FEATURED ARTICLE: WILL AVMs CREATE A WORLD WITHOUT APPRAISERS?
broker, agent, or salesperson that details the probable selling price of a particular piece of real estate property and provides a varying level of detail about the property’s condition, market, and neighbor- hood, and information on compara- ble sales, but does not include an automated valuation model.” Zillow reports that in the third quarter, “more than 186 million average monthly unique users ac- cessed Zillow Group brands' mobile apps and websites, an increase of 7 percent year-over-year.” What makes these huge and growing numbers remarkable is that in 2018, existing home sales de- clined, single-family housing starts were down, and mortgage rates were up. No less amazing, how do you get 186 million unique users to visit your sites when home sales for ONLINE HOME VALUE ESTIMATES
2018 only totaled about 6.2 million new and used units? The Zillow sites — which include both Zillow.com and Trulia.com — are just one part of the online real estate marketplace. There are oth- er substantial sites, including Yahoo! Homes, Realtor.com, Redfin.com, and Homes.com. Leading online property sites hold vast amounts of information. A visitor can find such things as a sale price, square footage, photos, price per square foot, past sale prices, past listing prices, the number of bedrooms, and tax costs. This ma- terial — market intelligence, really — is presented in a way that’s easy for site visitors to understand, the public side of complex automated valuation models (AVMs). The catch is that online valuations — no matter how beautifully pre- sented — can differ from each other. Go to several property sites and check the value for your home. Each estimate will likely be dif-
ferent, and the gap between the highest and lowest valuations can be significant.
“AVMs are the new fraud fron- tier,” said Joan Trice, Founder and CEO of Allterra Group. Allterra Group is the parent company of such well-known industry brands as the Appraisal Buzz website, Appraisal Buzz Magazine, Valuation Expo, and the Collateral Risk Net- work. “It is just assumed the AVM is superior. Everyone is infatuated with technology. We have lost all respect for experts. How would an AVM know about the 35 cats you have in your basement?” Property sites are careful to explain that an AVM is not a sub- stitute for an appraisal. Zillow, for example, states that its Zestimate “is not an appraisal. It is a starting point in determining a home's val- ue.” It advises site visitors to also obtain a comparative market anal- ysis (CMA) as well as an appraisal and to physically visit the property when possible. If it is true that an AVM is not an appraisal, it’s also true that home value estimates are typically free, instantly available, and constantly being updated. Online AVMs are being checked and rechecked by the public, not because people are necessarily in the market to buy or sell but because home values im- pact our ego and sense of financial success. Who doesn’t like to see the estimated price of their home, especially when prices are rising? Barriers such as price (there are none) and time (online valuations are available day and night) simply don’t exist with online systems. And – not that anyone would ever do this – you can easily and anon- ymously check the pricing of your manager’s house or how much Uncle Wally paid for his home. Conflict arises when homeowners see online AVMs as a benchmark which shows a higher value than an appraisal or CMA. It must then be ex- plained by appraisers, brokers, and lenders that no, the property is not
AVMs are the new fraud frontier. It is just assumed the AVM is superior. Everyone is infatuated with technology. We have lost all respect for experts. How would an AVM know about the 35 cats you have in your basement?”
Why does this happen?
• The variables and weights used in one model may differ from another. • The availability of recent prop- erty information can vary by jurisdiction. • A new subdivision with three models and lots of sales is easier to price than a neighborhood built 100 years ago where every home is different and sales are infrequent.
really worth as much as some sites might suggest, a conversation which is likely to be discomforting. “Consumers,” says the National Association of Realtors (NAR), “who are seriously in the home-buying and home-selling market should be mindful of a variety of compet- ing home price estimators. Solely relying on just one price estimate is likely to skew the views of what a particular property will actu- ally transact for. When it comes to online home value estimates, however, the number one caveat for consumers is that these estimates are not a substitute for formal ap- praisals, comparative market anal- yses, and the in-depth expertise of real estate professionals.” “AVMs are a misnomer,” explains Joan Trice, who is also the Founder and CEO of Clearbox, an appraiser credentials database used by lend- ers, regulators and AMCs. “They are not valuation models. They are sales price models. Who cares what the prices are? Fannie and Freddie should care about value, yet they have dismantled the appraisal pro- cess to a single approach to value, the Greater Fool Theory.”
claiming that appraisals for reverse mortgages – what HUD calls home equity conversion mortgages or HECMs – often do not offer suffi- cient accuracy. “During FY 2018,” said HUD, in its latest annual report to Congress, “FHA became aware of concerns with the accuracy of appraisals used to originate HECMs. A com- parison of over 80,000 HECMs endorsed between 2016 and 2018 strongly suggested that certain appraisals used in FHA’s HECM program were overvaluing the collateral and generating inflated property appraised values. Over this period, 21 percent of the population had an appraisal that was 10 percent or more above the automated valuation model (AVM) estimate. Over the same period, 9 percent of appraisals were inflated by 20 percent or more, and 4 per- cent of appraisals were inflated by more than 30 percent.” HUD has now begun to require two appraisals for selected HECM applications as a result of its find- ings, but the government’s claims are not without question. “It is worth noting that any losses the FHA is recording today are actually the result of transactions made years earlier, and in some cases many years earlier,” explains Larry M. Elkin, presi- dent of the Palisades Hudson Financial Group, an asset manager.
• One system may allow owner inputs while another does not.
• Online valuations can differ sig- nificantly from appraised values and marketing advice provided by real estate brokers.
2018 HOMES SALES BROKEN DOWN BY DECADE BUILT
MEDIAN SALES PRICE
2010-2020 2000-2010 1990-2000 1980-1990 1970-1980 1960-1970 1950-1960 1940-1950 1930-1940 1920-1930 1910-1920 1900-1910 1890-1900
WHAT ABOUT ACCURACY? How accurate are valuations, whether human or electronic? HUD, for one, has caused a stir by
8 think realty housing news report
march 2019 9
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