Real Estate

The pitfalls of depending on automation in post-close valuations

What happens when multiple valuations don't match?

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If you follow professional sports, you’ve probably noticed the enormous impact technology has had in recent years. The NBA has backboards that light up when the shot clock expires and referees have whistles that automatically stop the game clock when blown. At Wimbledon, tennis nets now have sensors that vibrate when a speeding ball touches them. Even baseball, a sport obsessed with maintaining tradition, is finally joining the rest of the sporting world in accepting instant replay technology.

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For the most part, these innovations are designed to provide answers in situations that are black or white. In real estate valuations, we’re seeing automation used for very similar purposes — especially true in the area of post-close valuations, where valuation speed and cost efficiency are important. While technologies such as automated valuation models (AVMs) can help create an opinion of value, however, they can miss the mark. 

Why automation Is critical

All of the information appraisers and valuation companies now have access to would be difficult to analyze without the help of automation. There are quite literally thousands of factors that can impact the value of a property. Meanwhile, the sheer amount of data available on properties, as well as new sources of that data, continues to grow. With a few keystrokes and in just seconds, anyone can retrieve property data and images from multiple sources.  

Automated valuation models can also leverage local sales data just as quickly. Simply enter an address and a search algorithm returns a list of recent sales that have been deemed comparable to the subject property. AVMs are also able to analyze large volumes of unfiltered property sales data, which is useful for valuing property portfolios. Most of these tools were not available a generation ago — certainly not to the extent they are today — and their impact on the analysis of the housing market has been remarkable. 

While not directly involved with the actual valuation, automation is also increasing the speed at which valuations are produced. This is particularly useful to servicers and investors trying to value multiple properties under tight deadlines. In this sense, automation is being used to order valuations, assign reports, schedule inspections, input notes and photos and other work involved with getting the valuation done in time and delivering it in the format preferred by the client. 

Where automation misses the mark

While automation has become critical in doing business and producing sound valuations, automation is really just a starting point. The reality is that technology alone has many drawbacks when it comes to producing a valuation that lenders can trust. 

There are a lot of tools that are out there that can pull together sales comps based on square footage, the number of beds and baths and other factors, and produce an estimate of value. Sometimes that number will be in the ballpark, especially if the property is located in a newer and homogeneous neighborhood with plenty of recent sales. If the property is an older home, or there aren’t many sales, or if it has features that affect its marketability, the returned value may be nowhere near the ballpark. And this is frequently the case. 

The fact is, no computer algorithm can tell the true condition of any property. It also has no idea how motivated the seller was, or how many offers were received, or what type of views someone gets from the family room, or what other houses on the street look like. These can all have a major impact on a home’s marketability. 

Another common challenge is that the data gathered about the property could simply be wrong. Some property data are input incorrectly, whether in the Multiple Listing Service or in county records. These shortcomings, too, as well as the tastes of local buyers, can impact a property’s appeal and therefore its market value. This is why technology needs to be combined with a set of eyes that can look at each report and determine whether the numbers make sense. And yet, having a human involved in the valuation process is no panacea, either. 

Many valuation companies employ local real estate agents to give opinions of value. These agents will usually drive up to the property, assess its general condition and property’s curbside appeal, take photos and send in a report. In many cases, the company that hired the agent will simply forward the report to the client, no questions asked. A client could just as well have used Google maps and any number of online “What is my home worth?” tools. 

Accurate, trustworthy valuations require taking a deeper look. That’s why it’s important to have a valuation expert independently review every valuation report and determine whether it makes sense. The most trustworthy valuation providers have a team of highly trained reviewers on staff who diligently analyze every comparable on a valuation report and ask: “Will a potential buyer consider this property similar to the subject property?” They will also pay close attention to the comments the agent made in the report. If they are confusing or do not appear to support the conclusion of value, the review should call it out and send the report back to the agent for clarification. 

How to bridge the automation gap

Sometimes, a report can be reviewed by a qualified appraiser and it still doesn’t make sense to the client that ordered it. The only choice is to ask someone to explain it—but too often, no one is available to do so. In fact, one of the most common complaints our first-time clients tell us about previous valuation companies is that they never had anyone to talk to—and when they tried, they only got stuck in an automated phone tree. 

Because valuations involve so many shifting factors, the answers are not always cut and dried, especially in the current market. Frequently, a company will have obtained multiple valuations from different providers on the same porperty that simply do not match up. When that happens, they want to have someone to talk to, not an automated attendant. Valuation providers need to be willing to have conversations with clients — and not simply send responses in writing, either. They need to make their reviewers available to discuss their findings and issues by phone.

Automation is great for streamlining the valuation process and creating efficiency, but it cannot be the only thing you rely on. Getting the opinion of a real estate expert is helpful too. But no matter how powerful these tools are, a valuation expert’s hands-on review is a critical component in achieving the best possible results. 

The bottom line is that there are many different methods to produce a property value. It’s not like sports, where technology assists in answering a yes-or-no question. Automation is great for deciding whether someone hit a home run or foul ball, or whether a hockey puck or a soccer ball was a goal or not. They’re not as useful for determining property valuations — at least, they cannot be the only thing one relies on. For those, we’re going to need a valuation expert’s participation. 


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