Will The AVM Replace The Traditional Appraisal?
By Charlie W. Elliott, Jr., MAI, SRA

Up until recently many of us probably had not ever heard of an AVM. Most of us upon hearing the term mentally threw it into the pile of contemporary abbreviations, acronyms and buzzwords currently circulating and made some attempt to sort it out of all of the confusion. For those of us subscribing to less than cutting-edge contemporary language, it is not inconceivable that the term AVM may have been confused with some sort of military vehicle or weapon system – maybe even some kind of suburban soccer-mom vehicle such as an SUV.

The Automated Valuation Model (AVM) has been around for a few years now and is becoming more widely accepted as a collateral assessment tool in connection with some mortgage loans. They have been reportedly used for a very broad array of valuation purposes with varying degrees of success.

What are AVMs? They are computer-generated appraisals, developed from general real-estate data collected from multiple-listing services, county property-tax departments, local register-of-deeds offices and other similar databases. Statistical models of varying levels of sophistication are applied to this data. Many, and perhaps most, use some sort of multiple regression analysis (MRA) as the basis for their value calculation. This could perhaps best be compared to a scatter diagram where price is on the horizontal axis and square feet of living area are on the vertical axis. A value per square foot is then selected in the approximate area where the preponderance of dots is centered. The results of these appraisals vary from being very reliable to being worthless and misleading, depending on the availability of relevant data and the use of appropriate statistical models.

Upon its introduction, the AVM was viewed by some as a tool to replace the appraisal management company and, perhaps, the appraiser. While the AVM has been, and is being, used for the purposes of determining property value, it has demonstrated some inherent weaknesses and is being used largely and generally as a supplemental and/or preliminary tool of evaluation.

There are a variety of AVM service providers in the industry, and one need not go farther than the interned search engine and type in the abbreviation AVM for a listing of companies in the business of providing automated valuation services. It should be noted that there are perhaps as many different formulas, formats and comparable databases as there are AVM providers and results will vary depending upon the provider selected. Therefore, the results obtained from an AVM will vary depending upon the AVM provider in addition to the location of the property. The fact that they may vary does not necessarily mean that the results are flawed or misleading, although they could be.

What are the general strengths and weaknesses of the AVM as it may pertain to the user evaluating a property or portfolio of properties under considered for collateral assessment? Since we do not live in a perfect world there are many issues to consider, however, listed below are a few of the more common and obvious issues to be considered.

AVM Strengths:

• Speed – An AVM can be prepared in its entirety in a matter of minutes in most cases. Traditional appraisal may require a number of days depending upon the forces of the market.

• Cost – While the cost of AVMs varies with the service provider it is safe to say that an AVM will typically cost a fraction of what a traditional appraisal will cost. Estimates for traditional appraisals in most markets based upon the authors knowledge range from $250 to $425 and compare to a range of between $10 to $50 for AVMs found in a recent survey. Based upon this data it is perhaps within reason to assume that your typical AVM may be purchased for approximately 10% of that of a traditional appraisal.

AVM Weaknesses:

• Lack of Property Inspection – Since no property inspection is made we are confronted with a major weakness encompassing a number of issues. The property improvements cannot be inspected for existence and condition. Verification of improvement size cannot be accomplished. A visual neighborhood assessment cannot be made.

• Lack of Appraiser Reasoning – The computerized report does not permit an appraiser to make “adjustments of reason” for superior and inferior conditions between the subject and the comparable sales.

• Data Accuracy – No examination of comparable and subject data is performed to insure accuracy.

• Lack of Data – In some geographic areas the lack of pertinent data will severely limit the automated process.

• Accuracy – Due to other inherent weaknesses of the AVM the degree of accuracy of the value conclusion is a major issue and considered the bottom line weakness of the process.

In summary, an automated valuation product has a place in the collateral assessment arena. Whether it will serve the required purpose becomes a matter of assessment within itself. As demonstrated in the strength-and-weakness analysis above, AVMs are considered to be of the most benefit where speed and cost are considered crucial and where specific accuracy of the value conclusion is secondary. The AVM is considered especially valuable as an auxiliary or second-opinion tool. It is also an important option where low loan-to-value ratio loans are a consideration. An example of a recommended use for an AVM would be in a situation where a borrower with AAA credit wants a 50% loan-to-value mortgage loan and needs to close within 10 days. In such a case, the lenders risk is at a level where an AVM might be appropriate and where the additional cost and time required for a traditional appraisal might not be warranted. Conversely, a different borrower with a B credit rating and requiring a 95% loan-to-value ratio might necessitate a traditional appraisal given the very different risk associated with the transaction.

To conclude this comparative analysis, it is apparent that while AVMs may be useful in some situations they are not always of value, and in some circumstances they may be misleading. The old adage, “you get what you pay for,” and the phrase, “an ounce of prevention is worth a pound of cure,” are pearls of wisdom that come to mind. The need for the traditional appraisal is still with us and will be required in the majority of cases where a collateral assessment is required. As long as there are people requiring high loan-to-value ratios and demonstrating less-than-perfect credit, the AVM, as we currently know it, will not be sufficient. Since there are more of us ordinary, average people who have trouble paying our bills from time to time and who have small down payments for home purchases, the AVM will take second place to the traditional appraisal until a better collateral assessment vehicle is developed. Not withstanding the above, there is also a need for the AVM, and when properly used it does, and will, enjoy a segment of the appraisal marketplace not usually served by the traditional appraisal.

Charlie W. Elliott, Jr., MAI, SRA, is President of ELLIOTT® & Company Appraisers, a national real estate appraisal company. He can be reached at (800) 854-5889 or at charlie@elliottco.com or through the company’s Web site at www.appraisalsanywhere.com.