What is the difference between an Appraisal and an Automated Valuation Model (AVM)?

Real Estate Appraiser with Preferred Appraisers, Inc. (NJ) 42RG00094600

The answer to your question is that the AVM is based upon dated, raw unverified data and has not taken into account the physical and locational characteristics of the subject. 

The appraiser has been engaged to prepare an Opinion of Market value, as defined "as the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) buyer and seller are typically motivated; (2) both parties are well informed or well advised, and each acting in what he considers his own best interest; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale." 

AVMs, Automated Valuation models are a collection of objective facts that are based upon raw unverified sales data. The parties to the transactions have not been interviewed and the motivations of the principals investigated. The AVM has not evaluated the subject to ascertain physical condition. Nor has the quality of construction, functional obsolescence, or nuances associated with view, location or offsite influences been uncovered and evaluated. The AVM has not investigated and confirmed that the comparable sales that it has based its value conclusion on are in compliance with numbers 1,2,3,4, and 5 making them reasonable illustrations of market reaction to the location, structure and amenities of the property which is the subject of the valuation analysis. 

Per FNMA: "At present, though, we believe AVMs have generally not evolved sufficiently to fully replace traditional appraisals and human judgment for the origination of first lien mortgages. https://www.efanniemae.com/sf/guides/ssg/relatedsellinginfo/avms/

"Fitch Ratings is imposing a devaluation, of the homes backing mortgages in bond pools if they have been performed by "automated value modules" (AVM's), broker price opinions, desk reviews, tax assessments or drive-by's.

AVM's have proved to be highly unreliable--returning valuations which have proved to be 15-20% inaccurate...even in so-called "cookie cutter" neighborhoods.

Fitch Ratings said it would discount by 10 to 15 percent securitizations of loans backed by homes in softer markets calculated by Automated Valuation Models" (AVM). -Washington Post, Kenneth R. Harney; syndicated columnist

The Fitch Group is a financial corporation whose divisions include Fitch Solutions, an advisory firm offering products and services to the financial industry and is one of the major risk-assessment firms for the global bond market. Fitch Ratings, Ltd. is an international credit rating agency dual-headquartered in New York City and London. It was one of the three Nationally Recognized Statistical Rating Organizations (NRSRO) designated by the U.S. Securities and Exchange Commission in 1975, together with Moody's and Standard & Poor's.

An AVM may be a useful tool to reveal potential comparable sales or to discern the trend in values. It is however by no means comparable in terms of accuracy and comprehensiveness to an appraisal performed by a well seasoned certified appraiser with years of experience in a specific market who has inspected the subject property and comparable sales, and verified data, as well as taken into account both onsite and offsite conditions. 

The AVM that is the subject of your query is devoid of critical and relevant facts pertaining to value and has formulated a value conclusion without consideration of their impact on market reaction. The question is akin to asking why pacing off a measurement is not the same as the measurement made by a laser measuring device. Pacing may be accurate on occasion but a laser measuring device is consistent and verifiably accurate. This is the source of the variance between the appraiser's USPAP compliant Opinion of Value and the value formulated by the analysis of raw, unverified data provided by the AVM.

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