Recently, many in the Real Estate industry have been discussing the fact that we are seeing some lenders start to use AVMs, or automated valuation models, to valuate the probable sales price of a home, instead of traditional appraisals done by on site appraisal professionals. An AVM is a residential valuation report that can be obtained in a matter of seconds. It is a technology-driven report. The product of an automated valuation technology comes from analysis of public record data and computer decision logic combined to provide a calculated estimate of a probable selling price of a residential property. But, this has many worried about the possible implications on a still recovering market.
The advantages of using AVMs over traditional chartered surveyors are that they save time, money and resources, thus lowering the cost of valuing a property. Many AVMs can be made and used with little cost, so more choices in valuation methodology are also possible. It is claimed that unlike traditional surveyor valuations, AVM outputs do not suffer from the same fraud risk, although certain providers can have their systems manipulated intentionally or otherwise if property features are incorrectly entered. AVMs remove the human element from the valuation process and rely on computer automation so as to remove human bias and subjectivity.
The disadvantages are that they do not take into account the property condition, as a physical inspection of the property does not occur and therefore the valuation produced assumes an average condition which may not reflect reality.If an appraiser doesn't actually come inside your home, for example, he or she may not have any idea that you've put in an expensive new kitchen. This kind of "drive-by" appraisal might fail to detect serious structural problems, termite damage, or hazardous wiring. Also, many AVMs are using transactional data, which may lag anywhere from three to six months. In today's fast moving market where values change quickly, true up-to-date value is not credible.
It's ironic that the same lenders who suffered the sloppy oversights and loose practices that led to the mortgage meltdown would accept such generalized and nonspecific appraisals. An AVM may have no bearing on real estate reality, yet can generate grossly misleading conclusions. Fitch Ratings, for example, a major bond market risk-assessment firm, believes that only on-site, exterior and interior professional appraisals can be trusted. What effect this will have on the real estate market has yet to be fully seen - what do you think?
Sources: www.mortgageloan.com, Wikipedia