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Avery Shelton and her husband were trying to get a home equity loan in November 2020. They needed the money for a new roof on their home in River Rouge.
To get the loan, the bank first wanted to know how much the house was worth and required an appraisal. The appraiser hired by the bank did an “exterior inspection,” walking around the house but never going inside. The appraiser asked some questions and left. The Sheltons waited to find out how much their house was worth.
“We were anticipating it to be worth around $100,000 because our house is a pretty big, midcentury ranch,” Shelton said.
The appraisal was a disappointment, coming back at just $50,000.
Shelton appealed. She provided examples to the bank of homes similar to hers in her neighborhood that had sold for more than $50,000. The appeal seems to have made a difference, with the appraisal going up to $70,000 fifteen days later — without explanation for the increase.
“They just sent an email that basically said, ‘Here’s the revised appraisal, thanks,’” Shelton said. “To me, it just seemed very unfair and subjective.”
The change in the appraisal allowed the Sheltons to get a bigger loan and get their roof fixed.
Appraisals mean a great deal in the housing market. Banks require them to determine how big of a mortgage to issue homebuyers. A low appraisal can make it difficult to buy or sell a home.
While an appraisal might say a home is worth a certain price, it’s ultimately worth whatever a buyer is willing to pay. And these days, buyers are willing to spend far above asking price to get a home. Whatever the ultimate price, the most recent sale will become the new comparison price for future sales.
Appraisals can have downstream effects as well, even in a housing market like Detroit where a large majority of homes are sold in cash, because they influence the way the city itself determines the taxable value of property.
It’s often unclear to homeowners like the Sheltons why their home was valued at a certain amount, even though the outcome of those determinations can have a significant impact on their financial well-being.
Assessing the city
“We lost the trust of a lot of people because of mistakes made in this office,” Detroit’s Assessor Alvin Horhn told Outlier Media. He leads the city division responsible for setting the taxable value for properties. “It’s 2022, and people are still questioning the city’s assessments.”
There is no better explanation for how much accurate property values matter than what happened when Detroit’s Office of the Assessor got them wrong on a large scale.
A 2020 Detroit News report found residents were overtaxed by around $600 million from 2010 through 2016 because assessments were above the legal amount set by Michigan law. Those inflated assessments fueled a tax foreclosure crisis, resulting in the foreclosure of tens of thousands of properties.
A recently published audit performed by an independent accounting firm hired by the city found mismanagement and little to no standards at Detroit’s Assessor’s Office during those years.
“The Assessments Division did not maintain any … calculations or other supporting documentation to evidence how values were determined,” wrote the audit’s author, Raymond A. Roth III. “As such, I was unable to perform any review and analysis related to how property values were determined for this period and can only conclude that the City is unable to support any residential property valuation from 2010 through 2016.”
The audit noted substantial improvements to the Assessor’s Office since 2016. Horhn took over as Detroit’s chief assessor in 2015, but worked in the office prior to the promotion. The office now has better bookkeeping, according to the audit, and regular reassessments.
“The numbers the auditor put out there tell a story that we’ve learned our lesson and are taking steps to make sure the office is compliant with state law,” Horhn said.
Beyond past mismanagement, Horhn said it’s simply a difficult task to assess individual property values on such a large scale.
The assessor judges value based on a variety of factors, including a home’s age, size and condition. It tracks transactions through the Wayne County Register of Deeds and property transfer affidavits sent to the Michigan Department of Treasury. Sale prices are then used to compute the market value on a given block or neighborhood, which affect the assessment of individual homes.
But there are bound to be errors in the process, given the volume of properties in the city and number of transactions that have to be processed. That can include basic clerical errors or sales that were missed, not properly filed, or can’t be used by the office because they weren’t “arms-length sales” conducted with brokers. Over the last two years, Horhn says his office has reviewed 56,000 transactions but can only use the 12,000 arms-length sales to determine market value. He said the other property sales are still useful, even if they don’t translate to a direct comp in an evaluation.
“It’s not a perfect process, and it never will be,” Horhn said. “There’s nearly 400,000 properties in this city, and 210,000 of them are houses.”
The office has relied on aerial imagery since 2016 to increase the volume of homes the office can assess. But the audit noted that “for certain properties, especially the lowest value properties, this type of review increases the risk of over assessment by not allowing the identification of deteriorated housing quality.”
Horhn doesn’t disagree with this opinion. To combat this, his staff looks at thousands of homes in person each year. This in-person review is meant to increase accuracy but is itself imprecise. The practice is “more art than science,” Horhn said. That includes interpreting the significance of the 44,000 transactions not directly used in its final computation.
“They are telling you a story,” Horhn said. “If you don’t understand what they’re saying, you’re going to get it wrong.”
Horhn cited the case of Brightmoor, a northwest Detroit neighborhood where people have been buying homes, rehabbing and flipping them with greater frequency in recent years. Those deals represent the market value transactions. But there are many more smaller deals done in cash, which are a better reflection of the neighborhood’s economic reality.
“Those flips were the exception, not the norm,” Horhn said. “If we had not taken a hard look at those other types of sales, we might have raised the assessments there across the board.”
The assessor’s job is made more challenging by the volume of cash sales, as well as during periods of large swings in values. The office is likely to be late to adjust.
“Appraisals, and to an even greater extent, tax-assessed values, tend to lag market momentum. That’s true going up and going down,” said Rick Sharga, executive vice president of Market Intelligence at ATTOM Data Solutions. “The valuation that lags everything is the assessed value because it takes assessors longer to compile data and make it up to date.”
The last citywide reassessment was conducted in 2017 — the first in 60 years. The Office of the Assessor is required to reassess 20% of all Detroit property annually so a large-scale overassessment doesn’t once again go unaddressed for years.
Different neighborhoods, different results
Detroit property has been consistently undervalued relative to what people are willing to pay. This “appraisal gap” — where an appraisal comes in under the contract price for a home — often requires buyers to make up the difference between the mortgage they can get and the price of the home, restricting options for people who don’t can’t afford a large cash downpayment.
“An appraiser just doesn’t have up-to-the-moment information on what property values are doing,” said Sharga of ATTOM Data Solutions. “The sale that you’re looking at right now is what’s going to reset the comps because it reflects the most current market conditions.”
Appraisers use many of the same factors as public assessors to reach their conclusions. But there are important distinctions.
“Licensed appraisers must follow use-path guidelines,” said Will Arabi, an appraiser in Southeast Michigan for 25 years and the owner of Appraisal Experts of Michigan. “You have to identify the intended use, intended user and scope of work in every single assignment.”
For a standard home sale, the appraiser will use a sales comparison approach, which bases the property value on recent sale prices of similar nearby homes.
This is the most common type of appraisal but may not be as accurate in Detroit. A majority of sales in the city are done in cash “off-market” and not recorded at the MLS, the database used by appraisers to find comps.
For newer properties, appraisers take the cost of the land plus the cost of construction and improvements minus any depreciation. For a rental property, a bank may want to appraise the present worth of the property plus revenue made through rent.
Most appraisers working in metro Detroit consider the entire region as part of their coverage area despite the vast differences in home and neighborhood conditions between more affluent cities like Birmingham and more working-class neighborhoods in Detroit or Downriver.
Bias may also be a problem. Black homeowners have long experienced lower appraisals because of discrimination.
Arabi doesn’t think this is a pervasive issue.
“Have I heard of it happening? Yes,” Arabi said. “Do people who were discriminated against sometimes not share that experience or file complaints or raise awareness? Sure. But in my world, where we’re dealing with reputable professionals in the real estate industry, it’s not an issue I see or hear about on a day-to-day basis.”
Arabi said anybody who feels they’ve been discriminated against should file a complaint with the state licensing agency and notify their lender.
How to appeal
Shelton, the River Rouge homeowner, was able to successfully challenge her appraisal. But the vast majority of homeowners never even try.
If a homeowner is not happy with the number the city or a bank comes up with as a property value, there are ways to appeal.
For an appraisal appeal, property owners need to provide their lender with different comparable sales and other relevant information about the condition of the home. The owner might also want to seek out other lenders, which may yield a higher valuation that can be used to leverage a better outcome.
City assessments have a three-part appeal process. The Assessor’s Review takes place during the first three weeks in February. During that time, anybody can reach out to the Assessor’s Office and question their assessment, Horhn said. He said over the last three years, 5,509 homeowners have come to this review and 50% have had their appeal accepted.
Anyone denied an assessment review can appeal further to the Board of Review, in March. This is a process where the homeowner can present evidence. The vast majority of petitioners here are successful, with only 138 homeowners out of 1,031 (13%) having had their appeal denied over the past three years.
Those who still feel their assessment is wrong after the Board of Review can make their case in front of the Michigan Tax Tribunal.
A Detroit News report from 2018 found it was mostly landlords and business owners who appealed their cases this far. But Detroit owners who successfully appealed saw their assessments decreased by 50% more than in the rest of Wayne County.
Horhn said the number of appeals coming into his office has steadily decreased since 2017, but especially the last two years.
“I think it shows that the process has been improved over the years,” Horhn said. “It tells me that the processing is working.”
For those overassessed by the city between 2010 and 2016, there may be little, or even no compensation. A $6 million proposal to give those residents priority in affordable housing, home-buying discounts and job opportunities was voted down by City Council in 2020. A working group led by advocates and City Council President Mary Sheffield say they are exploring other methods of compensation, including cash payments and tax credits.
Nothing has been officially proposed yet.
Reach AARON MONDRY at aaron@outliermedia.org or 313-403-7221. This article appears in today’s issue of The Dig, Outlier Media’s weekly newsletter on housing and real estate. Click here to sign up to receive it.