RP Data head of valuation and government solutions, Chris Spanos, today talks about the recent angst across the real estate industry over the increasing use of Automated Valuation Models (AVMs) which he says is understandable given this technology’s recent availability to consumers.
Chris’ views provide for some interesting reading and will certainly go a long way to explaining how an AVM works.
Lending institutions have been utilising AVMs since the early 2000s, but they have entire risk teams to help them understand and use AVMs.
Despite lenders being incredibly sophisticated consumers of AVMs, it’s easy to forget that they also resisted AVMs when they first entered the Australian market. How are the models constructed? What data do the models rely upon? How reliable are the estimates? As with all new technologies, AVMs have some fundamental pros and cons.
AVMs are cheaper, faster and allow for use cases that full valuations simply cannot compete with. For example, AVM technology allows Australia’s largest lenders to value their entire loan book in an instant and to update the portfolio valuation on a weekly basis. Additionally, AVMs allow lenders to perform stress testing of their loan book by tweaking underlying risk assumptions to analyse loan book performance under variable economic conditions.
Full valuations, on the other hand, involve an internal and external inspection of a subject property to ascertain a market value opinion by a professionally qualified valuer. Internal features such as new kitchen appliances, renovated bathrooms and premium light fixtures all feed into the ultimate valuation amount. Of course, this accuracy comes at a cost both in dollar terms and time taken to complete the valuation. Nor does a full valuation always predict the ultimate sale price of a property, as many auctions make clear.
Given the cons associated with full valuations, their use in the real estate industry has been limited at best. Costing several hundreds of dollars as a minimum, how many consumers pay for full valuations before making an offer on a property? Anecdotal evidence suggests this number is incredibly low – perhaps as low as 1% of investors.
In light of this, it is misleading to suggest that property investors have been abandoning full valuations in favour of AVMs. Rather, investors have shown significant interest in any new property information they can get their hands on – AVMs are just another type of property information investors are consuming in their constant thirst for more data. Given that demand, it should be no surprise that organisations have moved to meet that demand. From the CBA smartphone app Property Guide, to listings and wealth management portals that include AVMs, consumers have never had more property information available to them than they do now – much of it free.
For as little as $25 consumers can purchase AVM Reports which include attribute data, sales history, comparable recent sales and suburb statistics. Better yet, property investors can often get these AVM Reports for free from real estate agents or mortgage brokers that subscribe to a property information service like RP Data’s RP Professional.
It may sound trite to say that more information is better, but it has always been RP Data’s belief that the liberation of property information is a good thing for the industry. An investor armed with a healthy dose of data is a confident investor, and a confident investor is more likely to put in an offer.
So where is the disconnect?
In a word – education. While some property investors understand the limits of an AVM, many do not and may rely on them inappropriately. Additionally, many real estate agents and mortgage brokers have had little experience with AVMs and struggle to explain to a prospective client what the pros and cons are.
For these reasons RP Data has chosen to supply AVMs through its consumer channels as a value range rather than a point estimate and associated FSD*. Additionally, RP Data’s AVM Reports are branded as ‘RP Estimates’ and include a traffic light colour code to help consumers interpret FSDs.
Consider a recent industry example of investors refusing to make an offer because a public AVM was considerably less than the ultimate selling price. An agent needs to do more than just say “the AVM is low”. They need to look at the recent sales in a suburb, consider the prevailing stock, interpret the FSD for the investor and suggest reasons why the subject property may well sell for considerably more than the published AVM. Engaging with prospects more thoroughly educates investors and gives real estate and broking professionals an opportunity to sell themselves.
RP Data offers a number of resources to professionals who can use these to better understand AVMs, and runs training courses and seminars that can help you better utilise AVMs in your business. The increased use and reliance of AVMs in the real estate and mortgage industries will necessitate better education for all participants. It is a journey we look forward to taking alongside our clients and partners.
* The FSD or Forecast Standard Deviation is an estimate of the variation between an AVM and the market value of a property. A smaller FSD indicates an AVM is likely closer to the true market value of a property than a larger FSD.
For more information on how to get the most out of your RP Data subscription, book free training with us at [email protected]. Alternatively, call our friendly team on 1300 734 318 and they will offer some tailored reports to get you on your way.
To view an example rp.autoval report click here.