This article was written in 1998. I don’t update this page very often.
I regularly write about AVMs and other appraisal issues s in my paid monthly Appraisal Today newsletter.
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An updated article was published in the October, 1999 issue of Appraisal Today, available to subscribers. However, the “basics” discussed below have not changed much.
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 .
What about USPAP? Note: these references have been updaed.
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 NOTE: this information is old, but is useful as it shows the changes in the AVM industry. All of these vendors are out of business or have been purchased, except for real-info.
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.
500 Governors Drive East
Huntsville, AL 35801
Case, Schiller, Weiss
1696 Massachusetts Ave.
Cambridge, MA 02138
HNC (Ed note: HNC sold their AVM product, AREAS, in late 1998)
5930 Cornerstone Court West
San Diego, CA 92121
PSAR Systems, Inc.
1448 Fairway Vista Ct.
Calistoga, CA 94515
247 Cayaga Road
Buffalo, NY 14225
14841 Yorba St.
Tustin, CA 94880