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True or False: Lenders No Longer Require an Appraisal When an AVM is Available?

Automated Valuation ModelThis is an interesting topic because some confuse the different ways that AVMs are relied upon in real estate transactions. Many lenders use AVMs with other methods of assessing a property value, such as an appraisal. AVM is the acronym for Automated Valuation Model, which is computer generated and produces an estimate of a property value based on analysis of public record data, property location, market conditions and real estate characteristics at a specific point in time. Automated Valuations may be based on a single model or a combination of multiple models.

Some of the most popular models involved:

  • The House Price Index Model – leverages house price indices (sales in a specific geographic location) to establish a value.
  • Tax Assessed Value (TAV) models – leverages tax assessed valuations to estimate value.
  • Hedonic models – leverages regression techniques to estimate value.

Simply stated, when a lender uses an AVM tool like Purview to generate an AVM, the application will instantly generate an estimate of the value. It will provide information such as who the current homeowner is, recent sales history, information on the property, indicative market value, comparable sales of similar properties, check the application for attributes consistent with fraud and more…

This is different from an appraisal where there is a human element involving an appraiser either driving by or entering a subject property to prepare an appraisal report that will include an estimated market value of a property. An appraiser can derive a value using two popular methods – by comparable sales (which is common with residential properties) and by income method (common with income producing or commercial properties). A full property appraisal will consider interior and exterior conditioning to the benefit/detriment of a property valuation, where an AVM will not. Many lenders will use an AVM at the application stage to determine if an application has merit with respect to the stated value, before bringing the deal through to insurers or before having an appraisal done.

An AVM may be able to identify large discrepancies in value which can enable you, the lender, to go back to your client, agent/broker to probe for more information about the deal/value. This saves you and your partners greatly in the administration of deals that are not likely to close because of undisclosed or misstated information.

So what about the question “true or false: lenders no longer require an appraisal when an AVM is available?” In the end, it will always come down to the lending policy of each organization. While some lenders will choose to proceed after generating an AVM and without an appraisal, in many cases we see lenders taking advantage of all measures available to them, both AVM and appraisal to make sure they have a firm idea of what their security is worth.

For more about the benefits of using both and AVM and an appraisal in your due diligence, please contact Purview For Lenders today by calling 1.855.787.8439.

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