Bottled Water and AVM – Sold on a Lie
How about bottled water?
Advertising is a powerful tool and very smart people will do some very dumb things, if they are properly motivated. There are many examples of how advertising creates an illusion and how we all fall victim (at least for a while) to smooth ad campaigns. One great example is automobile insurance rates. “Switch and Save. Every insurance company ran ads promising savings over their competition. Well, of course, they all can’t be true, but for over a year there was a massive switch in policies by consumers. The ads worked.
How about bottled water? News shows and undercover reports show us time and time again, that much of the high priced water we buy, thinking we are getting a cleaner or safer product, is nothing more than tap water from a large city system. In many cases, the water we buy is less pure than the water from our home taps. Yet, the buying frenzy continues. Bottled water is the in thing. People have seen the ads and get a feeling they are doing something good for themselves and their health when they shell out their hard earned money to buy well packaged tap water.
If advertising didn’t work, mega companies wouldn’t spend billions a year on advertising. Put out a message enough and many people will believe it. Such is the case with automated valuation services or AVM.
Automated Valuation Models or AVM have been advertised as a “technology based” home valuation product that sorts through massive amounts of data to arrive at a fair price for your home. They sell consumers, and in this case government officials, on the quantity of information at their disposal, and therefore their products must be a higher quality service than a traditional appraiser can offer. They promote the use of statistics over opinion and give the impression that these products are dependable, and actually preferable over local appraisal services. As with most things in life, when something sounds too good to be true, it usually is. Such is the case with AVM.
Along with all the hype about the new and improved computerized home valuation services, is the full media blitz with stories about “inaccurate appraisals” and how they are killing the real estate industry. Low appraisals are made out to be the villains in the home value battle and consumers are being told to trust computers over conventional appraisals. The word “inaccurate” may actually be appropriate in about 5% of the cases, but more often than not the problem has nothing to do with the appraiser or the appraisal. It has more to do with the MLS, the comps that are actually available, and excessively restrictive underwriting guidelines. Many times appraisers may think the value should be higher, but they cannot prove it within percentage guidelines that fit current banking rules. Where the appraiser used to offer their opinion and logically make a case for a specific value, those days are long gone and this problem continues to push home prices lower. Until appraisers are allowed to do their job again, without interference from unlicensed and untrained reviewers at Appraisal Management Companies, and bank underwriters who know little about the real estate or appraisal business, this problem is going to get worse.
These reviewers only know percentage guidelines and how to make a report fit a tidy form. Their definition of a “quality” appraisal has little to do with an educated opinion of value, only a report that fits percentage guidelines. Real estate is simply not that perfect and requires opinion. In many cases, deals are lost simply because the bank will not take the appraiser’s opinion. Fit the form, forget the true value. Banks want perfect comparables from a real estate market that does not produce such comparables, except in about 20% of the country. Banks no longer want to know the true value of the property like they did when they held all their loans in-house. They only want to know they have a form that will fit the guidelines so they can sell the loan in the secondary mortgage market, make their profit and move on to the next loan. That’s what got us in this trouble in the first place.
Think we’re seeing inaccurate appraisals now? Let Zillow® or Trulia® take over. Then, you will see the collapse of the entire real estate system. The appraisal and home valuation system is far from perfect. However, it is the very best method of determining home prices, bar none. No computerized system will ever be better at this job than a real, live, licensed appraiser.