local knowledge. None at all. And they 00:05:38.329 --> 00:05:41.750 end up paying $50 ,000 over what any of the locals 00:05:41.750 --> 00:05:44.110 would have paid for that same house. So in doing 00:05:44.110 --> 00:05:45.870 that, they've set a new price record for the 00:05:45.870 --> 00:05:48.810 street. They have. Yeah. That extra $50 ,000, 00:05:48.970 --> 00:05:51.110 that is part of the market price. It happened. 00:05:51.839 --> 00:05:54.560 But it is absolutely not market value. It's an 00:05:54.560 --> 00:05:57.680 anomaly. It's an outlier based on imperfect information. 00:05:58.240 --> 00:06:01.139 So the appraiser is basically a referee. They're 00:06:01.139 --> 00:06:03.379 blowing the whistle on bad decisions. They look 00:06:03.379 --> 00:06:05.220 at that sale and say, nope, that one doesn't 00:06:05.220 --> 00:06:07.100 count for my analysis. Or at least they have 00:06:07.100 --> 00:06:09.360 to heavily discount it or explain why it's an 00:06:09.360 --> 00:06:12.100 outlier. Or they blow the whistle on unique motivations. 00:06:12.740 --> 00:06:15.759 And this brings us to the special interest scenario, 00:06:15.920 --> 00:06:20.100 which I find fascinating. Imagine you own a nice 00:06:20.100 --> 00:06:24.399 house. on a large lot. And the empty, undeveloped 00:06:24.399 --> 00:06:27.199 lot right next door comes up for sale. Right. 00:06:27.279 --> 00:06:29.879 Now to a random developer, that lot is worth 00:06:29.879 --> 00:06:33.319 maybe $100 ,000. They can build one small house 00:06:33.319 --> 00:06:36.430 on it, sell it, make a profit. Standard stuff. 00:06:36.689 --> 00:06:39.350 Standard market price. Makes sense. But to you, 00:06:39.509 --> 00:06:41.769 you live right next door. If you buy that lot, 00:06:41.850 --> 00:06:43.829 you can tear down the fence, combine it with 00:06:43.829 --> 00:06:45.550 your current property and suddenly you have a 00:06:45.550 --> 00:06:47.829 massive estate. Oh, I see where this is going. 00:06:47.889 --> 00:06:49.850 You can build a tennis court, a guest house, 00:06:50.029 --> 00:06:53.610 a sprawling garden. The utility of that piece 00:06:53.610 --> 00:06:56.370 of land is higher for you than for anyone else 00:06:56.370 --> 00:06:58.430 on the planet. I'm not just buying dirt. I'm 00:06:58.430 --> 00:07:00.790 buying the expansion of my kingdom. I'm protecting 00:07:00.790 --> 00:07:04.379 my privacy. Precisely. In appraisal terms, this 00:07:04.379 --> 00:07:07.439 process is called assemblage. And the resulting 00:07:07.439 --> 00:07:10.199 increase in value from combining the parcels 00:07:10.199 --> 00:07:12.860 is called plotage value. Plotage value. So you 00:07:12.860 --> 00:07:16.540 might be willing to pay, say, $150 ,000 for that 00:07:16.540 --> 00:07:18.889 lot. Way more than the developer would. Exactly. 00:07:18.930 --> 00:07:21.850 That 150 figure, that's the investment value 00:07:21.850 --> 00:07:25.389 to use specifically. But the market value is 00:07:25.389 --> 00:07:29.730 still only $100 ,000. If you pay 150, you're 00:07:29.730 --> 00:07:33.029 paying a premium for your specific unique use 00:07:33.029 --> 00:07:35.990 case. That's a really crucial distinction, investment 00:07:35.990 --> 00:07:38.810 value versus market value. It reminds me a lot 00:07:38.810 --> 00:07:40.990 of corporate mergers and acquisitions. How so? 00:07:41.509 --> 00:07:43.470 You know, when a tech giant... buys a little 00:07:43.470 --> 00:07:46.269 startup, they pay a massive premium. They aren't 00:07:46.269 --> 00:07:48.250 just paying what the stock is trading at. They're 00:07:48.250 --> 00:07:50.730 paying for the synergy or to eliminate a competitor 00:07:50.730 --> 00:07:52.850 or for the engineering talent. They're paying 00:07:52.850 --> 00:07:55.370 for control. The sum is greater than the parts. 00:07:55.509 --> 00:07:57.730 Exactly. That is the perfect analogy. And real 00:07:57.730 --> 00:07:59.769 estate works the exact same way. And we have 00:07:59.769 --> 00:08:01.569 to be really clear about these different types 00:08:01.569 --> 00:08:04.490 of value because different clients need different 00:08:04.490 --> 00:08:07.129 answers from the appraiser. For example, there's 00:08:07.129 --> 00:08:10.269 value in use. Value in use. OK, give me an example 00:08:10.269 --> 00:08:12.689 of that. Sure. Think of a factory that is custom 00:08:12.689 --> 00:08:16.250 built to manufacture a very specific very weird 00:08:16.250 --> 00:08:18.810 component for a satellite okay super specialized 00:08:18.810 --> 00:08:21.870 building extremely the ceilings are a specific 00:08:21.870 --> 00:08:24.550 height to accommodate a crane the floors are 00:08:24.550 --> 00:08:27.449 reinforced concrete for heavy machinery the power 00:08:27.449 --> 00:08:30.870 supply is industrial grade to the satellite company 00:08:30.870 --> 00:08:33.210 that owns it that building is worth millions 00:08:33.210 --> 00:08:36.529 it is perfectly designed for their use the net 00:08:36.529 --> 00:08:38.909 present value of the cash flow they can generate 00:08:38.909 --> 00:08:41.519 there is huge it's massive But what happens if 00:08:41.519 --> 00:08:42.960 they go out of business and have to put it on 00:08:42.960 --> 00:08:45.059 the market? Well, the general market just sees 00:08:45.059 --> 00:08:48.840 a weird, overbuilt, expensive warehouse. Right. 00:08:49.039 --> 00:08:50.679 What's a real estate developer going to do with 00:08:50.679 --> 00:08:53.200 that? The market value might be half of the value 00:08:53.200 --> 00:08:56.340 in use. If the appraiser doesn't clarify in their 00:08:56.340 --> 00:08:58.139 scope of work which value they are supposed to 00:08:58.139 --> 00:09:00.620 be calculating, they're going to get the wrong 00:09:00.620 --> 00:09:03.100 number for their client. And then there's the 00:09:03.100 --> 00:09:06.519 scary one, liquidation value. Just the name sounds 00:09:06.519 --> 00:09:10.610 bad. It is. This is the fire sale scenario. Market 00:09:10.610 --> 00:09:14.009 value, remember, assumes a reasonable exposure 00:09:14.009 --> 00:09:17.139 time on the market. Meaning? The house sits on 00:09:17.139 --> 00:09:19.519 Zillow for a normal amount of time, say 60 to 00:09:19.519 --> 00:09:22.500 90 days, so the right buyers can find it. Exactly. 00:09:22.740 --> 00:09:25.639 But if a bank is foreclosing on a property and 00:09:25.639 --> 00:09:28.659 says, we need cash in 20 days, you are not going 00:09:28.659 --> 00:09:30.779 to get market value. You are getting liquidation 00:09:30.779 --> 00:09:33.320 value. Which is always lower because you're trading 00:09:33.320 --> 00:09:35.519 price for speed. You don't have time to find 00:09:35.519 --> 00:09:37.740 that perfect buyer. That's it. And one more we 00:09:37.740 --> 00:09:39.639 absolutely have to mention because it confuses 00:09:39.639 --> 00:09:42.860 homeowners constantly. Insurable value. Oh, yes. 00:09:43.200 --> 00:09:45.789 This is when you get your appraisal back. Totally 00:09:45.789 --> 00:09:47.870 different from what your insurance agent says 00:09:47.870 --> 00:09:49.990 the house is worth and you immediately panic. 00:09:50.169 --> 00:09:52.309 It happens all the time. People think someone 00:09:52.309 --> 00:09:55.269 is wrong or someone is cheating them, but they're 00:09:55.269 --> 00:09:57.909 just measuring two different things. Insurable 00:09:57.909 --> 00:10:00.509 value is usually based on the replacement cost. 00:10:00.809 --> 00:10:03.490 Okay, what's that? It's literally the cost of 00:10:03.490 --> 00:10:05.990 the bricks, the sticks, the labor, and the copper 00:10:05.990 --> 00:10:08.470 wire to rebuild the house from scratch if it 00:10:08.470 --> 00:10:11.809 burns to the ground. Crucially, it often excludes 00:10:11.809 --> 00:10:14.470 the land value entirely. Because the dirt doesn't 00:10:14.470 --> 00:10:17.190 burn. Exactly. You don't need to insure the earth. 00:10:17.370 --> 00:10:19.950 So if you live in a tiny shack on the beach in 00:10:19.950 --> 00:10:23.070 Malibu, your market value might be $5 million 00:10:23.070 --> 00:10:26.429 because of the ocean view and the value of that 00:10:26.429 --> 00:10:28.929 land. Or the location. But your insurable value 00:10:28.929 --> 00:10:31.789 might only be $200 ,000 because the shack itself 00:10:31.789 --> 00:10:34.710 is cheap to rebuild. If you confuse those two 00:10:34.710 --> 00:10:37.009 numbers, you're either going to be way overinsured. 00:10:37.560 --> 00:10:41.580 Or worse, dangerously underinsured. OK, so we've 00:10:41.580 --> 00:10:44.299 established that value is this this nebulous 00:10:44.299 --> 00:10:46.580 shifting concept, depending on the context. Are 00:10:46.580 --> 00:10:49.340 you an insurer, a desperate seller, a neighbor 00:10:49.340 --> 00:10:52.000 building an empire? But the appraiser can't just, 00:10:52.019 --> 00:10:55.220 you know, vibe it out. They can't just walk in, 00:10:55.279 --> 00:10:57.879 lick your finger, stick in the air and say, yeah, 00:10:58.000 --> 00:11:00.840 feels like a million bucks to me. No, that would 00:11:00.840 --> 00:11:02.960 be that would be malpractice and it would get 00:11:02.960 --> 00:11:04.860 them sued very quickly. They have to show their 00:11:04.860 --> 00:11:08.389 work. The research we looked at mentions the 00:11:08.389 --> 00:11:10.909 three pillars or the three main approaches to 00:11:10.909 --> 00:11:13.230 value. And I want to walk through these because 00:11:13.230 --> 00:11:15.669 this is where the science actually happens. This 00:11:15.669 --> 00:11:17.750 isn't just guesswork. These are the three tools 00:11:17.750 --> 00:11:20.269 in the toolbox. And depending on the scope of 00:11:20.269 --> 00:11:22.570 work, which we'll get to later, the appraiser 00:11:22.570 --> 00:11:25.669 will pick the best tool for the job. Sometimes 00:11:25.669 --> 00:11:27.889 they use all three and then have to reconcile 00:11:27.889 --> 00:11:30.230 the different results. Let's start with the one 00:11:30.230 --> 00:11:32.149 that most listeners are probably going to recognize, 00:11:32.389 --> 00:11:35.360 the residential standard. The sales comparison 00:11:35.360 --> 00:11:37.779 approach. This is the bread and butter of home 00:11:37.779 --> 00:11:40.360 buying. If you're buying a standard single -family 00:11:40.360 --> 00:11:43.860 home in a subdivision, this is 99 % of the valuation. 00:11:44.279 --> 00:11:46.399 And it's based on a really simple economic idea, 00:11:46.500 --> 00:11:48.759 right? It is. It's called the principle of substitution. 00:11:49.299 --> 00:11:52.320 Which states? A rational person will not pay 00:11:52.320 --> 00:11:54.700 more for a property than it would cost to acquire 00:11:54.700 --> 00:11:57.899 a similar, equally desirable substitute property. 00:11:58.539 --> 00:12:02.039 It's just logic. Why would I pay $500 ,000 for 00:12:02.039 --> 00:12:03.820 your house if I can buy the exact same house 00:12:03.820 --> 00:12:06.820 next door for $450 ,000? But there's the problem. 00:12:07.120 --> 00:12:10.679 No two houses are exactly alike. Even in those 00:12:10.679 --> 00:12:12.840 cookie -cutter subdivisions, one has a bitter 00:12:12.840 --> 00:12:15.899 view, one is on a cul -de -sac, one is a new 00:12:15.899 --> 00:12:19.200 kitchen, one smells like wet dog. Right. How 00:12:19.200 --> 00:12:21.820 do they compare apples to oranges? They turn 00:12:21.820 --> 00:12:24.139 the oranges into apples through a process called 00:12:24.139 --> 00:12:26.240 adjustment. This is where the art really meets 00:12:26.240 --> 00:12:30.039 the math. The appraiser finds compables or comps. 00:12:30.039 --> 00:12:32.840 Okay. And this is important. These must be sold 00:12:32.840 --> 00:12:35.720 properties. We cannot use asking prices. Because 00:12:35.720 --> 00:12:38.299 asking prices are basically wishes. I can ask 00:12:38.299 --> 00:12:40.179 a million dollars for my shed in the backyard. 00:12:40.419 --> 00:12:42.759 Doesn't mean I'll get it. Exactly. Asking prices 00:12:42.759 --> 00:12:45.840 are fantasy. Sold prices are reality. So the 00:12:45.840 --> 00:12:48.399 appraiser finds three to five recent sales in 00:12:48.399 --> 00:12:50.710 the nearby area. Now let's do a quick simulation. 00:12:51.169 --> 00:12:53.570 Let's say the subject property, that's the house 00:12:53.570 --> 00:12:55.750 you want to buy, has a swimming pool. Okay, I'm 00:12:55.750 --> 00:12:58.549 buying a house with a pool. I am officially living 00:12:58.549 --> 00:13:01.470 the dream. So the appraiser finds a comp down 00:13:01.470 --> 00:13:03.409 the street that is almost identical. Same square 00:13:03.409 --> 00:13:05.970 footage, same age, same number of beds and baths. 00:13:06.029 --> 00:13:10.730 It's sold for $400 ,000. But it doesn't have 00:13:10.730 --> 00:13:13.350 a pool. Okay, so that house is inferior to mine. 00:13:13.759 --> 00:13:16.580 In appraisal terms. Correct. So now the appraiser 00:13:16.580 --> 00:13:18.779 has to answer the question, what would that comp 00:13:18.779 --> 00:13:21.220 have sold for if it had a pool? So they have 00:13:21.220 --> 00:13:23.620 to add value to it. Right. They adjust up. They 00:13:23.620 --> 00:13:25.960 add the contributory value of the pool to the 00:13:25.960 --> 00:13:29.259 comp's price. Now, wait a second. Is that just 00:13:29.259 --> 00:13:31.799 the cost of the pool? If it cost me $50 ,000 00:13:31.799 --> 00:13:34.679 to install the pool, do they just add $50 ,000? 00:13:35.120 --> 00:13:37.960 No. And this is the single biggest point of confusion 00:13:37.960 --> 00:13:41.860 for homeowners. Cost does not equal value. In 00:13:41.860 --> 00:13:45.059 many markets, a pool might cost $50 ,000 to build, 00:13:45.159 --> 00:13:47.879 but buyers in that area might only be willing 00:13:47.879 --> 00:13:50.320 to pay an extra $20 ,000 for a house that has 00:13:50.320 --> 00:13:52.940 one. In that case, the adjustment is only $20 00:13:52.940 --> 00:13:56.000 ,000. That is so painful for the seller who just 00:13:56.000 --> 00:13:58.879 put the pool in. They literally lost $30 ,000 00:13:58.879 --> 00:14:01.149 the second the water... water was put in it happens 00:14:01.149 --> 00:14:03.730 all the time over improvement is a huge financial 00:14:03.730 --> 00:14:07.149 risk conversely if the comp has a brand new finished 00:14:07.149 --> 00:14:09.409 basement and your subject property doesn't the 00:14:09.409 --> 00:14:11.970 comp is superior okay so you have to adjust down 00:14:11.970 --> 00:14:14.470 you subtract the value of that finished basement 00:14:14.470 --> 00:14:17.870 from the comps price the goal is to mathematically 00:14:17.870 --> 00:14:21.450 alter all the comps until they all look like 00:14:21.450 --> 00:14:24.159 your subject property And then you see what price 00:14:24.159 --> 00:14:26.360 they all point to. Exactly. You end up with a 00:14:26.360 --> 00:14:29.279 range of adjusted values and the appraiser reconciles 00:14:29.279 --> 00:14:31.980 them into a final opinion of value. I saw a stat 00:14:31.980 --> 00:14:34.580 in the notes that really, really blew my mind 00:14:34.580 --> 00:14:38.460 regarding these adjustments. Tree value. It says 00:14:38.460 --> 00:14:41.679 mature landscaping can contribute up to 27 % 00:14:41.679 --> 00:14:44.980 of a property's value. This seems insane. It 00:14:44.980 --> 00:14:46.740 is huge, and it's one of the most overlooked 00:14:46.740 --> 00:14:49.539 aspects of value. We aren't talking about, you 00:14:49.539 --> 00:14:51.960 know, some petunias in a flower pot. We are talking 00:14:51.960 --> 00:14:55.759 about mature oaks, maples, an established canopy 00:14:55.759 --> 00:14:58.649 over the house. What's the logic there? It signals 00:14:58.649 --> 00:15:01.789 stability, privacy, curb appeal. It provides 00:15:01.789 --> 00:15:05.309 shade, which lowers energy costs. It just creates 00:15:05.309 --> 00:15:07.549 an aesthetic that people subconsciously will 00:15:07.549 --> 00:15:11.129 pay a huge premium for. It takes decades to grow 00:15:11.129 --> 00:15:13.190 that. So how on earth do they determine that 00:15:13.190 --> 00:15:15.710 number? How do you isolate the price of a single 00:15:15.710 --> 00:15:18.230 tree? It's a technique called paired sales analysis. 00:15:19.080 --> 00:15:21.059 It's basically a form of regression analysis. 00:15:21.840 --> 00:15:24.279 If you look at enough data in a large neighborhood, 00:15:24.559 --> 00:15:27.519 you can eventually find two houses that are almost 00:15:27.519 --> 00:15:30.700 identical in every way. Same builder, same year, 00:15:30.860 --> 00:15:33.600 same floor plan, except one has a barren lawn 00:15:33.600 --> 00:15:36.539 and the other has a beautiful 50 -year -old oak 00:15:36.539 --> 00:15:38.419 tree in the front yard. And you just see what 00:15:38.419 --> 00:15:40.919 the difference in sale price was. Exactly. If 00:15:40.919 --> 00:15:43.740 the house with the tree sold for $15 ,000 more... 00:15:43.960 --> 00:15:46.320 all other things being equal, you now have a 00:15:46.320 --> 00:15:48.799 data -backed adjustment for a mature tree. That 00:15:48.799 --> 00:15:50.700 is fascinating. Yeah. So the big takeaway there 00:15:50.700 --> 00:15:54.259 for homeowners is do not cut down the big oak 00:15:54.259 --> 00:15:55.679 tree in the front yard if you're planning to 00:15:55.679 --> 00:15:57.679 sell. You're literally sawing off your equity. 00:15:57.700 --> 00:16:00.200 Please do not keep the tree. Okay, so that's 00:16:00.200 --> 00:16:02.980 sales comparison. It works great when there are 00:16:02.980 --> 00:16:05.779 lots of similar houses, but what if there aren't? 00:16:05.919 --> 00:16:08.779 What if I'm buying a brand new church or a marina? 00:16:09.399 --> 00:16:12.200 A public library. You can't exactly look for 00:16:12.200 --> 00:16:14.059 sold libraries down the street to compare it 00:16:14.059 --> 00:16:15.960 to. Oh, you definitely can't. And that is when 00:16:15.960 --> 00:16:18.860 we pull out tool number two, the cost approach. 00:16:19.120 --> 00:16:22.539 This was historically called the summation method. 00:16:23.080 --> 00:16:25.600 Summation. So we're just adding things up. Essentially, 00:16:25.659 --> 00:16:28.059 yes. The formula is actually quite simple on 00:16:28.059 --> 00:16:30.259 the surface. You calculate the value of the land 00:16:30.259 --> 00:16:32.919 as if it were empty and available. Then you add 00:16:32.919 --> 00:16:35.840 the cost to build the building new today. And 00:16:35.840 --> 00:16:39.710 then, and this is the key, you subtract. So what 00:16:39.710 --> 00:16:41.870 is the dirt worth plus what does it cost to build 00:16:41.870 --> 00:16:44.090 the structure minus how much has it fallen apart 00:16:44.090 --> 00:16:47.669 over time? Precisely. But in appraisal, depreciation 00:16:47.669 --> 00:16:50.129 isn't just about things getting old and rusty. 00:16:50.289 --> 00:16:53.250 It's a much more nuanced concept. There are three 00:16:53.250 --> 00:16:55.690 distinct types of obsolescence that we look for. 00:16:55.850 --> 00:16:57.889 Okay, lay them on me. The first one is the easiest 00:16:57.889 --> 00:17:00.929 to understand. It's physical obsolescence. That's 00:17:00.929 --> 00:17:03.230 the straightforward stuff. The roof is leaking. 00:17:03.549 --> 00:17:06.609 The carpet is worn out. The boiler is from 1950 00:17:06.609 --> 00:17:09.670 and sounds like a dying whale. The building is 00:17:09.670 --> 00:17:12.069 physically breaking down. Simple enough. Just 00:17:12.069 --> 00:17:14.430 normal wear and tear. Then you have functional 00:17:14.430 --> 00:17:17.269 obsolescence. This is a bit trickier. This is 00:17:17.269 --> 00:17:20.230 when the building works physically. The walls 00:17:20.230 --> 00:17:23.009 are sturdy. The roof is tight. But the design 00:17:23.009 --> 00:17:25.589 is bad. It's out of step with what the modern 00:17:25.589 --> 00:17:27.869 market wants. And the notes had a hilarious example 00:17:27.869 --> 00:17:30.089 of this. The house with two bedrooms and nine 00:17:30.089 --> 00:17:32.349 bathrooms. The classic super adequacy house, 00:17:32.450 --> 00:17:35.630 yes. Technically, those nine bathrooms cost an 00:17:35.630 --> 00:17:37.970 absolute fortune to build. The plumbing, the 00:17:37.970 --> 00:17:40.670 tile, the fixtures. It might have cost $200 ,000 00:17:40.670 --> 00:17:43.329 just for the bathrooms alone. So from a cost 00:17:43.329 --> 00:17:46.160 perspective, it's a huge number. Huge. But if 00:17:46.160 --> 00:17:48.720 you try to sell that house, no buyer is going 00:17:48.720 --> 00:17:50.980 to pay extra for nine bathrooms. In fact, they 00:17:50.980 --> 00:17:52.859 might pay less because now they're thinking about 00:17:52.859 --> 00:17:54.920 the nightmare of cleaning nine toilets every 00:17:54.920 --> 00:17:57.900 week. So the extra bathrooms, which cost a fortune, 00:17:58.079 --> 00:18:01.140 actually have negative value in the market. Or 00:18:01.140 --> 00:18:05.319 at best, zero value. That is functional obsolescence. 00:18:05.619 --> 00:18:08.700 You overbuilt for the market. Another great example 00:18:08.700 --> 00:18:11.019 is a five -bedroom house where you have to walk 00:18:11.019 --> 00:18:13.420 through one bedroom to get to another. Technically, 00:18:13.420 --> 00:18:15.640 it's five bedrooms, but functionally, it's a 00:18:15.640 --> 00:18:18.180 disaster. That's a bad design. I get it. Okay, 00:18:18.279 --> 00:18:20.380 and the third type of obsolescence. The third 00:18:20.380 --> 00:18:22.819 type is the most painful because you absolutely 00:18:22.819 --> 00:18:26.500 cannot fix it. External obsolescence. This is 00:18:26.500 --> 00:18:28.799 the location, location, location problem, isn't 00:18:28.799 --> 00:18:31.000 it? It is. Let's say you build a perfect mansion. 00:18:31.640 --> 00:18:34.180 Best materials, great design. Everything is top 00:18:34.180 --> 00:18:37.099 notch. But then a year after you move in, the 00:18:37.099 --> 00:18:40.099 city builds a noisy six lane highway right behind 00:18:40.099 --> 00:18:42.359 your backyard. Oh, that's my nightmare. Or a 00:18:42.359 --> 00:18:44.859 rendering plant opens up downwind or the main 00:18:44.859 --> 00:18:47.740 employer in town closes and property values tank 00:18:47.740 --> 00:18:50.559 across the city. You can't fix the highway. You 00:18:50.559 --> 00:18:52.720 can't fix the economy. You cannot. Your property 00:18:52.720 --> 00:18:55.619 has lost value purely due to factors outside 00:18:55.619 --> 00:18:58.400 your property lines. And the cost approach has 00:18:58.400 --> 00:19:00.700 to account for that loss. It's brutal because 00:19:00.700 --> 00:19:02.950 it's. Completely out of your control. So that's 00:19:02.950 --> 00:19:06.329 the cost approach. Really useful for unique special 00:19:06.329 --> 00:19:10.970 use properties. Now for the third pillar, the 00:19:10.970 --> 00:19:13.750 one the Wall Street guys love, the income approach. 00:19:14.069 --> 00:19:16.630 Yes. This is for the office towers, the apartment 00:19:16.630 --> 00:19:19.009 complexes, the shopping malls. If you're buying 00:19:19.009 --> 00:19:20.769 these types of properties, you don't care about 00:19:20.769 --> 00:19:23.910 the wallpaper or the view or the oak tree nearly 00:19:23.910 --> 00:19:25.950 as much as you care about one thing. Show me 00:19:25.950 --> 00:19:28.940 the money. The cash flow, exactly. The value 00:19:28.940 --> 00:19:31.460 is a direct function of the net operating income, 00:19:31.660 --> 00:19:35.519 or NOI. They use a tool called a cap rate, a 00:19:35.519 --> 00:19:37.700 capitalization rate, to determine the value. 00:19:37.859 --> 00:19:40.480 I hear cap rate thrown around at cocktail parties 00:19:40.480 --> 00:19:42.660 by people trying to sound smart about real estate. 00:19:42.819 --> 00:19:45.420 What is it, really, in simple terms? In the simplest 00:19:45.420 --> 00:19:48.589 terms, it's a measure of risk and return. It's 00:19:48.589 --> 00:19:50.170 the rate of return you would expect to get on 00:19:50.170 --> 00:19:52.410 the property if you bought it all in cash. If 00:19:52.410 --> 00:19:54.490 a building costs a million dollars and generates 00:19:54.490 --> 00:19:57.950 $100 ,000 a year in profit after expenses, that's 00:19:57.950 --> 00:20:00.509 a 10 % cap rate. Okay, so if I'm an investor, 00:20:00.630 --> 00:20:03.089 do I want a high cap rate or a low cap rate? 00:20:03.250 --> 00:20:05.230 If you are buying, you want a high cap rate. 00:20:05.309 --> 00:20:07.650 You want more income for your price. If you are 00:20:07.650 --> 00:20:10.230 selling, you want a low cap rate. A low cap rate 00:20:10.230 --> 00:20:13.170 means the market is willing to pay a very high 00:20:13.170 --> 00:20:15.990 price for that income stream. It's a seesaw. 00:20:16.410 --> 00:20:19.269 And can we touch on this idea of froth? The notes 00:20:19.269 --> 00:20:21.450 mentioned this specifically in the context of 00:20:21.450 --> 00:20:23.609 the UK commercial market. It sounds like a term 00:20:23.609 --> 00:20:25.750 for my morning latte, but I suspect it's not. 00:20:25.930 --> 00:20:29.990 No, not quite. In the UK specifically, appraisers 00:20:29.990 --> 00:20:32.930 or surveyors, as they're called, they look at 00:20:32.930 --> 00:20:36.730 the estimated rental value or ERV. That's what 00:20:36.730 --> 00:20:38.569 the property should be renting for based on the 00:20:38.569 --> 00:20:40.549 current market. And then they compare that to 00:20:40.549 --> 00:20:41.990 the actual income it's currently generating. 00:20:42.799 --> 00:20:45.019 Sometimes a building has a tenant who is paying 00:20:45.019 --> 00:20:47.839 way, way above the market rate. Maybe they signed 00:20:47.839 --> 00:20:49.839 a 10 -year lease five years ago when prices were 00:20:49.839 --> 00:20:51.940 crazy. So they're locked into a great deal for 00:20:51.940 --> 00:20:55.180 the landlord. A fantastic deal. But that extra 00:20:55.180 --> 00:20:57.940 income, the slice of rent that is above the current 00:20:57.940 --> 00:21:01.099 market rate, is called froth. It's precarious. 00:21:01.440 --> 00:21:03.700 It's not sustainable. Because when that lease 00:21:03.700 --> 00:21:06.299 expires? The income will drop back down to the 00:21:06.299 --> 00:21:08.940 market level. So appraisers have to heavily discount 00:21:08.940 --> 00:21:11.599 that froth. It's a very descriptive way of saying, 00:21:12.349 --> 00:21:15.089 This income stream is a bit bubbly. Don't trust 00:21:15.089 --> 00:21:17.609 it long term. I love that. Be careful. That revenue 00:21:17.609 --> 00:21:20.829 stream is just froth. It's so visual. So, okay, 00:21:20.869 --> 00:21:23.609 we have the three pillars. Sales comparison for 00:21:23.609 --> 00:21:26.230 regular houses, the cost approach for unique 00:21:26.230 --> 00:21:29.049 buildings, and the income approach for investments. 00:21:29.230 --> 00:21:31.690 The three -legged stool evaluation. But this 00:21:31.690 --> 00:21:34.680 deep dive took us on a bit of a world tour. And 00:21:34.680 --> 00:21:37.200 I was really surprised to learn that value isn't 00:21:37.200 --> 00:21:39.500 calculated the same way everywhere. It's not 00:21:39.500 --> 00:21:41.700 a universal constant. Not at all. Culture and 00:21:41.700 --> 00:21:44.039 legal systems play a huge role in the methodology. 00:21:44.380 --> 00:21:46.940 Let's talk about Germany because their system 00:21:46.940 --> 00:21:50.160 seems, well, it seems incredibly German, very 00:21:50.160 --> 00:21:52.440 structured, very precise, very philosophical 00:21:52.440 --> 00:21:55.130 even. It is completely distinct. In Germany, 00:21:55.170 --> 00:21:57.109 they have a core philosophy known as the separation 00:21:57.109 --> 00:21:59.869 of earth and stone. Earth and stone. It sounds 00:21:59.869 --> 00:22:02.670 like a fantasy novel or a heavy metal band. It 00:22:02.670 --> 00:22:05.710 does. But the logic behind it is extremely practical. 00:22:06.049 --> 00:22:09.009 They treat the land and the improvements, the 00:22:09.009 --> 00:22:11.930 buildings as completely separate assets to be 00:22:11.930 --> 00:22:15.309 valued independently. Why? The idea is that the 00:22:15.309 --> 00:22:17.730 land is eternal. It will be there forever. The 00:22:17.730 --> 00:22:20.369 building, however, has a limited lifespan. It 00:22:20.369 --> 00:22:22.809 will eventually crumble or be torn down. That's 00:22:22.809 --> 00:22:25.250 a very long -term view. In the U .S., we just 00:22:25.250 --> 00:22:28.769 say house plus land equals one price. We treat 00:22:28.769 --> 00:22:32.390 it all as one big bundle. Right. But in Germany, 00:22:32.509 --> 00:22:34.430 to value them separately, they have these incredible 00:22:34.430 --> 00:22:37.170 local committees called the Gutechtrausches. 00:22:38.690 --> 00:22:40.269 Gutechtrausches. They're appraisal committees. 00:22:40.410 --> 00:22:52.329 And here's the amazing part. So they have... 00:22:52.589 --> 00:22:55.609 Perfect or near perfect data transparency. Better 00:22:55.609 --> 00:22:57.890 than almost anywhere else in the world. And using 00:22:57.890 --> 00:23:00.890 this incredibly rich data, they calculate a specific 00:23:00.890 --> 00:23:04.289 interest rate for land use called the Liegenschaftsens. 00:23:04.410 --> 00:23:06.390 Okay, what's that? It's conceptually the interest 00:23:06.390 --> 00:23:08.569 paid by the building owner to the landowner, 00:23:08.690 --> 00:23:10.930 even if they're the same person. It's a way to 00:23:10.930 --> 00:23:13.509 mathematically isolate the value of the dirt 00:23:13.509 --> 00:23:16.130 versus the value of the structure with incredible 00:23:16.130 --> 00:23:19.069 precision. That is so different from the U .S. 00:23:19.069 --> 00:23:23.890 approach. It feels more... scientific, less Wild 00:23:23.890 --> 00:23:26.970 West. It is. It's designed to eliminate a lot 00:23:26.970 --> 00:23:28.630 of the guesswork that can happen in other systems. 00:23:28.849 --> 00:23:31.029 OK, now let's hop over the channel to the UK. 00:23:31.250 --> 00:23:34.910 The Red Book. What's that about? The RICS Red 00:23:34.910 --> 00:23:37.130 Book. It's the Bible, essentially, for chartered 00:23:37.130 --> 00:23:39.029 surveyors in the UK and much the Commonwealth. 00:23:39.250 --> 00:23:42.069 It sets out all the mandatory practices and ethical 00:23:42.069 --> 00:23:44.410 standards. And what really stood out to me about 00:23:44.410 --> 00:23:47.029 the UK system was the traffic light. concept 00:23:47.029 --> 00:23:49.690 in their surveys. It feels very consumer friendly. 00:23:49.890 --> 00:23:52.289 It is. In the UK, when you commission a survey, 00:23:52.369 --> 00:23:55.150 specifically the RICS homebuyer report, the surveyor 00:23:55.150 --> 00:23:56.829 will rate the condition of different parts of 00:23:56.829 --> 00:23:59.390 the house using a traffic light system. Condition 00:23:59.390 --> 00:24:01.970 rating one is green, meaning it's good. Two is 00:24:01.970 --> 00:24:05.190 amber, meaning it needs attention soon. And three 00:24:05.190 --> 00:24:08.170 is red. The roof is red, fix it or it collapses. 00:24:08.529 --> 00:24:12.740 Exactly. Needs urgent attention now. But there 00:24:12.740 --> 00:24:15.380 is a massive trap for buyers in the UK that we 00:24:15.380 --> 00:24:17.880 need to highlight. This is a public service announcement 00:24:17.880 --> 00:24:20.079 for anyone listening who's buying property there. 00:24:20.240 --> 00:24:22.400 The mortgage valuation versus the survey. Yes, 00:24:22.579 --> 00:24:25.440 this is absolutely crucial. When your bank orders 00:24:25.440 --> 00:24:28.480 a valuation in the UK, it is for the bank. It 00:24:28.480 --> 00:24:31.660 is solely to answer one question. Is this house 00:24:31.660 --> 00:24:35.539 safe collateral for our loan? It is not a structural 00:24:35.539 --> 00:24:39.000 survey for you, the buyer. So the surveyor might 00:24:39.000 --> 00:24:42.660 see a huge problem. like faulty wiring. But if 00:24:42.660 --> 00:24:44.460 it doesn't affect the bank's security on the 00:24:44.460 --> 00:24:46.619 loan, they might not even mention it to you. 00:24:46.779 --> 00:24:49.460 Worse. The surveyor will often include a legal 00:24:49.460 --> 00:24:51.599 disclaimer in that report stating they have no 00:24:51.599 --> 00:24:53.720 liability whatsoever to the borrower. So if you 00:24:53.720 --> 00:24:55.740 buy a house based on the bank's valuation and 00:24:55.740 --> 00:24:58.200 the walls fall down a month later, you have no 00:24:58.200 --> 00:25:00.359 recourse. You can't sue the surveyor. Because 00:25:00.359 --> 00:25:02.339 you weren't their client. You weren't the client. 00:25:02.420 --> 00:25:04.480 You should have gotten your own building survey 00:25:04.480 --> 00:25:07.299 or home buyer report. That is a huge distinction. 00:25:07.720 --> 00:25:09.720 Listener, if you are buying in the UK, get your 00:25:09.720 --> 00:25:12.400 own survey. Do not rely on the bank's quick glance. 00:25:12.599 --> 00:25:14.660 It's a classic case of knowing who the client 00:25:14.660 --> 00:25:17.759 is and what the scope of work is. The bank is 00:25:17.759 --> 00:25:20.940 the client, not you. Now, let's go even further 00:25:20.940 --> 00:25:24.029 east and look at Russia. This was a fascinating 00:25:24.029 --> 00:25:26.470 history lesson in the source material, because 00:25:26.470 --> 00:25:28.809 for a very long time, there was no such thing 00:25:28.809 --> 00:25:31.769 as market value in Russia. Right. Under the Soviet 00:25:31.769 --> 00:25:34.049 Union, the state set the prices for everything. 00:25:34.650 --> 00:25:36.690 There was no market. Everything was owned by 00:25:36.690 --> 00:25:39.710 the state. So when the 90s hit and privatization 00:25:39.710 --> 00:25:42.890 began, the entire profession of appraisal had 00:25:42.890 --> 00:25:45.289 to be invented from scratch almost overnight. 00:25:45.509 --> 00:25:47.430 That must have just been absolute chaos. It was 00:25:47.430 --> 00:25:50.049 the Wild West. You moved from statutory price 00:25:50.049 --> 00:25:52.650 setting to a free for all market profession instantly. 00:25:52.910 --> 00:25:55.630 By the 2000s, you had the big four international 00:25:55.630 --> 00:25:57.829 consulting firms handling the high end commercial 00:25:57.829 --> 00:26:00.990 appraisals. But you also had thousands and thousands 00:26:00.990 --> 00:26:03.150 of independent valuers popping up everywhere. 00:26:03.980 --> 00:26:06.440 The quality, well, it varied dramatically. And 00:26:06.440 --> 00:26:09.059 then came the crackdown in 2017. The qualifying 00:26:09.059 --> 00:26:11.500 exam. The government decided there was too much 00:26:11.500 --> 00:26:13.680 malpractice, too much variance, too much corruption. 00:26:13.799 --> 00:26:17.220 So they instituted a new mandatory and incredibly 00:26:17.220 --> 00:26:20.220 difficult certification exam. And the notes say 00:26:20.220 --> 00:26:23.789 it was difficult. Difficult is an understatement. 00:26:23.809 --> 00:26:25.990 The predictions at the time said it would decimate 00:26:25.990 --> 00:26:29.089 the profession. They expected the number of active 00:26:29.089 --> 00:26:31.990 valuers to drop from thousands down to maybe 00:26:31.990 --> 00:26:34.210 just two or three thousand for the entire country. 00:26:34.390 --> 00:26:37.130 Wow. Imagine if 80 percent of the doctors in 00:26:37.130 --> 00:26:39.150 a country suddenly lost their license because 00:26:39.150 --> 00:26:41.150 the board exam got too hard overnight. That's 00:26:41.150 --> 00:26:42.990 basically what happened to Russian appraisal. 00:26:42.990 --> 00:26:45.569 It was a forced, brutal consolidation of the 00:26:45.569 --> 00:26:49.059 industry to try and purge the incompetence. Talk 00:26:49.059 --> 00:26:51.680 about raising the barrier to entry. OK, so we've 00:26:51.680 --> 00:26:53.460 done the history. We've done the global tour. 00:26:53.619 --> 00:26:56.079 Now I want to look forward. The source material 00:26:56.079 --> 00:26:59.599 talks a lot about the 2025 landscape. We are 00:26:59.599 --> 00:27:01.980 living in a time of massive change for this industry. 00:27:02.160 --> 00:27:04.380 We really are. The days of the clipboard and 00:27:04.380 --> 00:27:06.519 the tape measure and the Polaroid camera are 00:27:06.519 --> 00:27:08.779 fading fast. First, let's talk about the forms. 00:27:09.160 --> 00:27:14.000 The UAE and URR. Which sounds like alphabet soup, 00:27:14.079 --> 00:27:16.210 but the notes say it really matters. It does. 00:27:16.549 --> 00:27:18.950 For decades, appraisers in the U .S. used these 00:27:18.950 --> 00:27:22.029 static, rigid forms. It was like filling out 00:27:22.029 --> 00:27:25.450 a tax return from the 1980s. Box one, box two, 00:27:25.509 --> 00:27:28.670 box three. But the 2025 overhaul that's underway 00:27:28.670 --> 00:27:31.250 is moving toward dynamic reporting. What does 00:27:31.250 --> 00:27:33.789 that mean? The report itself adapts to the property. 00:27:33.990 --> 00:27:36.470 It allows for more data, more photos, more storytelling, 00:27:36.690 --> 00:27:39.349 more nuance. It's a move away from just checking 00:27:39.349 --> 00:27:42.319 boxes and toward... explaining value. But the 00:27:42.319 --> 00:27:44.079 biggest change, and the one that scares a lot 00:27:44.079 --> 00:27:46.279 of people in the industry, is the rise of machines, 00:27:46.680 --> 00:27:49.700 AVMs, automated valuation models. This is the 00:27:49.700 --> 00:27:52.019 Zillow's estimate on steroids. We're talking 00:27:52.019 --> 00:27:54.380 about incredibly powerful regression analysis 00:27:54.380 --> 00:27:56.980 and machine learning algorithms that can crunch 00:27:56.980 --> 00:27:59.720 millions of data points in seconds to spit out 00:27:59.720 --> 00:28:02.180 a value. It sounds great on paper. It's fast. 00:28:02.240 --> 00:28:04.480 It's cheap. There's no human error or bias. Why 00:28:04.480 --> 00:28:07.359 pay a human $500 when a bot can do it for free 00:28:07.359 --> 00:28:10.549 in two seconds? Well, it is great for a certain 00:28:10.549 --> 00:28:14.230 type of property. For cookie cutter homes. If 00:28:14.230 --> 00:28:17.869 you live in a subdivision in Phoenix where every 00:28:17.869 --> 00:28:20.349 house was built in 2015 and they all have the 00:28:20.349 --> 00:28:22.890 same three floor plans, a computer can value 00:28:22.890 --> 00:28:25.349 that perfectly. It has enough clean data points 00:28:25.349 --> 00:28:27.589 to be incredibly accurate. There's always a but. 00:28:27.730 --> 00:28:30.009 But computers can't smell. Computers can't smell. 00:28:30.089 --> 00:28:33.069 What do you mean? An AVM cannot walk into a house 00:28:33.069 --> 00:28:35.309 and smell the cat urine that's embedded deep. 00:28:35.740 --> 00:28:38.180 in the carpets and the subfloor. It can't see 00:28:38.180 --> 00:28:39.980 that the layout is incredibly awkward and you 00:28:39.980 --> 00:28:41.380 have to walk through a bedroom to get to the 00:28:41.380 --> 00:28:43.799 kitchen. Right. It can't feel that the neighborhood 00:28:43.799 --> 00:28:45.880 vibe has shifted because a trendy new coffee 00:28:45.880 --> 00:28:48.779 shop just opened up or conversely that a gang 00:28:48.779 --> 00:28:50.880 has moved in down the street. All those qualitative 00:28:50.880 --> 00:28:53.799 things. Right. The computer sees three bedrooms. 00:28:54.410 --> 00:28:57.509 Two baths, 1 ,500 square feet. It doesn't see 00:28:57.509 --> 00:29:00.369 three bedrooms, two baths, and a meth lab operating 00:29:00.369 --> 00:29:03.970 next door. Exactly. AVMs struggle with nonconformity. 00:29:04.130 --> 00:29:06.910 Rural areas are a nightmare for AVMs because 00:29:06.910 --> 00:29:10.190 there just isn't enough sales data. Unique homes, 00:29:10.309 --> 00:29:12.710 like a converted barn or a historic Victorian 00:29:12.710 --> 00:29:15.690 with tons of character, they completely confuse 00:29:15.690 --> 00:29:18.069 the algorithms. They need patterns. They need 00:29:18.069 --> 00:29:21.069 patterns. And real estate is often very messy 00:29:21.069 --> 00:29:23.500 and unpatterned. So the human appraiser is still 00:29:23.500 --> 00:29:25.539 safe for now, at least for the weird stuff. For 00:29:25.539 --> 00:29:28.240 the weird stuff, yes. But the human element brings 00:29:28.240 --> 00:29:31.619 its own set of very serious problems. And this 00:29:31.619 --> 00:29:33.960 is the heavy part of our deep dive. We have to 00:29:33.960 --> 00:29:37.279 talk about racial bias. Yeah. The source material 00:29:37.279 --> 00:29:39.700 references studies from Freddie Mac and other 00:29:39.700 --> 00:29:43.140 major institutions that are. They're pretty damning. 00:29:43.160 --> 00:29:45.900 This isn't just anecdotes anymore. No, the data 00:29:45.900 --> 00:29:49.240 is becoming very, very difficult to ignore. Recent 00:29:49.240 --> 00:29:51.440 studies show that traditional modeling simply 00:29:51.440 --> 00:29:53.920 cannot explain the valuation gap for minority 00:29:53.920 --> 00:29:56.380 owned homes. Even when you control for every 00:29:56.380 --> 00:29:59.660 conceivable variable income, credit score, house 00:29:59.660 --> 00:30:02.480 size, condition, age of the homes in majority 00:30:02.480 --> 00:30:04.880 black or Latino neighborhoods are consistently 00:30:04.880 --> 00:30:07.720 valued lower than similar homes in white neighborhoods. 00:30:08.039 --> 00:30:10.480 And the debate, as I understand it from the reading, 00:30:10.599 --> 00:30:12.849 is. really about where that bias comes from. 00:30:13.130 --> 00:30:15.730 Is it the individual appraiser being consciously 00:30:15.730 --> 00:30:18.569 or unconsciously racist? Or is it the data itself 00:30:18.569 --> 00:30:20.710 that's the problem? It's the chicken or the egg 00:30:20.710 --> 00:30:24.430 problem of systemic inequality. Some argue that 00:30:24.430 --> 00:30:26.950 appraisers are merely recording the bias that 00:30:26.950 --> 00:30:30.410 already exists in the market. If buyers, if society 00:30:30.410 --> 00:30:33.170 as a whole, is willing to pay less for a house 00:30:33.170 --> 00:30:35.109 in a certain neighborhood, then the appraiser's 00:30:35.109 --> 00:30:38.130 job is to reflect that reality. They use neighborhood 00:30:38.130 --> 00:30:41.470 quality as a proxy for value. But neighborhood 00:30:41.470 --> 00:30:43.670 quality can be a code word for other things. 00:30:43.910 --> 00:30:46.150 It can be. And it's often a direct byproduct 00:30:46.150 --> 00:30:48.849 of historical redlining. If a neighborhood was 00:30:48.849 --> 00:30:52.250 literally drawn on a map in Reading in the 1930s 00:30:52.250 --> 00:30:54.990 and labeled hazardous for lending, often because 00:30:54.990 --> 00:30:57.170 of its racial makeup. It received less investment 00:30:57.170 --> 00:30:59.589 for decades. Decades of disinvestment. Value 00:30:59.589 --> 00:31:02.269 stayed low. So when an appraiser today pulls 00:31:02.269 --> 00:31:04.569 comps from that neighborhood, those comps are 00:31:04.569 --> 00:31:06.690 inherently low. The appraiser can say, hey. I'm 00:31:06.690 --> 00:31:09.289 just using the data, but the data itself is poisoned 00:31:09.289 --> 00:31:12.049 by history. So the appraisal perpetuates the 00:31:12.049 --> 00:31:14.750 past. It locks in those historical inequalities. 00:31:15.569 --> 00:31:18.250 Precisely. And that is the huge challenge for 00:31:18.250 --> 00:31:21.430 2025 and beyond. How do you break that cycle? 00:31:21.529 --> 00:31:24.710 Can you appraise a house based only on its physical 00:31:24.710 --> 00:31:26.750 attributes, irrespective of its neighborhood? 00:31:27.150 --> 00:31:29.829 But if you do that, are you ignoring the economic 00:31:29.829 --> 00:31:33.059 reality of location? It is a massive ethical 00:31:33.059 --> 00:31:35.519 and economic knot that the entire industry is 00:31:35.519 --> 00:31:37.819 trying to untangle right now. It really makes 00:31:37.819 --> 00:31:40.059 you realize that these numbers aren't just math. 00:31:40.319 --> 00:31:43.460 They're sociology. They are history. They are 00:31:43.460 --> 00:31:46.220 policy. They absolutely are. And they have very 00:31:46.220 --> 00:31:48.940 real world consequences for generational wealth 00:31:48.940 --> 00:31:51.039 generation. OK, let's pivot for a moment to some 00:31:51.039 --> 00:31:53.259 practical takeaways. I'm a listener. I'm in the 00:31:53.259 --> 00:31:55.440 process of buying a house or maybe I'm refinancing. 00:31:55.579 --> 00:31:57.299 What do we really need to know from all this? 00:31:57.359 --> 00:31:59.710 First off. The inspection myth. Oh, this is a 00:31:59.710 --> 00:32:01.809 big one. Please, listener, hear this. An appraiser 00:32:01.809 --> 00:32:04.970 is not a home inspector. Say it louder for the 00:32:04.970 --> 00:32:07.089 people in the back. They are not the same person. 00:32:07.230 --> 00:32:11.430 An appraiser spends maybe 30 minutes, maybe an 00:32:11.430 --> 00:32:13.789 hour at the property. They are looking at value, 00:32:13.849 --> 00:32:16.569 at the layout, the general condition. They are 00:32:16.569 --> 00:32:18.710 not climbing up into the attic to check the depth 00:32:18.710 --> 00:32:20.809 of the insulation. They are not testing every 00:32:20.809 --> 00:32:23.269 electrical outlet. They are not running a camera 00:32:23.269 --> 00:32:25.569 down the sewer line. So if the appraisal comes 00:32:25.569 --> 00:32:28.670 back and says value is good, That does not mean 00:32:28.670 --> 00:32:30.869 this house is not going to fall down. Correct. 00:32:31.089 --> 00:32:33.910 But here's a pro tip. If you get a home inspection 00:32:33.910 --> 00:32:36.150 before the appraisal, which is rare, but it is 00:32:36.150 --> 00:32:38.950 possible, or if you have a prior inspection report 00:32:38.950 --> 00:32:41.769 from the seller that shows defects, give that 00:32:41.769 --> 00:32:43.930 report to the appraiser. Really? Why would I 00:32:43.930 --> 00:32:45.549 want to show them the problems? Wouldn't that 00:32:45.549 --> 00:32:48.809 just lower the value? It might. But if you are 00:32:48.809 --> 00:32:51.329 the buyer, you want the appraisal to reflect 00:32:51.329 --> 00:32:54.369 reality. If the foundation is cracked and needs 00:32:54.369 --> 00:32:57.349 $30 ,000 in repairs, the value of the home should 00:32:57.349 --> 00:32:59.630 be lower. If you give that professional report 00:32:59.630 --> 00:33:02.250 to the appraiser, they must factor it into their 00:33:02.250 --> 00:33:05.710 analysis. It forces them to acknowledge the defect 00:33:05.710 --> 00:33:08.930 in a data -driven way. This can save you from 00:33:08.930 --> 00:33:11.509 overpaying for a lemon or give you leverage to 00:33:11.509 --> 00:33:13.470 go back and renegotiate with the seller. That 00:33:13.470 --> 00:33:16.210 is a great tip. Collaborate with your appraisers. 00:33:16.230 --> 00:33:18.690 Don't hide things from them. And the final practical 00:33:18.690 --> 00:33:21.150 concept we should cover is the scope of work. 00:33:21.640 --> 00:33:24.700 This comes from USPAY, the Uniform Standards 00:33:24.700 --> 00:33:27.079 of Professional Appraisal Practice. It's the 00:33:27.079 --> 00:33:30.079 rulebook. The rulebook. The rulebook. In 2006, 00:33:30.299 --> 00:33:32.140 they changed the rules to say that an appraiser 00:33:32.140 --> 00:33:34.160 must define the scope of work for an assignment 00:33:34.160 --> 00:33:37.480 before they even start. Who is the client? What 00:33:37.480 --> 00:33:39.940 is the intended use? What is the specific definition 00:33:39.940 --> 00:33:42.480 of value being used? Why does this matter to 00:33:42.480 --> 00:33:44.720 me, the regular homeowner? Because you can't 00:33:44.720 --> 00:33:46.619 just take an appraisal that was ordered for a 00:33:46.619 --> 00:33:48.720 tax appeal and then try to use it to get a mortgage. 00:33:48.920 --> 00:33:51.400 The scope is totally different. The definition 00:33:51.400 --> 00:33:53.700 of value might be slightly different. If you 00:33:53.700 --> 00:33:56.180 hire an appraiser for a divorce settlement, the 00:33:56.180 --> 00:33:59.339 scope might be to find the value as of a specific 00:33:59.339 --> 00:34:01.640 date in the past, say the date of separation. 00:34:02.859 --> 00:34:04.960 That number is completely useless for a bank 00:34:04.960 --> 00:34:07.779 making a loan today. Context is king. You have 00:34:07.779 --> 00:34:10.019 to know what question you are asking the appraiser 00:34:10.019 --> 00:34:13.119 to answer before they start. Exactly. An appraisal 00:34:13.119 --> 00:34:16.400 without a clearly defined scope of work is like 00:34:16.400 --> 00:34:19.079 a map without a legend or a scale. It's just 00:34:19.079 --> 00:34:21.099 lines and numbers that don't mean anything. You 00:34:21.099 --> 00:34:22.679 need the key to be able to read it properly. 00:34:22.940 --> 00:34:26.019 Wow. So let's try to recap. We've gone from the 00:34:26.019 --> 00:34:28.239 pure anxiety of that waiting game after you make 00:34:28.239 --> 00:34:30.840 an offer, through the complex math of substitution 00:34:30.840 --> 00:34:33.800 and the nine -bathroom house. Yes. We've traveled 00:34:33.800 --> 00:34:36.659 to Germany's earth and stone philosophy, the 00:34:36.659 --> 00:34:39.619 UK's traffic light system, and we've landed in 00:34:39.619 --> 00:34:42.539 the AI -driven, ethically complex landscape of 00:34:42.539 --> 00:34:45.219 2025. It's a very long journey for a single number 00:34:45.219 --> 00:34:47.739 on a page. It really is. Yeah. And I think for 00:34:47.739 --> 00:34:49.539 me, the biggest takeaway from all this is that 00:34:49.539 --> 00:34:52.000 real estate appraisal isn't just a hurdle you 00:34:52.000 --> 00:34:55.320 have to clear. It's the mechanism we as a society 00:34:55.320 --> 00:34:59.440 use to try and put a static rational number on 00:34:59.440 --> 00:35:01.260 something that is fundamentally fluid, emotional. 00:35:01.769 --> 00:35:04.550 and deeply, deeply human. Shelter. That's the 00:35:04.550 --> 00:35:06.409 core tension of the whole profession. We're trying 00:35:06.409 --> 00:35:09.329 to quantify the unquantifiable. A home is where 00:35:09.329 --> 00:35:11.150 your kids grew up. It's memories, it's safety, 00:35:11.269 --> 00:35:14.050 it's status. But the bank needs a number. The 00:35:14.050 --> 00:35:16.349 tax assessor needs a number. The court needs 00:35:16.349 --> 00:35:19.070 a number. The appraiser is the translator between 00:35:19.070 --> 00:35:21.369 those two worlds. And as we look at the future 00:35:21.369 --> 00:35:23.849 with AI and AVM taking a bigger and bigger role, 00:35:24.070 --> 00:35:26.289 it raises a really provocative final thought 00:35:26.289 --> 00:35:28.250 for me. And I want to leave the listener with 00:35:28.250 --> 00:35:30.230 this to mull over. Go for it. We talked about 00:35:30.230 --> 00:35:32.730 how these AVMs, these AI models, rely entirely 00:35:32.730 --> 00:35:35.510 on past data. And we talked about how that past 00:35:35.510 --> 00:35:38.130 data contains the ghosts of our history, things 00:35:38.130 --> 00:35:41.869 like redlining and systemic bias. So if we hand 00:35:41.869 --> 00:35:44.670 the keys over to the algorithms entirely, if 00:35:44.670 --> 00:35:46.949 we let the robots decide what our homes are worth 00:35:46.949 --> 00:35:48.789 based purely on what's happened in the past, 00:35:49.050 --> 00:35:51.590 will we ever actually be able to fix the unfairness? 00:35:51.849 --> 00:35:54.809 Or do we just crystallize it? Or... Will the 00:35:54.809 --> 00:35:57.170 AI just crystallize the prejudices of the past 00:35:57.170 --> 00:35:59.610 and lock them in forever with the illusion of 00:35:59.610 --> 00:36:02.429 mathematical objectivity? That is the great danger. 00:36:02.949 --> 00:36:05.969 If the input data is biased, the output will 00:36:05.969 --> 00:36:08.690 be biased. And the machine doesn't have a conscience 00:36:08.690 --> 00:36:11.349 to question its own answer. Something to think 00:36:11.349 --> 00:36:12.849 about the next time you check your Zestimate. 00:36:13.429 --> 00:36:15.690 Look at your own home, not just as a place to 00:36:15.690 --> 00:36:18.349 live, but as a bundle of rights, a bundle of 00:36:18.349 --> 00:36:21.150 values, and a bundle of history just waiting 00:36:21.150 --> 00:36:23.539 to be decoded. Thanks for diving deep with us 00:36:23.539 --> 00:36:24.340 until next time.