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First Discrimination Lawsuit: What it Means for Appraisers
by Isaac Peck, Editor
As you likely already know, the first discrimination-based lawsuit against an appraiser (at least the “first” in recent history) was filed in December 2021 against Janette Miller, an individual appraiser, and AMC Links, LLC, an appraisal management company (AMC), in the U.S. District Court of Northern California.
The lawsuit was filed by a Black family in Marin County, California and alleges that Miller, a white appraiser, undervalued the plaintiff’s home by nearly $500,000, that race was a motivating factor in her appraisal, and that she committed multiple violations of the Fair Housing Act.
As the first formal lawsuit filed alleging discrimination, this case fleshes out some of the key accusations that are being leveled against appraisers and how these charges are interpreted by the courts will no doubt have far-reaching implications and have a critical role in how this issue continues to play out on a national level.
Here is a deep dive on the details of the case and an analysis of the arguments being leveled against the appraisal profession. Trigger warning: this is a controversial subject.
Tenisha Tate-Austin and Paul Austin, black homeowners, purchased their home, now nicknamed “the Pacheco house,” in 2016 and immediately began making improvements, including enlarging two rooms, updating appliances, adding a deck, and even a gas fireplace. The Austins had previously refinanced their house in 2019 and had received an appraisal valuing the house at $1.4 million. Seeking to refinance again in 2020 because of lower interest rates, the Austins were expecting the appraised value of their home to have risen compared to the year prior.
However, in 2020, Janette C. Miller, a licensed real estate appraiser hired by AMC Links LLC, appraised the Austin’s home for only $995,000, nearly one-third less than the appraised value the Austin’s had received the year prior.
The Austin’s were understandably shocked and disappointed and decided to run an experiment. They took down their family photos, their African art, hid CDs, and concealed any other indicators that a Black family lived there. Then they ordered a second appraisal to be done and they asked one of their white friends to pose as the homeowner. The Austin’s new appraisal came in at $1.48M—nearly a half a million-dollar difference.
In response, the Austins filed a lawsuit against Janette Miller and AMC Links, LLC. In their lawsuit, the Austins were joined in their case by the Fair Housing Advocates of Northern California, a non-profit dedicated to fighting discrimination in housing.
Factors at Play
As appraisers, industry stakeholders, homeowners, and the local and national news outlets discuss discrimination and bias within the appraisal profession, there are several distinct accusations that are leveled against appraisers:
- Individual actors (appraisers) who are either consciously or unconsciously biased/racist
- Lack of diversity in the appraisal industry (90%+ of appraisers are white)
- Appraisal practices in general are racially bias or perpetuate discrimination
Whether analyzing this particular case, or the dozens of other cases that have been covered by local and national news outlets over the last two years, part of the conversation centers around whether an individual appraiser in question is, in fact, consciously or unconsciously biased. With so many cases making the news in the last two years, some appraisers have publicly questioned whether an appraiser might simply be incompetent, instead of biased.
However, the other part of this conversation revolves around the appraisal profession’s practices and processes themselves. If an appraiser is merely reflecting the market, is that biased?
If an appraiser accurately reflects what a motivated buyer is willing to pay for a home on a particular street or in a specific neighborhood, does that perpetuate discrimination?
In their lawsuit and in their comments to the press, the Austins have strongly suggested that Miller herself may have been consciously or unconsciously biased, but their legal arguments go well beyond simply attacking Miller as an individual appraiser. The core of the Austin’s lawsuit raises key allegations against long established techniques and practices of the appraisal profession today—such as defining neighborhoods boundaries and the use of the sales comparison approach.
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Allegation #1: Prioritizing Comps from the Same Neighborhood = Racial Bias
The Austin’s lawsuit advances an argument that is at the heart of many of the accusations being leveled against mainstream appraisal methodology. While the subject property (the Austin’s home) was located in Marin City, an unincorporated community in Marin County, the suit argues that because Miller used comparables primarily in Marin City, that in itself is evidence of racial bias.
The suit reads:
“Appraising a house located in Marin City, such as the Pacheco Street House, using comparisons of other property sales located exclusively or primarily in Marin City results in a skewed and race-based valuation of the property…Using Marin City sales as the primary source of comps is evidence of racial bias – i.e., that the appraiser believes that Marin City’s demographics make it so much less ‘desirable’ than surrounding areas that property in those areas cannot be used as comps.”
In other words, the mere act of using comps from the same neighborhood is “evidence of racial bias,” according to the legal theories behind the Austin’s lawsuit. Let’s dig into the reasoning behind this argument.
The lawsuit goes to great lengths to detail how the racial and economic composition of Marin City is the product of historical discrimination. The suit explains that housing was first developed in Marin City in the early 1940s to house workers who migrated to work in the Sausalito shipyards. “Many of the shipyard workers were Black but they lived alongside whites and Asians as well. After the end of World War II, shipbuilding jobs weren’t as needed and jobs declined, so many workers ended up unemployed,” the suit reports.
White residents moved away in search for better employment, aided by the FHA through bank loans that “were designed to move white residents to all-white neighborhoods that would remain all-white through the use of racially-restrictive covenants,”i.e. redlining.
Most Black residents had to stay in Marin City due to “housing discrimination, racially-restrictive covenants, redlining, denial of access to government-backed financing, and other forms of discrimination, “the suit reads. Today, black residents make up 35.8% of residents. It is against this backdrop of historical discrimination that the Austin’s are advancing their argument. In other words, because the black residents of Marin City have been discriminated against and have been victims of redlining for the last 70 to 80 years, the values of houses in Marin City are a product of historical discrimination. And because the values of houses in Marin City are a product of historical discrimination, if an appraiser is appraising a property in Marin City and looks primarily to Marin City for comparable sales, that is an act that “perpetuates discrimination “and shows “evidence of racial bias.”
This line of reasoning will undoubtedly leave most appraisers befuddled. After all, appraisers typically prefer to select comparable sales (comps) in the same neighborhood because those comps are the closest representation of what market participants are willing to pay for a property in that particular neighborhood, with access to those particular schools, with those specific neighborhood amenities, shopping centers, and so on.
Appraisers are hired to provide an opinion of “market value, “which is defined by Fannie Mae as “the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus.”
The dilemma for appraisers is clear. If homes in a historically black neighborhood are consistently selling for lower prices than surrounding neighborhoods that are predominantly white—what is an appraiser to do?
After all, appraisers are hired to reflect the market. If the market reflects the impact of historical discrimination, or if the market continues to reflect ongoing discrimination and segregation, should the appraiser ignore what the market is saying?
Allegation #2: Sales Comparison Approach is Racist
The second key allegation in the Austin’s lawsuit is that the use of the sales comparison approach perpetuates discrimination. This argument builds on the critique of neighborhood boundaries above.
Reiterating the history of redlining, the lawsuit explains how the history of housing discrimination had longstanding effects on black neighborhood home values. The lawsuit also points out that appraisal standards contained explicitly race-based valuation standards until the United States Department of Justice (DOJ) sued the American Institute of Real Estate Appraisers (AIREA) and related defendants in 1976 under the Fair Housing Act.
But that didn’t fix the situation, the lawsuit argues. “The damage was already done. Property in Black neighborhoods and racially diverse neighborhoods reflect these low valuations that appraisers were trained to make. Most appraisers continue to evaluate a house’s value by comparing it to houses in similar, proximate neighborhoods that have sold in the recent past (comps),”the lawsuit reads.
Similar to their attack on neighborhood boundaries, the Austins argue that the historical discrimination that black and racially diverse neighborhoods experienced means that the use of the sales comparison approach perpetuates that discrimination.
The suit reads: “The continued use of the sales comparison approach recycles home values that were initially determined using explicitly race- based criteria, and compounds the effects of decades of undervaluation of homes in non-white areas. Likewise, some appraisers, including defendants, have continued to use race-based criteria in assessing property value, including limiting comparisons to houses within areas of similar racial demographics and valuing predominantly white areas more highly than other areas.”
Just like the critique of neighborhood boundaries, this attack again turns appraising on its head. Normally, an exact model match that sold on the same street two houses down from the subject property would be considered the perfect comp. If using a comp on the same street as the subject property is “evidence of racial bias”—then the very foundation on which the appraisal profession is built is being questioned. What is an appraiser to do?
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Origin of Arguments
The arguments being advanced by the Austins are not new. In fact, the allegations so passionately argued in the Austin’s lawsuit bear much resemblance to position papers that have been recently written by academics.
While there has been much discussion over a report published by the Brookings Institute titled “The devaluation of assets in Black neighborhoods” by Andre Perry et al, it is actually one of the sources that is cited by Perry’s article that lays out the deeper arguments that have been leveled against the appraisal profession.
One of the articles that Perry cites in his much debated report is: “The Increasing Effect of Neighborhood Racial Composition on Housing Values, 1980–2015,” by Junia Howell and Elizabeth Korver-Glenn.
Published in 2020 by the Oxford Academic, Howell, a PhD candidate studying Philosophy, and Korver-Glenn, an Assistant Professor with a PhD in Sociology, advance the following arguments:
- Using previous sales without correcting for the fact that these values had been derived under an explicitly racialized system ensured the historical hierarchy was preserved.
- We conclude contemporary appraising practices contribute to ongoing inequality. We argue they do so in two ways. First, the continued use of the sales comparison approach after fair housing legislation meant appraisers used previous sales, which explicitly relied on neighborhood racial composition, to determine appraisals. Since no steps were taken to rectify the historic inequities, this approach has enabled such inequalities to persist. Second, appraisers continue to use neighborhood racial composition to help determine which homes are comparable.
- At the policy level, we propose swift, dramatic interventions to transform the existing appraisal landscape. New regulatory legislation should decouple neighborhood demographic characteristics from home values and appreciation rates.
Taken in context, portions of President Joe Biden’s housing policy positions, Andre Perry’s report, as well as large portions of the Austins’ lawsuit, seem to draw on, or at the very least, contain striking similarities to the arguments advanced in this article by two academics who specialize in Philosophy and Sociology.
In fact, the Austin’s lawsuit appears to be a proving ground for the exact same arguments that were advanced by Howell and Korver-Glen two years ago.
The dilemma facing appraisers is that the academic critique of the historically racist policies in the United States, ultimately conclude with a call for reparations—which is defined by the Oxford Dictionary as: “the making of amends for a wrong one has done, by paying money to or otherwise helping those who have been wronged.”
Here it is in Howell’s and Korver-Glenn’s own words:
“Policy makers need to consider how we can collectively offer reparations for explicitly racist housing policies that contributed to the systemic hyper-valuing of White neighborhoods and de-valuing of neighborhoods of color (especially between the 1930s and 1970s). Such considerations should also grapple with the dramatic divergence in home appreciation rates observed in the last 35 years: since 1980, homes in White neighborhoods appreciated $194,000 more than comparable homes in otherwise comparable communities of color.”
California actually has recently convened a “first-in-the-nation” Reparations Task Force that is charged with “recommending how California will issue a formal apology, how to eliminate discrimination in existing state laws, and determine how any potential compensation should be calculated for the descendants of enslaved persons in the U.S. and who would be eligible.”
In case there was any doubt about its relation to this case in particular, the CA Reparations Task Force invited Paul Austin, one of the plaintiffs in the lawsuit, to be one of the keynote speakers at a recent Reparations Task Force meeting.
When asked what it meant to him to be sharing his story of appraisal discrimination with the California Reparations Task Force, Paul Austin replied: “It’s such an honor. But what’s most important, I think, is we might actually be able to see some real tangible change.”
This idea of reparations, or “righting the wrongs of the past” was also addressed in Bill H.R.2553—Real Estate Valuation Fairness and Improvement Act of 2021. After outlining that the government is, in part, responsible for “harmful consequences of discrimination,” the bill proposes, as the solution, the creation of a national Task Force to right these historical wrongs.
Among other things, the Task Force would create specific definitions for limited or inactive housing markets in which comparable sales are “limited or unavailable over a certain period of time.” Once defined, the Task Force will “establish greater flexibilities and guidance for appraisals and any underwriting processes associated with appraisals conducted in such markets, such as the ability to consider market evidence for similar properties in other geographic areas or utilizing a range of value.”
In other words, the Bill as written would mandate alternative guidelines for appraisers to encourage them to (1) ignore neighborhood boundaries, and (2) significantly alter the definition of a “comparable sale”–all with the goal of addressing the wrongs of the past.
Reparations is no doubt an incredibly contentious, polarizing issue in the United States. But whether you agree with the idea of reparations, the trouble with framing appraisers as the problem and then posing reparation as the solution, is that it places the burden of reparations solely at the feet of appraisers.
Many appraisers feel that placing the responsibility of righting the many wrongs of America’s historically racist past, squarely on appraisers’ shoulders is not fair–and perhaps more importantly, it’s just not realistic.
The old adage, appraisers don’t make the market, they just report it, might be worth revisiting.
What about USPAP?
Another dilemma that appraisers face is that they are being asked to simultaneously provide special treatment to black and racially diverse communities, while also being tasked with not seeing or using race at all.
For example, in the Austin’s own lawsuit, when naming AMC Links, LLC, the AMC responsible for placing the appraisal order with Miller, the Austins point out that California law requires an AMC to “review the work of all…appraisers with whom it contracts to ensure that appraisal services are performed in accordance with [USPAP].”
In other words, the AMC has liability in this case, the Austin’s argue, because they are responsible for ensuring compliance with USPAP under CA law.
The Conduct Section of the Ethics Rule in USPAP states that an appraiser:
- must not use or rely on unsupported conclusions relating to characteristics such as race, color, religion, national origin, gender, marital status, familial status, age, receipt of public assistance income, handicap, or an unsupported conclusion that homogeneity of such characteristics is necessary to maximize value.
So on the one hand, appraisers and AMCs are being asked to follow and uphold USPAP, but on the other hand, the underlying criticism of appraisal methodology that is taking place in academia as well as in Congress, is a philosophical critique that ultimately calls for reparations.
But how are appraisers supposed to avoid the “use” of or “reliance” on conclusions relating to race or color if they are also being expected to provide reparations for the discriminatory housing practices of the past?
If appraisers are not allowed to use race at all, how do they know when to eschew the use of the sales comparison approach or neighborhood boundaries and when those methods are allowable?
The issues raised in the Austin’s lawsuit, as well as those raised by Bill H.R.2553, admittedly create more questions than answers for the appraisal profession.
Based on the suit, the facts of this case show the following:
- In 2019, the Austin’s home was appraised for $1.4M
- In February 2020, Miller appraised the Austin’s Home for $995,000
- In February 2020, a third appraiser appraised the Austin’s home for $1.48M
So Miller is definitely in the “minority” (excuse the pun) as far as accurately valuing the Austin’s home. Her appraised value contains a large discrepancy between two of her peers. Why did Miller’s appraisal vary so widely from the opinions of two other appraisers?
As far as the larger critiques of appraisal methodology, much depends on how the courts interpret the Austin’s claims and whether Congress manages to pass sweeping legislation that will come up with alternative valuation methods and mandate appraisers to “consider market evidence for similar properties in other geographic areas.”
Without significant changes in appraisal standards and/or national laws, appraisers seem to be caught between a rock and a hard place. On the one hand they are being told to follow USPAP and never to use race in their appraisal, and on the other hand they’re being told that when they’re appraising in black or racially diverse communities, that to rely primarily on comparable sales that are in that community “perpetuates discrimination.”
The issues of racial discrimination in appraisal, the lack of diversity in the appraisal industry, and the prospect of biased and/or incompetent individual appraisers are incredibly important, but difficult, problems that the industry will continue to struggle with.
In the meantime, appraisers will be watching with bated breath how the Austin’s lawsuit plays out in court and whether Congress decides to take action—potentially changing appraisal standards as it relates to racially diverse communities.
This is a developing story. Don’t miss Working RE’s story next week as we dive into the written response by the attorneys for Janette Miller, the appraiser defendant in this case.
About the Author
Isaac Peck is the Editor of Working RE magazine and the President of OREP, a leading provider of E&O insurance for real estate professionals. OREP serves over 10,000 appraisers with comprehensive E&O coverage, competitive rates, and 14 hours of free CE for OREP Members (CE not approved in IL, MN, GA). Visit www.OREP.org to learn more. Reach Isaac at email@example.com or (888) 347-5273. CA License #4116465.
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