REQUIRED READING: When I think about the use of technology to value real estate, I often ponder about what the earliest attempts at human flight must have been like. Have you ever seen those old black-and-white films that showed men trying all sorts of things to get off the ground? Most of them didn't work, and more than a few were pretty silly. But eventually, of course, we humans figured out how to do it, and now millions of people soar across the skies in metal birds every day.
Like the earliest flying machines, technology in the appraisal process had gotten off to a rather shaky start some two decades ago, when the first automated valuation models (AVMs) began making the rounds. And it was as true then as it is today: Technology simply cannot do everything that experienced, skilled appraisers can. It cannot, for example, account for current market tastes or the impact of anomalies – such as substandard roof heights, septic systems, wood stoves or an indoor pool – on overall value. The first AVMs were intriguing and useful as a supplemental valuation tool, but not much more.
But over the past 20 years, we've seen a tremendous growth in the types of valuation products and services, which now span the entire spectrum, from computer to appraiser. All the major valuation providers and appraisal management companies now provide some level of hybrid products – that is, a combination of technology and the review of a market expert or licensed appraiser.
Both Fannie Mae and Freddie Mac have developed and use AVMs as tools to help determine property value and use them for appraisal reviews along with the expertise of licensed appraisers. Though it is true that many solutions on the market lack the necessary reliability or flexibility to be used as stand-alone, one-size-fits-all solutions, they have slowly become indispensable tools and a permanent part of a servicer's valuation tool kit.
There are several reasons for this trend, the first being market competition. Today's lenders and servicers face an incredibly difficult operating environment, given the nation's struggling economy and increasingly regulated playing field. Everyone needs to do more with less. As a result, there has been intense competition among appraisal firms, appraisal management companies, valuation providers and technology vendors, which are each trying to outdo the other in terms of costs, speed and accuracy. This is particularly true in the servicing arena, where these three factors are at a premium when it comes to valuating distressed property.
The second reason is innovation. There are ongoing improvements in valuation technology, and a huge growth in the data, analytics and reports that are collected and created about residential property. The first AVMs, for example, could do little more than extrapolate the past sales price of a property and the local tax assessor's values. Today, valuation reports can include not only local sales prices and assessments of surrounding properties, but also graphs on price trends, local foreclosure rates, ratios of listings per sold homes and retroactive valuations.
Technology is also being used to qualify appraisers. For example, as many servicers know, it is difficult to trust a valuation that has been reviewed by an appraiser if one cannot be sure whether the appraiser understands the local market dynamics. Today, however, technology can be used to locate and certify whether an appraiser has experience in the local market through simple mapping tools.
The third reason hybrid valuation products are here to stay has to do with the shifting nature of the appraisal business. It is no secret that appraisers have been hard-hit by the recent real estate market downturn; fewer sales, of course, mean less work. But appraisers are also currently facing the single largest regulatory upheaval in their industry since the Financial Institutions Reform Recovery and Enforcement Act of 1989. Signed into law last year, the Dodd-Frank Wall Street Reform and Consumer Protection Act places additional requirements on appraisers that will carry profound impacts on how appraisers conduct their business for years to come.
As a result, appraisers will have to become more efficient in their work practices and more open to the types of assignments they accept. This industry dynamic has already begun to materialize in the growing acceptance – albeit reluctantly, in some cases- that appraisers have toward appraisal management companies and alternative valuation products.
There is a fourth reason that is perhaps a little less tangible but no less compelling. After witnessing a real estate market in which values in many local markets have fallen by at least 40% – and, in some places, even more – I believe all real estate will be scrutinized much more heavily in the future.
This is where hybrid products will fulfill a lasting need, not just for short sales and REOs, but for any transaction that requires a check on the underlying value of the asset. Hybrid products are today being used for home equity loans, portfolio valuations and reviews, and even commercial real estate, tax appeals and family law cases.
Alongside this growth of hybrid solutions has been the increasing deployment of collateral valuation strategies that enable lenders, servicers and investors to match different valuation solutions to different scenarios, depending on how much scrutiny is warranted for a particular property or portfolio of properties. These valuation tool kits – within which hybrid products are delivering great value and playing an increasing role – will help ensure that servicers will always be able to provide the most accurate, cost-effective solution, regardless of the particular scenario.
Of course, more than speed and affordability, servicers need property values that are accurate and worthy of trust, as well as the evidence to back it up. There is the potential for hybrid products to receive the best of both worlds: the latest, most powerful technology, and the professionalism of the licensed, experienced appraiser. It is true that this has been an uneasy and relatively young marriage, and there are still many kinks to work out within the hybrid product set.
Yet, in the not-so-distant future – and without the sort of fanfare or even the notoriety garnered by the Wright Brothers, Charles Lindbergh or other early heroes of aviation – hybrid valuations are certainly aloft, and appear unlikely to come back down.
William Fall is CEO of William Fall Group and its subsidiaries, WFG and Valuation Partners, national providers of valuation services and products for the real estate and mortgage industries. He can be contacted at wfall@williamfallgroup.com.
