AVMs No Substitute for Real Estate Appraisals
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With lenders facing myriad challenges and consumers seeking cost reductions, it might be tempting to take a shortcut with real estate valuation — but the negative impact could be significant and long lasting.
Some lenders utilize automated valuation models in certain cases. However, AVMs are not real estate appraisals; the two are not comparable. An actual appraisal typically requires the appraiser to visit the property and to perform a visual inspection. This enables the appraiser to accurately report property information, which they then verify. Appraisers use their experience, expertise and education to determine which comparable sales to use and what adjustments, if any, to make. A qualified, competent appraiser conducts thorough research and thoughtful analysis to develop a reliable, credible opinion of value.
Automated valuation models, on the other hand, largely aggregate data from public records, which are often inaccurate, incomplete or outdated.
AVMs are an unregulated method of obtaining opinions of value that undermines federally created appraisal standards. Lenders’ use of AVMs put both banks and consumers at risk of receiving unreliable valuations.
Oftentimes, fees for an AVM are well below those of a “full-blown” appraisal. And the turnaround time is often shorter. But at what cost?
Appraisal services are performed at various levels of assignment conditions, levels of inspection, levels of analysis and levels of reporting. It helps nobody if lenders are incentivized to use the lowest cost service available. Appraisal costs can vary widely depending on the property type, time devoted to research, travel time and a host of other factors that determine appraisal pricing.
On the surface, it might seem logical for lenders to reduce costs and for consumers to save money. But think about the vital importance of appraisers generating credible opinions of value. It serves neither the lender nor the consumer when a property is unreliably valued. The easiest and cheapest way is not necessarily the best way, and the use of AVMs perfectly illustrates that point.