Earlier this month, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., and the Federal Reserve proposed a plan to loosen home appraisal requirements and make way for the use of more Automated Valuation Models (AVMs). As the Wall Street Journal reports, the plan would increase the current value-limit of $250,000 for AVMs to $400,000, enabling “a majority of U.S. homes to be bought and sold without being evaluated by a licensed appraiser.” This would effectively speed up the home purchase process, but also puts values in the hands of “largely untested property valuations based on computer algorithms.”
Market experts have expressed concern that introducing more AVMs into the $10.7 trillion home loan market could prove detrimental, especially as an incorrect estimate of even just a few percentage points can “leave a homeowner owing more than their house is worth or lenders with insufficient collateral to cover defaulted loans.”
The Mortgage Reports echoed these sentiments in an article following the news, outlining that while AVMs are cost effective—consider an appraisal typically runs $375 to $900, while an AVM can be obtained for as little as $100— but that they undoubtedly leave questions: “without someone physically going through the property will you get the right value? Might you overpay?”
In addition to saving a buyer hundreds of dollars, AVMs can also speed up the transaction process. According to the National Association of Realtors®, appraisals were the third leading cause of delays last year, accounting for 16 percent of transactional delays (behind financing at 30 percent and home inspection/environmental issues at 19 percent).
Despite assurances from technology companies that AVMs are a trusted valuation tool, there is growing concern over the largely unregulated industry. The Journal points to HouseCanary Inc., which offers AVMs for under $100 using “artificial intelligence, algorithms and sometimes even drones to value home.” Yet appraisals can also sometimes be “more art than science.”
As Jim Murrett, president of Appraisal Institute and director of Appraisal Standards and Audit Standards for Colliers International tells Bisnow, “technology does not replace the appraiser, even though there are some automated valuation models out there, you still need the human element involved. What technology has done is make the appraiser far more efficient in their process so they can complete an assignment with less human error and much quicker.”
“There’s still no computer that can see, hear, taste, smell and touch,” Pat Turner, a Virginia-based appraiser, adds. “Have you ever been in a hoarder’s house?”
As we move closer to a day in which we ask our computers to accurately assess the value of our homes (not just in our online research but in our application for home mortgage loans), it’s important to weigh the pros and cons of either approach and consult with a residential real estate broker that can advise you regarding appraisals and AVMs to ensure you make the right decision for your real estate needs.