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Automated Valuation Models - threat and opportunity
This article is excerpts of an article
published September, 1998 in Appraisal Today and was written by Ann O'Rourke. It is copyrighted. For reprint permission, Contact Us.
An updated article was published in the October,
1999 issue of Appraisal Today, available to
subscribers.
For the latest AVM vendor list, go to the Vendor
Page.
This article does not provide a comprehensive
list of AVM providers, which is a rapidly moving target!
Automated Valuation Models (AVMs) are the latest hot topic for many
appraisers, replacing AMCs (appraisal management companies). As with AMCs, AVMs have been
around for at least 20 years in appraising, starting with multiple regression programs
used for mass assessments by assessors' offices.
My first appraisal job, in the mid-1970s, was field checking property
characteristics for a California Assessor's office that was converting to automated
valuations. Now, 20 years later, I am doing many property inspections on Freddie's 2070
form.
Appraisers developed many of the AVMs in use today, including REASON
and PSAR. Some savvy appraisal firms offer AVMs on a state-wide basis to lenders.
The key to an accurate AVM valuation is data. Although many lenders
thought AVMs could provide values for all their loans, many areas don't have adequate
data. Some states, such as Texas, are non-disclosure on sales price. Even California,
which supposedly has some of the "best" data, has many counties (including urban
counties) that don't provide data on property characteristics or only limited data. Other
counties sell their data for very high prices.
Appraisals and the bell shaped curve
"Appraisers have never been as accurate as mortgage lenders
thought," according to Lewis Allen, appraiser and AVM consultant.
As appraisers know, values for very similar homes actually fall along a
bell shaped curve says Allen. For lending purposes, we appraise the probable sales price
along a curve or range of possible values. When two (or more) appraisers value the same
home, seldom are the values the same. If you do appraisals for relocation purposes, you
learn this very fast. If two values are within 5%, the relocation company doesn't usually
have to order a third appraisal.
That's one of the reasons lenders like to use AVMs. They don't have the
‘human" element. But, of course, AVMs can't get any more accurate than the bell
shaped curve.
So what does this mean for appraisals? Allen sees collateral risk-based
pricing, where more accurate values (less "variance"), with a lower range, will
get a lower interest rate. Appraisers need to rethink the service they provide, separating
the factual data and trends from the final subjective opinion of value.
Just like underwriting the borrower's credit can't always be done by an
automated underwriting program and is referred to a human underwriter as an
"exception," AVMs don't always work and have to be referred to an appraiser.
Allen says appraisers can provide a range of value, say $200,000 to
$225,000, and the lender can pick where along that value range they want to lend. If the
value required for the loan is $225,000 they could offer a 7% interest rate. If the value
is $200,000, they could offer 6.75%, for example.
Risk based pricing for the borrower's credit is a controversial topic
now, but may be the future of lending for both the credit and the collateral.
What is multiple regression analysis?
Before the term "AVM" became widely used, multiple regression
analysis (MRA) was the most used term for computer based valuations.
MRA has been around for many years, in many types of applications, for
determining which variables are most important in determining an outcome. In valuation
applications, an MRA is used to determine if square footage, lot size, age, quality, etc.
affect property values, and by how much. College professors (and some appraisers) use MRA
in other valuation related applications, which are frequently published in appraisal
journals. When I was in graduate business school 20 years ago, MRA was frequently used in
research.
When you do a valuation using an adjustment grid, you are doing what an
MRA or AVM does to determine value. The MRA or AVM uses mathematical calculations to
determine the dollar amount of the adjustments
In its simplest form, a regression analysis is a calculation that takes
a property characteristic such as square footage and determines a value, similar to a
square footage adjustment. For example, a 2,000 sq.ft. house X $100 per sq.ft. yields a
value of $200,000. In this example, the equation would be Y=100X, where Y is the value and
X is the square footage of the home.
MRA is widely underutilized in appraising. We are taught to use matched
paired sales to determine adjustments, but how often do you have paired sales available?
Appraisers can use MRA features in spreadsheet programs or statistical
programs such as SPSS.
What is an AVM?
AVMs are computer programs that use real estate information, such as
demographics, property characteristics, sales prices, and price trends to calculate a
value for a specific property.
The basis of AVMs is adjustments, whether used as an MRA, neural
network (multiple MRA equations), appraiser emulation, or other method.
Some AVMs use more than one method of calculating a value. Typically an
MRA and appraiser emulation are used. Appraiser emulation is more like what an appraiser
does. The most similar sales are selected and adjustments are made.
What adjustments do AVMs make?
No commercially available AVMs let the user know the equations used in
calculating values, as the equations are proprietary. Sometimes you can find out which
variables are most important. A few let you see adjustments that were made on their
appraiser emulation models, where adjustments are made on a grid, like on an appraisal
report.
What about appraiser/user input?
Some AVMs allow user input, such as changing a square footage or
inputting a time adjustment, and others don't allow any input.
The main reason for not allowing user input is to eliminate the human
element from valuation. These AVMs are seen as "pure" without human errors and
bias.
Good data is the key
Public records is the primary data source for all commercially
available AVMs. This data is typically purchased by the AVM vendor. Some vendors collect
part of their data, particularly if they work only a few states. Public records data is
used for both the subject and the comps.
Freddie and Fannie use their extensive appraisal database for their
AVMs. Freddie's AVM is marketed through Dataquick also.
Some vendors use additional enhanced property data, with information
from appraisals or other sources.
If an address is input and the AVM has no property characteristics or
previous sale (for price trending) it cannot be run. Only one vendor I spoke with,
Solimar, will run an AVM without property characteristics on the subject.
If the property is in a nondisclosure state, public records are of no
use unless a sales price can be obtained from another source, such as MLS.
No AVM provider has 100% coverage in the U.S. In many areas,
particularly rural areas, no one compiles and sells the data.
National AVM vendors compete on how many counties they can cover.
What about MLS data?
A few AVMs use MLS data, but the user must subscribe to the MLS
service. Many MLSs are reluctant to resell their sales data as they see it as a profit
center.
Assessments - a significant threat to appraisers
In many states, tax assessment information can be used to determine
values. This is particularly useful for a local appraisal firm or lender, who is familiar
with local assessment practices. Some assessments are at 100% of market value and some are
at 6%. If assessments are equalized in a neighborhood or city, all you have to do is apply
a factor to the assessment.
Who inspects the properties?
One of the major weaknesses in AVMs is a lack of a physical inspection
of the properties.
Most lenders I have spoken with using AVMs for home equity and seconds
don't have anyone drive by the properties. They see them as credit loans, with the
collateral very secondary. Banking regulators, and many investors, agree.
Methods such as verifying an address with the U.S. Postal Service and
using aerial photography are possible strategies for cutting down on fraud. But there is
no substitute for a physical inspection.
Freddie and Fannie are taking a more conservative approach (for now)
and having appraisers inspect the properties to see if there are any problems.
Who has developed AVMs for lenders?
The oldest AVM for lenders I know about is PSAR (Property Survey
Analysis Report), which was developed in the 1980s by an appraiser, Robert Maxfield, Sr.
for use in his probate and divorce appraisals. When I started my appraisal business in
1986, one of my primary lender clients was using PSAR for seconds and home equity loans.
REASON (Real Estate Evaluation Appraisal Statistical Observation
Navigator) was developed in three appraisers, Atom Levi, Phil Mitchell, and Joe Cuffaro.
Several years ago it was sold to PMI, a large mortgage insurer.
AREAS (Automated Real Estate Analysis System) was developed by HNC, a
company specializing in "artificial intelligence" applications for several
industries, including lending. Their product manager, Vickie Cassens, is an appraiser.
Case, Schiller, Weiss, founded by college professors, started with a
paper-based trend index and now has an AVM, CASA (Characteristics And Sales Analysis).
HPI, Home Price Index, a price trending model, is sold by TRW/REDI, now
Experian (ed. note - Experian's real estate division was sold to First American in late
1998).
Valuepoint, now owned by Experian (ed. note - Experian's real estate
division was sold to First American in late 1998), was developed by Solimar, which was
founded by Larry Hudack, a former real estate investment banker. Solimar's new AVM is
PASS.
ValueWizard from Banton Research was started by an appraiser and former
college professor, H. Stan Banton, and is connected to his appraisal company.
Q-Val from real-info was developed by an appraiser, Jim Kirchmeyer in
New York.
Many appraisers are working on AVMs for use their areas, and some have
them up and running. Some appraisal management companies also have their own AVMs.
Use of multiple methods
Many AVMs use more than one method of valuation. Typically appraisal
emulation and purely statistical valuations are used. The more reliable estimate is given
more weight in the valuation.
Why do AVM reports show comps?
A purely statistical AVM often includes comps on a grid as that is what
their lender clients are used to seeing, even if those comps are not used to estimate the
value.
How do you know the accuracy of an AVM output?
Many outputs give you an "accuracy range" similar to a
standard deviation.
Users typically set a cut-off for acceptance or rejection of a value.
For example, accepting any values with a 10% or less variation.
What's the best AVM?
No AVM is perfect. They all have data problems. The best AVM for a user
gives the most accurate results with the most "hits," for their "comfort
level" of acceptable risk. Some models perform better than others, but all depend on
data to get reliable results.
If you're trying to run an AVM in an area with few sales, it won't be
very reliable. If the AVM database has no property characteristics for the subject
property, it won't run if it doesn't allow user input.
If you're running an AVM from a vendor that also provides better data
than another equivalent AVM, it will be more reliable.
Real-info - New York data and AVM
Jim Kirchmeyer, an appraiser, was frustrated for years over lack of
good data in Upstate New York, so he has started his own data service and also provides
values using an AVM, Q-Val.
He has been working on the database for three years. It covers 57
counties in New York, excluding the city of New York and Nassau and Suffolk counties. The
database has been commercially available since August, 1997.
His primary markets are appraisers for the data and lenders for the
AVM, particularly for home equity loans.
For more information, go to www.real-info.com
.
Banton Research - Southeast U.S.
Banton was founded by H. Stan Banton, PhD, MAI and has been developing
AVMs since 1993. Their product, ValueWizard, was commercially available in January, 1998.
Delivery is via the Internet on a network server.
They first started in Tennessee, then expanded to Alabama and
Louisiana, with plans for expansion into other southeastern states, depending on data
availability and clients' needs. Banton heavily uses GIS and geostatistical methods.
If Banton is unable to determine a value from their AVM, they use an
appraiser referral network, or their own appraisal company, for a "human"
appraisal referral.
Solimar
Solimar was founded by Larry Hudack, formerly involved in
collateralized mortgage securities.
What makes Solimar's AVM different is its ability to calculate a value
with limited (or no) property characteristics such as square footage, bedrooms, and
bathrooms.
Solimar's first AVM, ValuePoint, was commercially available in 1994,
and was sold to Experian in 1996.
What about USPAP?
Advisory Opinion 18, Use of an automated valuation model (AVM) was
published July 9, 1997 and is worthwhile reading.
Per the Advisory Opinion, an AVM output, by itself, is not an
appraisal, but may become a basis for an appraisal or review opinion and conclusion if the
appraiser believes the output to be credible and reliable for use in a specific
assignment.
If you are only running an AVM (typically typing in an address) and are
not "signing off," you are not subject to USPAP, and are simply performing a
clerical function. If you are asked to sign off on AVM values, be sure to read USPAP.
To read the advisory opinion, go to www.appraisalfoundation.org, click
on Appraisal Standards Board, then click on USPAP.
Opportunities for appraisers
If you're in an area where public records information is poor and tax
assessments are very inaccurate, you're pretty safe from AVMs. You do have an opportunity
to become a data and AVM provider like Kirchmeyer in New York.
If you're in an area where AVMs are a threat, while your competitors
have their heads in the sand, you can expand into appraisals that aren't automated, such
as relocation and REOs.
Automating as much of the appraisal production as possible by using
digital photos and mapping programs can help. Using an assistant to free you from tasks
such as packaging and mailing reports, researching flood and zoning data can let you
increase your volume and make more money.
Ask your clients if they are doing many 2070 and 2075 inspections.
Volunteer to do them as many appraisers are refusing. Learn how to speed up your time as
they can be very profitable.
Where to get more information
This article only covers some of the AVMs available. They are popping
up all over, particularly for use in one state or a few states. Many thanks to Lewis
Allen, an appraiser and AVM consultant/guru for information on available AVMs. He can be
reached at 909-780-5737 or ljmallen@aol.com .
Banton Research
500 Governors Drive East
Huntsville, AL 35801
256-536-5330
www.banton.com
Case, Schiller, Weiss
1696 Massachusetts Ave.
Cambridge, MA 02138
617-354-1400
www.cswcasa.com
HNC (Ed note: HNC sold their AVM product, AREAS, in late 1998)
5930 Cornerstone Court West
San Diego, CA 92121
619-546-8877
www.hnc.com
PSAR Systems, Inc.
1448 Fairway Vista Ct.
Calistoga, CA 94515
707-942-4171
www.psar.com
real-info, Inc.
247 Cayaga Road
Buffalo, NY 14225
716-632-2800
www.real-info.com
Solimar, Inc.
14841 Yorba St.
Tustin, CA 94880
714-505-8155
www.solimar.net
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