Automated valuation models (AVMs) are services that incorporate data and mathematical modeling to provide real estate property valuations—usually providing a snapshot of a property’s momentary value, using comparables, much like an appraisal. However, appraisers who suspect that AVMs could render human appraisers irrelevant apparently don’t have much to worry about—yet.
On the one hand, an AVM report is that you can get it in a matter of seconds, and it will contain helpful information. On the other, it’s never complete, and still leaves plenty of work for the appraiser.
Ordinarily, an AVM will include a property’s sales history, the value placed on it by a tax assessor, and sales analysis of comparable properties. Originally, AVMs were useful mainly to institutional investors—especially when it came to estimating the risk on a collateralized mortgage loan. They’re coming into play more often on valuations of individual residences, now, but they’re limited. AVMs don’t consider the condition of the property, nor intangibles such as view and appearance.
Choosing the right automated valuation models
Jeff Dickstein, chief compliance officer at Pro Teck Valuation Services (Waltham, Massachusetts), a company that re-sells many different AVMs, agrees that these products might be useful to an appraiser, but in no way do they take the place of an appraiser. Choosing the right AVM, he says, will depend on what you’re using it for, and what your risk metrics are.
“An appraiser might use an AVM as a diligence tool,” he says, “to obtain certain data as part of their ‘diligence waterfall,’ but they wouldn’t make a lending decision based on it. You might see the AVM’s valuation, but you don’t know how the sausage has been made, so to speak.”
Susan Allen, subject matter expert from the valuation solutions group of CoreLogic, remarks that the mortgage industry employs many types of risk analytics, including AVMs. To build its models, CoreLogic starts with its databases of property and market information. These databases include county data, listing data, and data contributed by various users including lenders.
“Our research team builds models based on the type of risk we are attempting to assess,” she explains. For AVMs, the models predict a sales price for a subject property based on analysis of the property and nearby sales.
“A modeler is not a licensed appraiser, and an AVM report is not USPAP compliant. USPAP contains many requirements that models don’t perform, so we don’t consider an AVM to be an appraisal. However, an AVM can be used in many valuation circumstances. Although some appraisers do acquire AVMs in their research, it’s more typical for appraisers to use unfiltered data and their own observations as the basis for their analysis and opinion of value.”
Automated valuation models cannot reflect intangibles
Appraiser Ron Cowan of Yorba Linda, California, points out that an AVM cannot, for example, drive by a house to make sure it’s still standing. It won’t take factors such as school district, the proximity of nuisances such as busy train tracks, or the renovations and improvements that the seller may have made. Moreover, since tax assessments are made only every three years in many localities, and in some states are constrained by law from increasing at a rate that reflects a home’s market value, an AVM might produce misinformation based on that metric.
Moreover, Cowan notes, an AVM cannot reflect intangibles, such as whether a comparable property was sold at a deep discount because the seller was over-motivated or closely related to the buyer. Nor can an AVM provide accurate information as to whether a given neighborhood is experiencing a rising or declining market.
“The AVM will assume that the property is in average condition,” Dickstein elaborates. “Even if the user of the AVM knows the condition of the property, and knows that it’s other than average—for example, if it’s on a golf course or has a great ocean view—it won’t be possible to adjust the AVM to account for that.”
Allen points out that some lenders and GSEs offer “waived appraisal” or “property inspection waiver” loan programs, and the applicability of non–appraisal evaluations is documented at length in regulatory guidance. However, she adds, these programs represent a minuscule percentage of overall mortgage lending.
“AVMs may be part of these programs,” she elaborates, “but most also include some combination of additional analytics, loan qualifications, property inspection, data review, and/or reconciliation by an appraiser.
“CoreLogic sees a future where appraisers interact with various models as part of their routine work. The ideal valuation solution uses robust and comprehensive analytics to support professionals in the field.
Largest users of automated valuation models
The vast majority of AVM use, Allen says, is in processes where appraisals would be impractical. She notes that CoreLogic produces and licenses more than 1 billion AVMs each month, and is only one of many providers of AVMs in the United States.
The largest users of AVMs, she says, tend to either support bulk decisions (such as portfolio valuation and marketing) or deal with situations where instantaneous analytics are required (such as consumer education and appraisal review.)
Appraisal review is a requirement in most cases for appraisal management companies (AMCs) and lenders, and many use AVMs in conjunction with other analytics, data, and review procedures to meet their review requirements. In all, she adds, CoreLogic offers many data, analytics, and technology solutions to support appraisers.
“As an aside, CoreLogic is one of the nation’s largest employers of appraisers,” she notes. “Because appraisers are a key component of our business, having strong appraiser-facing resources is critical to our success. We license data and analytics to thousands of appraisers and AMCs beyond our internal use.
“CoreLogic hosts a collateral valuation management technology platform that enables appraisers to interact with their clients. More than 70,000 appraisers are registered users. We offer data packets with assignments that provide the most comprehensive data available to help appraisers perform their research more efficiently, and we integrate with industry standard appraisal forms software.
“That said, we know that providers like CoreLogic can and should do much more for the appraiser community. We’re continuously investing in innovations to simplify the process for appraisers and lenders.”
How are you using AVMs in your appraisal business? What kind of impact have they made? Share your experience in the comments below.
Article by Joseph Dobrian. Joseph Dobrian has been writing about commercial and residential real estate, and real estate-related finance, for more than 30 years. His by-line has appeared in The Wall Street Journal, The New York Times, The New Yorker, Real Estate Forum, Journal of Property Management, and many other publications. He is also a noted novelist, essayist, and translator. His website is www.josephdobrian.com, and he can be contacted at [email protected]