BLOG VIEW: An appraisal is a necessary part of any real estate transaction. It is the process of developing an opinion of value on a property, and forms the basis for mortgage loans, taxes and property sale prices. Traditionally, appraisals have been conducted exclusively in person by an experienced appraiser. This includes the appraiser driving to the property, walking around, taking pictures, driving back to the office and logging all notes. While the process is effective, it has begun to prove expensive and inefficient.
Fortunately, with the recent technology innovations in the mortgage industry, lenders are not forced into using only in-person appraisals anymore, as they now have the ability to choose among four other types of valuations including automated valuation models (AVMs), desktop valuations, hybrid valuations and property condition reports.
An AVM is the most basic valuation – and also the fastest. It provides the lender with instant results and is often recommended for most loans for this reason. Using mathematical modeling combined with an appropriate third-party database, an AVM calculates a property’s value at a specific point in time by analyzing values of comparable properties. It is a more attractive option than an in-person appraisal when a lender needs information fast – or when there is nothing unique about the property or location. The disadvantage of an AVM is that is does not take into account the property’s physical condition and therefore may not reflect reality.
This is where desktop valuations come into play and why they are quickly becoming a top valuation choice for lenders. Although desktop valuations are still completed by a computer, like an AVM, a real estate valuation specialist is employed to manually select and weigh the comparable sales. This approach of computer and human working together was created to provide an appraisal that is more reliable than an AVM, but less expensive than a full, in-person appraisal.
Of course, not all properties are viable candidates for desktop valuations. Although a specialist is reviewing the information, the process still relies heavily on automated valuation tools and available market data. This leaves room for potential holes in certain lending areas, such as extreme rural locations.
The next step up is to utilize a hybrid valuation. This model is the result of a joint effort between real estate agents and appraisers effectively working together, while, at the same time, independently focusing on their particular contribution to the product. There is no value sharing between the real estate agent and the appraiser; the appraiser simply uses the data aggregated by the real estate agent to establish a final value. This is a great alternative to traditional appraisals at much lower costs and quicker turnaround times.
Finally, the property condition report is the closest option to a full appraisal while still being faster and less expensive. If a certain property requires a lender’s eyes, the property condition report can be added onto an AVM or desktop valuation to provide current photos and condition of the property along with the hard data.
There are plenty of valuation types, each with its own advantages and disadvantages. It is vital that lenders select the best option for themselves and their properties, and that they are working with third-party providers that offer all options – including full, in-person appraisals. By partnering with a providers that can match underwriting guidelines and meet each scenario, lenders can stay compliant and continue to grow their business.
Brenda Brand is a real estate valuation specialist with Austin, Texas-based FirstClose, provider of end-to-end technology solutions to mortgage lenders nationwide.