Photo credit: Richie Girardin

Lender-provided insight on why using appraisers should continue to be the default

Consumers are increasingly utilizing the home valuation tools found on many real estate sites; all that is usually required is a property address; the tool then provides some property and neighborhood data. Consumers are making buying and/ or selling decisions based on information from these tools. These tools, called automated valuation models (AVMs), have been around for about four decades and although appraisers helped developed many of them, they are increasingly becoming competitors of appraisers.

Although AVMs, are data-rich, they are not known for being highly-accurate. In a market-powered economy, the home’s value is determined by what the buyer is willing to pay for it; meaning an AVM’s estimated price and the home’s actual sold price should be close.

Jeremy Owens, a senior mortgage banker at Ameris Bank provides insight on the differences between appraisal and AVM data accuracy, “The widespread availability of AVMs and the consumers’ willingness to rely on them as an authoritative source has really grown over the past 5 years.  The most worrisome aspect of an AVM is the same problem that affects all equations: the integrity of the data.”  Owens says, “The AVMs rely on publicly reported data that is frequently out of date.  Some rely on information pulled from FMLS or MLS that does not correspond to the data requirements and regulations governing an actual appraisal.  For instance, an FMLS listing may say a property has 6 bedrooms and a finished basement.  If 2 of the 6 bedrooms are located in the finished basement, the appraiser would consider the home as a 4 bedroom home and compare to other 4 bedroom homes that may or may not have a finished basement.  The AVM is typically unable to differentiate between the bedrooms location and will compare against a 6 bedroom home.”

In addition to AVMs not considering bedrooms in basements, human element parameters such as property views, present condition, improvements, location and actual square footage are not considered in the AVM final output, instead home value data is mostly derived from algorithms which analyze local price per square foot and public records data.

Here are some examples of disparities in AVM price results. According to a recent Zillow’s Zestimate, a 7 bedroom, 6.5 bathroom, 4,389 square foot home in an eastern Atlanta suburb had an estimated price of $543,525, but sold for $344,900 on December 13, 2013. Trulia’s price estimate for the property is $374,000, but shows that it has 4 bedrooms, 6 bathrooms with the same square footage. Redfin’s price estimate was $424,377 and showing the same number of bedrooms and bathrooms Zillow has, but the square footage is listed as 6,314.

It may be assumed by looking at Trulia’s price estimate that the property has appreciated nearly $30,000 since it sold. Based on Zillow’s Zestimate, the estimated price appreciation is nearly $200,000 and with such a large appreciation, consumers may assume that the home has had a major renovation and/or additions. By ignoring the most recent sold price, the sampled AVMs presents data which suggests that the underlying value of the home is still directly dependable on a data set, rather than qualitative factors the AVM can’t consider.

Can AVMs easily produce more accurate results? Yes, if they:

The data powering AVMs should be based on qualitative factors such as local, neighborhood or regional analyses and should have a deeper vetting by comparing with the appraiser opinions and recently sold prices.

Appraisers provide impartial, unbiased and objective opinions after taking into consideration a series of statistics, facts and other relevant information and although AVMs are more consumer friendly and can provide fast, basic property value and other data; an AVM shouldn’t be the only source of property information or be considered as an excellent replacement for a good appraiser.  Hiring an appraiser to do what they do best, provide a professional opinion of value can not only save money and time, but the client’s sanity in the long run. How are lenders using AVMs compared to appraisers?

Owens posits on the use of AVMs by mortgage lenders, “Most all mortgage lenders use the Fannie Mae Automated Property Service to provide a predicted value and a confidence score to compare against the actual appraisal completed by a certified appraiser as required by agency regulations.  Lenders do not utilize AVMs to provide for appraisal waivers as we did prior to the financial implosion of 2008.  The regulatory requirements of the Frank-Dodd Act changed the use of AVM from a valuation tool replacing an appraisal to a tool to support the appraisal report prepared by an appraiser.  I personally only use an AVM to gain a very broad idea of expected value range when advising a client for a refinance.  Both buyers and sellers should use the AVMs to provide a very rough value range.  Buyers and sellers are best served when they depend on the expertise of their REALTOR and appraiser.”

 See Is Appraisal Profession Ready for a Big Reset?

See Low Valuations is a Hot Topic with Lenders in 2015

See Home-Buyers Should Hire Their Own Appraiser

See The Differences Between a Comparative Market Analysis and Broker Price Opinion.

See Do Appraisal Management Companies Sacrifice Quality for Quantity?

See What Do You Know About Appraisal Management Companies (AMCs)

Resources:

GeekEstate. Everything Wrong With AVMs in Two Pictures

Appraisal Institute. The Appraisal Profession