Appraisal Quality Determined by AVMs?

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Appraisal Quality Determined by AVMsIn a recent Mortgage New Daily article, Brian Coester with Coester VMS writes, “I completely disagree with the article not just based on owning an AMC, but on the basis of being an appraiser and being on both sides of the table. The reality is that appraisals are more accurate than they’ve ever been.” He even repeats himself, “in the short term there will be issues to work out, however appraisals are better than they’ve ever been.”

Next, he talks about the lack of quality in the appraisal industry. So, appraisals may be better than they’ve ever been, but there is still a huge lack of quality; at least according to Brian. Let’s look at his logic.

“The reason for the appearance of lack of quality, is now we have the ability to check appraisals against relevant data like an AVM, Automated scoring, UCDP and variety of other tools that weren’t available before.”

Stop the presses! So, now we can check to see if appraisals are accurate by checking them against Automated Valuation Services?

Wow! That’s frightening on so many levels. Remember the “garbage in, garbage out” articles about using AVM’s? Many AVM’s are close to useless. “Relevant data,” really, like an AVM? Gimme a break! Hard to get passed this on and it’s flat out crazy. If computers could price real estate accurately, the appraisal industry would have died out years ago. These automated valuation products have been around for over twenty years. They are just as bad today as they were when they first came out. Sure, the bells and whistles have dramatically improved. However, they depend on the same inaccurate public records and come up with the same inaccurate home values they are famous for (at least within the real estate industries). Some consumers like them because they give them false hopes about their home’s value. Then, when reality comes crashing in from a local real estate professional, it destroys all their plans. Relevant data they are NOT!

By the way, Coester’s services include Appraisal Management services for traditional appraisals, AVM’s, Broker Price Opinions, and Desktop Valuations. That’s covering all your bases! No wonder they like AVMs, it’s their largest profit item. Most of the data they need is available for free. Now that’s a large profit margin!

If you live in a huge urban area where the same house gets built over, and over, and over again, they can actually be pretty reliable. The problem is, they are only halfway reliable in about 10-15% of the country. In the rest (the 85-90% +-) of the country, they are just plain wrong. And, often by much more than a small amount. $10, 20, 30, $40,000, even hundreds of thousands are every day mistakes. Sure, it’s fun to look at your neighbor’s house and talk about how much better yours is than theirs. But, “if you really want to know the value of your house, they’re not worth the paper they’re written on.” That quote came from a 25 year banking veteran. “It’s an inside joke and it’s nothing but a way for the bank to bring in more profits. We’re laughing at this piece of paper we put in the file and after all, what’s the customer going to say? If the bank says we have to have it, guess we just have to pay for it. We just want to buy a house.”

AVM’s use public records, which have inaccurate data more often than not. They use a price-per-square-foot formula using the square footage details from tax rolls, which are so inaccurate it can change the value dramatically. AVM’s also never see the property in person, inside or out. For anyone that understands the home valuation process, they know the majority of these products are as close to useless as you can get. They are fun – that’s it. This is from ten years of following AVM’s and home values. The mistakes are easy to find, if you simply look. If the future of the appraisal industry is based around AVM’s, consumers get ready to be ripped off, again. At the end of the day, it all comes down to money. Banks want more, and they have discovered how to make more profits off the appraisal process. They keep searching for more and more ways to reduce the appraiser’s role in the home buying process, so they can be the ones calling every shot and leaving consumers in their ever so trusting arms. The only one in the process whose sole job it is to protect consumers and mortgage investors, is being slowly phased out and killed off. In the good ole days, when banks actually kept the loans in-house and had their personal money invested in the loan, they really cared about the value and appraisal quality. Now, they sell all their loans, and quality is not their problem. For banks, quality has a new definition – fit the form and make the loan go through. Who cares if the value is right or wrong, sell more loans and make more money. The Golden Rule continues to rule the appraisal business via the banking industry.

AVM’s to judge appraisal quality? Smoke and mirrors, all the way to the bank…

Image credit flickr - Jason Taellious
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8 Responses

  1. Jack Schlenk says:

    In in all my Appraisal reports I note the AVM value (also the AVM range) the Assessor Values and the prior sale value of the subject and the comps.

    All of my comps have a time adjustment up, down or none based on market data for the subject market.

    My blog explains how I make said adjustments in my reports.

    On my Desk the 1968 copy “RE Appraisal Desk Book” By Robert W Winstead, ” Market Value”= The law of substitution. No Property is worth more than it cost to substitute an acceptable property. The Appraiser’s hard job is finding an property that is a acceptable substitute. Most Comps required adjustments. How to support the adjustments. Review Jack Schlenk’s blog.

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  2. Jeremy Hall Appraisals - Colorado Jeremy Hall Appraisals - Colorado says:

    This is a very great article. Too bad more appraisers just don’t understand that the quickie products and quickie workup methods, mean an end to traditional appraisal as we know it. If price can always equal value, lenders won’t need an appraiser, and then could phase out realtors as well. The appraisal profession is under attack by unscrupulous interests who do not lend their own money, or shoulder their own risk. Now our local MLS has adopted a nationalized mls system which is avm heavy and all the salesmen are pointing to this uber aggressive automatic value model as some illusionary justification for pressing the price. Somehow it became the industry norm to have a one or two day turn time, as appraisers one by one, fell to the trap of automatic analysis process. This industry is so awful, I would not wish it on anyone else. Consumer beware, because with some avenues, you cannot get fair representation in this business. Now a days, most appraisers auto import everything, run analytics on it all, match that against existing avm data points, and point to the results as if they have done an appraisal. They turn the report in a day, and make us manual and considerate appraisers look bad. There is no future in this industry, because the ethical base is too far eroded. Attention to consumer and lender safety and loan viability is so way down the line, nobody even remembers that’s supposed to be the primary purpose of appraisal products. Efficiency this, profit that, and who honestly cares about the details anymore? Various forms of mortgage fraud are bigger then ever, don’t kid yourself about anything to do with appraisal quality; it’s generally absent.

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  3. My appraisal REPORTS include explanation of my adjustments as they are required to do. On rare occasions I may make a reference to my website for a complex technical explanation, but I never do so routinely. Certainly I would never routinely refer a user to a blog for explanations on generic ROTE adjustments, rather than how they were determined for a specific assignment.

    I NEVER include AVM data. Why would I intentionally include potentially erroneous and misleading information that contradicts my own professional work?

    Jack, times have changed since 1968. perhaps you should give some thought to that. The PRINCIPLE of substitution also has a proviso in it, when applied to the Cost Approach that “…assumes no undue delay would be entailed in building that substitute property.”

    Try getting a mega mansion done in Malibu or anywhere in Los Angeles near the Santa Monica Mountains Conservancy areas. Coastal Commission alone can take 6 to 9 months IF there are no issues.

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  4. Jack Schlenk says:

    Now in Illinois Per Public Act 098-1109 a statement in substantially the following must be noted.
    “This is a broker price opinion/comparative market analysis. NOT AN APPRAISAL OF THE MARKET VALUE OF THE REAL ESTATE . AND WAS PREPARED BY A LICENSED REAL ESTATE BROKER OR MANAGING BROKER. NOT BY A STATE CERTIFIED REAL STATE APPRAISER.”
    Any and all broker price opinion/comparative market analysis must be in writing and a brief description of the methodology used to develop the broker price opinion or comparative market analysis.
    Question; Is there any liability for the broker for a price opinion/comparative market analysis that was not supported by the methodology used?

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    • I would hope there is not, other than damage to his or her own reputation if they have done careless work. The Brokers job is NOT to measure market value as we define it. His job is to sell the property he lists for the highest possible net amount to the sellers within the time frame and conditions they all agree upon.

      On those rare occasions when the BPO s actually performed by the broker for a lender with an REO, the lenders limit the benefits of a professional broker by telling them the conditions of sale rather than ASKING  for professional advice.

      MV and cash equivalence constraints are not, and should not be limitations to a BPO or CMA. It’s time to allow professionals in ALL disciplines go back to doing what they do best instead of holding all our work up to such microscopic second guessing that any benefits of our professional skills become lost.

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  5. Jack Schlenk says:

    Collateral Underwriter (CU) FAQs 12/01/2014
    Q. 22 FAQs
    New, Qs, 7, 9, 10, 20, 21, 22

    Desktop Underwriter (DU) Spring 2015 Update 12/05/14

    UCDP Fannie Mae Appraisal Messaging Change Notification
    11/18/14

    Jack Schlenk
    has successfully completed the course:
    Understanding the CU Risk Score, Flags and Messages
    12/21/2014

    I would recommend all Appraiser’s take the course.
    FannieMae will give, if you pass, a Certificate of Completion

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