Tuesday , 23 October 2018

Automated Valuation Models Are Tools, Not Solutions

Because you may be reading this on a laptop, tablet, or smartphone, you already know that today we use technology in ways we never imagined even a few years ago. Who could have dreamed of ordering something online and having it delivered within hours? Now we’re anticipating deliveries via driverless cars and flying drones.

With these advances, will computers inevitably replace appraisers when it comes to valuing homes? That question is the subject of much debate. In some limited transactions, an automated valuation model may be used appropriately today instead of an appraisal. Based on the specifics of the property and the transaction details, an appraisal may be unnecessary. For example, I’d be irate if I owned a $2 million home free and clear but had to pay a large fee for an appraisal in order to take out a $50,000 line of credit. However, if I’m looking to buy a $500,000 home with 10 percent down, is it reasonable for a lender to rely on artificial intelligence to determine whether the collateral is adequate? Not likely.

I couldn’t agree more with the sentiments of Karen Belita, a data scientist with the National Association of REALTORS®, who wrote in a blog post, “When it comes to online home value estimates, the number one caveat for consumers is that these estimates are not a substitute for formal appraisals, comparative market analyses, and the in-depth expertise of real estate professionals.” Bravo. Indeed, AVMs are not appraisals. It’s possible that as technology evolves, AVMs may be used to a greater degree. But today, in many cases, an automated valuation is suspect if there is a lack of available data or the property isn’t a “cookie cutter.” Many of us have checked our own properties against the finding of an AVM and thought, “Yeah, right.” When it comes to AVMs, your mileage may vary.

So why aren’t automated models more reliable in more transactions? Because computers don’t buy houses; people do. An AVM does a great job of analyzing tangible features such as a property’s age, number of bedrooms and baths, square footage, and lot size. However, a property’s overall appeal is something that has been, at least to date, extremely difficult to quantify. It’s a uniquely human phenomenon; a property’s overall appeal reflects a combination of characteristics. While not everyone has the same preferences, some unusual features will likely face significant market reluctance.

But wait, you say, aren’t appraisers required by the Uniform Standards of Professional Appraisal Practice to be “independent, impartial, and objective”? Absolutely. Still, appraisers are not machines. They must have relevant data and logic to support their analyses, opinions, and conclusions, but they also incorporate the concept of market value reflecting the interests of consumers who are “typically motivated” and “well-informed.”

Recognizing that AVMs play a role in developing an appraisal, the authors of USPAP acknowledge their relevance with respect to their use of regression, adaptive estimation, neural network, expert reasoning, and artificial intelligence. But appraisers remain better than AVMs at recognizing motivations and knowledge levels of market participants.

The output of an AVM is not, by itself, an appraisal. It may become a basis for one if the appraiser believes the output to be credible for use in a specific assignment. If the appraiser believes it to be credible. Today, that’s a very big “if.” So unless and until AVMs can better emulate the human factor, an ethical and competent appraiser remains indispensable.

Reprinted from  REALTOR® Magazine Online, September-October 2018, with permission of the National Association of REALTORS®. Copyright September-October 2018. All rights reserved. http://realtormag.realtor.org

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About John Brenan

John Brenan
John has been the Director of Appraisal Issues for The Appraisal Foundation since October 2003. In this capacity, John serves as the Foundation’s senior staff contact regarding the work of the Appraisal Practices Board (APB), Appraisal Standards Board (ASB), and Appraiser Qualifications Board (AQB). Prior to his current position, John spent 8½ years as the Chief of Licensing and Enforcement for the California Office of Real Estate Appraisers (OREA). In that role, John administered the largest real estate appraiser licensing program in the United States, evaluating applicants for compliance with both federal and state requirements. John was also responsible for California’s enforcement program; educating and/or disciplining licensees who violated law, regulations or USPAP. John worked with local, state, and federal law enforcement agencies regarding cases involving fraud. John has been in the appraisal profession since the early 1980s. Prior to joining OREA in February 1995, he worked as a staff appraiser and fee appraiser for several large financial institutions, appraising both residential and non-residential real estate covering a wide variety of property types. He also previously managed an appraisal department for a major financial institution. John is a Certified General appraiser, AQB Certified USPAP Instructor, and a Fellow with the Royal Institution of Chartered Surveyors. John holds a Bachelor’s degree in Business Administration from California State University, Long Beach.

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