AVMs? What do we do with AVMs?

08 Dec
December 8, 2010

Automated Valuation Models. AVMs for short. A lot of talk in Real Estate this year has swirled around the various AVMs available and their importance/impact on the industry. There are quite a few available, the most recent, and possibly most polarizing, being NAR’s RPR initiative – an initiative that provides possibly the most accurate AVM ever (which has recently been licensed to LPS for resale to the banking and mortgage industry – more on this in a later post).

Are AVMs a good thing for the industry? A bad thing? Are they to be ignored?

If pressed for an answer, I think ultimately, AVMs are a good thing. Any tool designed to assist professionals in making more accurate judgments is never a bad thing in my opinion. This can be a win for consumers and professionals alike. However, I do not believe AVMs are quite the “game changer” that many predict.

The Real Estate Market and How it Relates

Yesterday I sat through a Wells Fargo training session on short sales and their impact on the local Real Estate market (Avery-Hess’ mortgage company is a joint venture with Wells Fargo Home Mortgage). This training session was not only one of the best I have ever attended, but a lot of the topics covered were very relevant to the context of this post.

There were a lot of facts and figures shared by our presenter, a Short Sale Regional Manager at Wells Fargo, but there were a couple statistics shared that were especially germane to the discussion about AVMs:

  • About 36% of the market here locally is distressed inventory (short sales, REO etc.). Folks, that is a large number, with over 1/3 of the local inventory classified as “distressed.” But that’s nothing…
  • …Because over 75% of the inventory in California is classified as “distressed” – that number is absolutely staggering.

This Real Estate, and subsequent economic downturn, has been deeper and more protracted than anyone could have predicted. Even though many indicators point to a stabilization and strengthening of our local market (this is relevant to the Washington DC Metro/Northern VA/MD region), distressed properties are going to be prevalent in our market for quite some time.

And accurate pricing and valuation are going to be critical for both the homeowners in need and the banks carrying the distressed assets on their balance sheets.

So what does this mean? How does this relate to the discussion about AVMs?

Our Wells Fargo presenter mentioned that AVMs are indeed utilized as part of the short sale remediation process. And he also mentioned that AVMs tend to be fairly useless when used to price these properties.

Interesting.

With all of the hype and hoopla surrounding AVMs, here is a high-level decision maker stating that there is a marginal, if any, benefit to the use of AVMs during the sale of his asset(s).

Why?

What if a neighborhood has an average sale price of $300,000, recent sale comps that support a list price of $290,000 – $310,000, an AVM that suggests a price of $303,000 – but a Real Estate professional, representing a homeowner in need during a short sale, submits a suggested list price of $175,000 in that very neighborhood?

Why? Why the low list price? Why when the AVM and comps generated through the on-line systems being utilized support a $303,000 sale price?

That’s because there is nothing normal or average about distressed properties. Properties and homeowners in need. What if there is structural damage to the home? Cosmetic deficiencies affecting the masonry and facade? Mold issues? The list can go on and on and on and on. And ladies and gentlemen, these are REAL ISSUES in today’s market. And tomorrow’s market. And the market for the next (insert number here) years. AVMs and on-line valuation algorithms alone are not going to cut it when there is nothing standard about this market, this industry.

And with over 1/3 of our LOCAL market comprised of these very properties that cannot be properly benchmarked and valued by an algorithm (I also contend that most properties – distressed or otherwise –  cannot be shoved through a computer model for truly accurate pricing), there needs to be something more. There HAS to be something more.

The Takeaway

These banks, Short Sale Managers, REO Asset Managers – and most importantly – Homeowners, are relying on Real Estate professionals to guide them, advise them. Help them make decisions that are not easy, but necessary. They are relying on the knowledge, expertise, cognitive reasoning, savvy and experience possessed by these professionals that cannot be provided solely by an AVM.

There is so much more to Real Estate than pricing through a valuation model. There’s helping people through difficult and emotional homeownership situations. There’s counseling your clients on the concerns associated with incomplete settlements. The importance of title insurance. The different types of title insurance. The merits of 203K financing and how this product has helped with purchase of many distressed properties. Again, this list could go on and on and on and on…

AVMs can be a good tool for consumers and professionals alike. In fact, they can be a great tool. But again, there is so much more to Real Estate than valuation and pricing; AVMs should not be the only tool used in the pricing an valuation process, rather, AVMs should be utilized as a starting point in the pricing and valuation process.

Ultimately, what really separates the wheat from the chaff in this industry – the professional from the hobbyist – is the application and implementation of the data generated by AVMs into an overall Real Estate experience that is far more complex than simply associating a price with a property.

-Amit

Find your home, Plan your life: www.averyhess.com

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3 replies
  1. Jay Jack says:

    Great article Amit, filled with lots of good information. As far as the distressed property numbers go, who really knows how many distressed properties are really and truly out there. The government can throw plenty of excrement at us but I believe many, many owners are there already distressed and sitting in denial but have somehow kept afloat at least temporarily. I have never seen an economy so unpredictable and filled with so very much uncertainity in my lifetime.

    Sincerely,

    Jay

  2. Amit Kulkarni says:

    Jay – thanks for the feedback, and glad you liked the post.

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