Anyone who has ever taken on a home improvement project will tell you that having the right tools for the job makes all the difference in the world. But even when the do-it-yourselfer looks down at the full complement of tools that they have on their workbench, they still may not know which tool is right for the task at hand. Some credit unions may find themselves in a similar situation when trying to determine which valuation tool to select. Both automated valuation models (AVMs) and full appraisal products generate a property value, and both can be used by credit unions to manage collateral risk. However, there are many distinctions between these products that should be considered.
AVMs are computer models that predict property values based on rules and logic that are programmed to run on a defined set of market data. They are widely used in home equity/second mortgage lending, and they are also utilized for prequalification purposes, audits, and reviews. There has also been some limited acceptance of AVM usage for first mortgage lending. Dozens of AVMs are available in the marketplace, and each one has its own methodology, rules, and data.
AVMs are much less expensive than full appraisal products, and they typically return a value within minutes. When used as a collateral screening/review tool or when making home equity/second mortgage or lower risk loans, AVMs are a great option. They provide a reasonable “ballpark” prediction of what a “typical” house with similar physical property characteristics may be worth. If credit unions are making loans in markets where there is abundant sale activity of existing homes and where pricing trends are relatively stable, then AVMs may be a good fit.
But just like carpenters who do harm to their home improvement project by using the wrong tools, credit unions that rely on AVMs in the wrong situations are also at risk. The AVM does not have the ability to consider view amenities, construction quality, property condition or location. They also do not have the ability to account for incorrect or missing assessment record data. Additionally, the AVM operates under the premise that the property being valued is “average” in condition and quality, and it assumes that no atypical influences exist. Therefore, a disservice is done to a credit union member if their AVM -generated value comes in low because the AVM did not have the ability to account for any of the above missing elements. The reverse is true for the credit union if the AVM -generated value comes in too high because the AVM did not have the ability to account for poor condition/property damage or factor in any adverse external influences (freeway noise, being located across the street from an industrial property, etc.). The other great risk occurs when real estate markets start to soften and the AVM is not aware of an overabundance of available housing stock and unable to see all of the “for sale” signs on the subject's street. As a result, overvaluation is likely.
A full appraisal is another tool that credit unions can select. They are more expensive than an AVM , and they typically take several days before a value is returned. Unlike AVMs, which do not have standardized forms or universally accepted criteria/methodologies, full appraisal reports are written on standardized forms, and all appraisers are required to abide by the Universal Standards of Professional Appraiser Practice (USPAP). In addition to relying on the same types of assessment records that the AVMs draw from, the appraiser also considers local construction cost data and local realtor sales and listing data ( MLS ) that may be available. By inspecting the subject property, the appraiser also has the luxury of blending the physical property characteristics with the qualitative aspects of the property to develop a more accurate value conclusion.
Whether a “ballpark” value is desired from an AVM or a more thorough valuation by a licensed appraiser, credit unions should consider all the valuation solutions that are available to them. However, with a softening market, we recommend that credit unions make greater use of full appraisals.
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