Leveraging
AVM Technology
From Form-Filling to “Collateral Valuation”
By: Darius Bozorgi & Jeff Bradford
What business are you in? It’s a question that ice manufacturers
should have asked themselves as the refrigeration business advanced
with the invention of the refrigerator and they lost business.
Or railroad tycoons pondered as the transportation business
evolved from the rails to the skies. It’s a question that every
forward-looking appraiser ought to be asking themselves right
now. Here’s why.
Appraisers
often complain about being pigeonholed into form-filling roles
but new technologies are providing valuation professionals with
an opportunity to expand their expertise and their practice.
Most appraisers would describe themselves as being in the “appraisal”
business: data gathering, verification and analysis, property
inspections and condition reports, photographs and other research-oriented
functions. Your practice probably includes some or all of these
functions. But to define the function of an appraisal business
as only generating appraisals is far too limiting. You are not
in the “appraisal” business; you are in the collateral valuation
business. New technologies, aimed at the core roots of valuation
analysis - data gathering, filtering and analysis, can be of
tremendous assistance in moving you from a form-filler role
to the role of local valuation expert.
The primary strength of an AVM (automated valuation model) is
its ability to rapidly analyze large amounts of data. This process
is repeated continuously, with new data being added daily and
new technologies being incorporated frequently. In other words,
AVMs are getting faster, better (smarter) and more efficient
every day. Understanding this new technology, which was designed
specifically to aid in the work of collateral valuation, is
the first step in benefiting from it.
Workflow efficiency has grown exponentially in the last 20 years
in the appraisal business (time and cost reduction). But there
has been little change in the actual work of collateral valuation.
In the 1980s, appraisers supported adjustments using the “paired-sales”
technique. Today appraisers still support adjustments using
the “paired-sales” technique. The process has remained unchanged
because technology was not readily available to address the
issue. Now it is. As AVM technology evolves and changes, appraisers
should be asking how their practice and their clients can be
better served by these new analysis and valuation techniques.
The following sections provide examples of how to take advantage
of this emerging technology today!
High Speed Property Analysis
AVMs were introduced more than a decade ago. Since that time computer
hardware and property data sources have improved dramatically
and they will continue to do so. Technology savvy appraisers have
already benefited from their introduction. They use AVMs as a
starting point in the valuation process. Here’s how.
 |
•
Pull an AVM and use the data provided to pre-fill the
appraiser form.
• Apply some or all of the recent property sales (usually
at least six per property) according to proper valuation
procedures.
• Assess the price trends for the neighborhood and zip
code to obtain an immediate understanding of what home
prices have done over the last three years.
• Check the AVM value provided to further support the
appraised value.
Why
start from scratch when this technology is immediate and
available? Using this technology, how many additional
properties could be appraised each day, week, or year?
What is the return on investment with the proper application
of this technology? What is the added value and greater
insight this additional and independent report provides
to the lender? What does it mean for the professionals
who are using these tools today?
|
It means faster turn times, additional support and verification
of value and with that, the ability to distinguish themselves
as the elite valuation service providers and experts in their
area.
VeroVALUE AVM technology integrated into Bradford’s ClickFORMS
v2.4.6
Appraiser
Assisted AVMs
Just as 2055s and 704s were added to the appraisers’ menu of
services, the time has come for one more: appraiser-assisted
AVMs or, as some refer to this hybrid, appraiser-enabled AVMs.
This service combines the speed and cost savings of an AVM with
the valuation expertise of a local real estate professional.
The appraiser-assisted AVM presents the appraiser with a completed
AVM valuation report and several options: (1) the appraiser
can indicate that the information set forth in the AVM appears
realistic and reliable, informing his client accordingly; (2)
for complex assignments, the appraiser may need to inform his
client that a desktop analysis/review is required and add additional
data or support (the appraiser would submit this information
directly into the assisted AVM form itself); or (3) for some
assignments, the appraiser may need to inform his client that
a higher level of service is required (e.g. 2055, 1004). The
finished form is electronically signed and then printed or emailed.
This value-added product is fully USPAP compliant and provides
the lender with the ability to save time and money, when appropriate,
while relying on the local valuation expert to make this determination.
Support
for Adjustments
In the hands of a skilled appraiser, paired-sales analysis works
perfectly in the extraction and support of adjustments used
in the Sales Comparison Approach. The creation of AVM technology
does not change this reality. What AVMs bring to the table is
speed, consistency, and verifiable support. The next time you
consider using market change adjustments in the Sales Comparison
section of your appraisal report, consider what the AVM has
to offer.
One of the services available from AVM vendors is called an
index. The index captures and tracks changes in market conditions
over time. Using the charts that follow, you can easily see
the changes in value (y-axis) over time (x-axis).
Orange County, CA: Reading from
the left, the data has been normalized to zero
with price changes tracked cumulatively.
When you compare the above steps to the process of extracting
adjustments using paired-sales, the time saving benefits are
obvious. Slightly less obvious is the benefit of being able
to support your adjustments without fear of contradiction. The
AVM uses all of the relevant market data to generate the index
– not just a few sets of paired-sales.
Time
Adjustments
There
are other major benefits of AVM technology that only experienced
and seasoned appraisers will appreciate. Over the past many
years, there has been a reluctance to use market change adjustments
because of the additional time required to provide substantiating
support. To mitigate this situation, many appraisers have substantially
reduced or omitted the use of market change adjustments and
have instead “moved” the adjustment elsewhere in the Sales Comparison
grid. While this work-around provides a solution to handling
reviewers, the side effect is the elimination of a powerful
tool (the time adjustment). This is no longer necessary. An
AVM index provides excellent support for market change adjustments
because it uses all of the available data as opposed to a select
few sets of sales, returning valuation decisions back to the
appraiser.
Conclusion
There are numerous reasons for including an AVM valuation within
a traditional appraisal report. The AVM valuation may be considered
a “new” valuation method, a separate unbiased opinion or just
additional support for the appraised value. Obviously, the differences
between the AVM valuation estimate and the expert opinion of
the appraiser can and should be addressed in the reconciliation
section. Future readers of the appraisal report will welcome
the additional support of value.
We have covered just three ways that appraisers may use AVM
technology in their current appraisal practice. As technology
advances, there will certainly be more tools for appraisers,
including more robust adjustment indicators, automatic integration
within forms software, more services to provide and even tools
to assist in forecasting market stability and performing risk
analysis. AVM technology will provide the high-level tools and
analysis to help appraisers do what they do best; provide expert
opinions on issues of collateral valuation from a local and
qualified real estate professional.
Darius
Bozorgi is President of Veros, specializing in automated collateral
assessment products and other predictive technology decision-support
applications. He serves on the Board of Directors of the Real
Estate Information Professionals Association (REIPA) and is
Chairman of its Collateral Assessment Technologies Committee
(CATC). He holds a J.D. from Chicago-Kent College of Law and
B.A. from the University of Michigan.
Jeff Bradford is President of Bradford Technologies, a leader
in appraiser software for over 18 years. He holds a Masters
in Computer Science and an MBA from the University of Santa
Clara and a Masters in Engineering Mechanics from the University
of Texas.
Sidebar
Roots
of Change
For some time now, mortgage origination has been moving toward
a real-time environment within accepted risk parameters. Consumers
seek faster turn-around times on underwriting decisions. Lenders
want to keep customers off the street and away from their competitors.
Issuers and investors continue to seek the means to enhance
risk management procedures for faster, more cost-effective securitization
while maintaining expected performance. AVMs did not cause these
changes in the mortgage business, they were created in response
to them. Appraisers are only now recognizing these changes and
embracing the tools that can help them respond.
