Long before the rise of the machines, computers were human clerks who took a series of data and calculated values in accordance with effective methods, crunching the numbers for various businesses. The past two decades have brought many technological changes to the appraisal industry. Changes range from the use of Polaroids to digital photography; paper and pencil for an inspection versus a cell phone with appraisal applications; and taking two or more weeks to turn around an appraisal report compared to sending the report via email within hours of inspection.
While most technological advances have aided and supported the appraiser, there is one that most appraisers consider a thorn in their side – the use of the computerized Automated Valuation Models (AVMs). The mortgage industry has started to rely heavily upon the AVM versus the use of an appraisal report prepared by a licensed appraiser, who has field experience, and is familiar with the market area.
Homeowners have access to the internet and popular AVM models. Nowadays most homeowners give an appraiser a “true value” range based on these models. It’s at this point that an appraiser knows that there is a high probability that the estimate of value on their report will be challenged. An appraiser will have to prove their estimate of value with additional comparable sales. They are asked why the 3,700 s/f sale provided by the lender (when the subject property is 1,800 s/f) wasn’t used, or alternatively, why wasn’t the sale provided by the homeowner of their across-the-street neighbor’s house, which sold for $400,000 more than the estimate of value on their property used in the appraisal report? Never mind that the neighbor’s property closed over two years ago and is a direct waterfront property, compared to the subject property’s seasonal water view.
What are AVMs?
Just what are AVMs, and why do they have the ability to potentially double or treble an appraiser’s work time on a file? An AVM is a residential valuation report obtained online in a matter of seconds; it is a service that can provide real estate property valuations using mathematical modelling combined with a database. Most AVMs calculate a property’s value at a specific point in time by analyzing values of comparable properties and estimate a probable selling price of a residential property. An AVM generally takes into account the tax assessor’s indication of value, if available, information on a subject property and recent sales history, and comparable sales analysis of like properties. The results are weighted, analyzed, and then reported as a final estimate of value based on a requested date
Advantages of Using AVMs
The mortgage industry, as a whole, sees several advantages for the use of computerized AVMs in lending. AVMs are a quick, inexpensive means to a value needed for processing a loan. Why wait a week for the appraisal report and pay $200 - $400 when you can get your answer in minutes and the expenditure is only $20 - $50? It seems like a no-brainer, and truthfully, AVMs can be quite accurate, particularly when used in a very homogeneous area. An AVM also removes the human element from the valuation process and relies on the computer valuation, which removes any chance of human bias and subjectivity. AVM outputs also do not have the fraud risk attached to it compared to the use of a human, who can manipulate the property features or numbers intentionally for a desired result.
Disadvantages of Using AVMs
On the converse side, there is evidence that AVMs are not entirely accurate when used on properties located in rural areas, when there are fluctuations in the market, or if the property is non-conforming. AVMs also do not have the capability to take into account the property condition, which a physical inspection of the property would note. AVMs rely on a valuation produced assuming average conditions, which may not be accurate at the time of valuation. AVMs also use transactional data, which is typically three to six months behind current market conditions and does not take into account changes in the market. Another misleading item is that the model does not take into account the possibility that the information used is misleading due to concealed incentives, such as recorded sales prices.
Rise of the Machines
In the past two decades, AVMs have shown their overall effectiveness in falling markets and they have proven to be highly effective throughout the latest downturns. The soundness of the data used for the model has improved, making the AVMs similar to an appraiser’s estimate of value. That said though, an AVM is only as good as the information provided; the models can be skewed, dependent on the age and exactness of the information used to produce the model.
When it comes to an accurate estimate of value, the industry will go with the machine, but in the long- run, the best estimate of value is always going to be from a hands-on inspection of the property. No computer model can compete with the ability of an appraiser to report on the current condition of the property or their ability to gather up-to-date information on current market conditions. It’s the age-old adage of man vs machine - and a machine is only as good as the data used and the person who input the data.
Laurie Mentz Nichols, SRA, is the owner of Enterprise Appraisals, LLC, West Haven, Conn.