REQUIRED READING: Servicers trying to maintain the value of the properties they own face many challenges, among them what to do when those properties are located in neighborhoods with many other vacant, foreclosed residences. Centralized foreclosures have a significant impact on values in neighborhoods. A random foreclosure does not have the same value impact as several on the same street.
A major challenge is determining a property's ongoing market value. In the past, many servicers have used broker price opinions (BPOs) to determine estimated values in correlation to the balances that are on the books for those loans.
A smart approach to the subject is to look at each property against all of the valuation variables to derive comparable sales and comparable listings. Among the things to consider are the proximity of the subject property to other vacant properties, its age and condition, the square footage, and the number of foreclosures in that specific neighborhood.
A BPO allows the servicer to ascertain a good understanding of what is going on with the property. If allowed by time and/or budget, an interior BPO can be performed, which includes several photos of the interior condition. If interior access is not available, a drive-by BPO may be all the information a servicer has to use in the decision process.
If a servicer has access to the interior, it is obviously going to provide a much better idea of the value of that property. One can check out the interior conditions and determine what items need to be repaired or rehabbed and what improvements need to be completed.
Servicers can also see if mold remediation needs to be done or if the roof needs to be repaired. The estimated repairs can be listed on the inspection portion of the automated valuation model (AVM) or on the interior BPO. That way, the servicer can get an idea of whether to list it as is or list it after at least some of the repairs have been completed, and will know what the estimated value is or will be.
Servicers can pick and choose what repairs they want to complete based on where they think the biggest impact will be on the value. Exterior appearance, which can be improved by such simple things as mowing lawns and planting flowers, can also impact valuations done by BPOs or appraisals.
Some questions have been raised regarding BPOs. In some states, they are actually illegal. Even though banks and servicers would much rather spend money on a BPO than on a more costly appraisal, in some cases, it is very difficult to do that. The alternative is to rely more heavily on an AVM. However, as more properties go into foreclosure, personalized BPOs have proven too costly, and servicers are now ordering more AVMs.
An AVM aggregates statistical data from a database to produce valuation estimates. The data can come from varied sources and include compiled numbers harvested from the Internet and then run through a process to ensure appropriate hit rates. AVMs offer different approaches to determine values depending on a servicer's purpose and needs.
However, AVM results can vary widely. Despite a lot of talk about developing best practices for them, no such standard yet exists.
Servicers can choose many variables to ensure that they come back with accurate ‘comps’ – or comparable valuations – in the neighborhood, both for occupied and vacant homes.Â
There is currently a lot of discussion on how accurate an AVM, is because it is based off data mined through the Internet and/or a multiple listing service, thus the dollar amount predicted may not be sustained when the property is listed.
In other words, can the Realtor list the property at the value that comes back from the AVM and will it really sell for that price? That sets up a sometimes-fierce debate about how much a servicer should spend per property on an AVM versus a BPO versus an appraisal.
A different approach
Appraisals are a different story, because there are many state guidelines covering them. They are more costly, for sure, but they provide more accurate information about the property. However, many servicers just do not have the budget for this in a large portfolio.
One alternative would involving pairing an AVM with an inspection. In this approach, a computer model will pull data in and correlate it against other property information. Servicers will then pair it with the results of an actual property inspection to ensure that the property is still standing and that it is in the condition in which the servicers think it should be.
There is some liability if a servicer relies solely on the estimated value provided by an AVM. Few things are worse than doing an AVM by itself and then finding out that the property has since burned down. A lot of the AVM databases are only updated monthly, so when servicers run these AVMs, the data – and, thus, the valuation – may or may not be current.
Under that scenario, a servicer can order an enhanced AVM, or even an interior BPO, within limited budgets, and will be better off because of the additional details regarding a property's current condition. A BPO – even with budget limitations – can provide servicers with ways to enhance a property's value. After all, a servicer may also want the home to be in the same condition as other homes in the neighborhood. Needed repairs would be done first, and if there are additional funds, paint or new carpeting can be considered to help increase the value.
These are steps that servicers can take to more accurately identify the ongoing value of their properties, thus allowing them to better determine whether they want to offer ‘cash for keys,’ loan modifications, a deed-in-lieu, or foreclose. It gives them an opportunity to evaluate a short sale, as well. And, it helps give them the tools necessary for determining what should go in a borrower's response package.
Suzanne Ball is president of America's InfoMart Inc., headquartered in Allen, Texas. She can be reached at (972) 727-9500.