Tag: Appraisal

Automated Valuation Models are Tools, Not Solutions

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This article was posted in Realtor Magazine and can be found here. It was written by John S. Brenan who has been the Director of Appraisal Issues for The Appraisal Foundation since 2003.

Because you may be reading this on a laptop, tablet, or smartphone, you already know that today we use technology in ways we never imagined even a few years
ago. Who could have dreamed of ordering something online and having it delivered within hours? Now we’re anticipating deliveries via driverless cars and flying
drones.

With these advances, will computers inevitably replace appraisers when it comes to valuing homes? That question is the subject of much debate. In some limited
transactions, an automated valuation model may be used appropriately today instead of an appraisal. Based on the specifics of the property and the transaction details,
an appraisal may be unnecessary. For example, I’d be irate if I owned a $2 million home free and clear but had to pay a large fee for an appraisal in order to take out
a $50,000 line of credit. However, if I’m looking to buy a $500,000 home with 10 percent down, is it reasonable for a lender to rely on artificial intelligence to
determine whether the collateral is adequate? Not likely.

I couldn’t agree more with the sentiments of Karen Belita, a data scientist with the National Association of REALTORS®, who wrote in a blog post, “When it comes
to online home value estimates, the number one caveat for consumers is that these estimates are not a substitute for formal appraisals, comparative market analyses,
and the in-depth expertise of real estate professionals.” Bravo. Indeed, AVMs are not appraisals. It’s possible that as technology evolves, AVMs may be used to a
greater degree. But today, in many cases, an automated valuation is suspect if there is a lack of available data or the property isn’t a “cookie cutter.” Many of us have
checked our own properties against the finding of an AVM and thought, “Yeah, right.” When it comes to AVMs, your mileage may vary.

So why aren’t automated models more reliable in more transactions? Because computers don’t buy houses; people do. An AVM does a great job of analyzing tangible
features such as a property’s age, number of bedrooms and baths, square footage, and lot size. However, a property’s overall appeal is something that has been, at
least to date, extremely difficult to quantify. It’s a uniquely human phenomenon; a property’s overall appeal reflects a combination of characteristics. While not
everyone has the same preferences, some unusual features will likely face significant market reluctance.
But wait, you say, aren’t appraisers required by the Uniform Standards of Professional Appraisal Practice to be “independent, impartial, and objective”? Absolutely.
Still, appraisers are not machines. They must have relevant data and logic to support their analyses, opinions, and conclusions, but they also incorporate the concept
of market value reflecting the interests of consumers who are “typically motivated” and “well-informed.”

Recognizing that AVMs play a role in developing an appraisal, the authors of USPAP acknowledge their relevance with respect to their use of regression, adaptive
estimation, neural network, expert reasoning, and artificial intelligence. But appraisers remain better than AVMs at recognizing motivations and knowledge levels
of market participants.

The output of an AVM is not, by itself, an appraisal. It may become a basis for one if the appraiser believes the output to be credible for use in a specific assignment. If
the appraiser believes it to be credible. Today, that’s a very big “if.” So unless and until AVMs can better emulate the human factor, an ethical and competent
appraiser remains indispensable.

The Appraiser’s Coalition of Washington along with the Network of State Appraiser Organizations (NSAO) aka “The Network”, have asked that readers of this article share it on their social media accounts, sent it to agents, lenders and AMC’s as well as to State and Federal Legislators.

 

What is a territorial view in Spokane Valley worth?

Territorial View

I was recently asked to appraise a high quality dwelling with a beneficial view of the Spokane Valley. The subject property was located in Veradale and it faced the northwest.

Some of the comparables recited in the appraisal had competitive (similar) views while others had neutral residential views which were considered to be inferior to the subject.

To determine the likely market reaction to significant beneficial territorial views in the subject’s neighborhood, I compared three recent vacant land sales that were all located inside of the subject’s neighborhood boundaries. Two had beneficial territorial views and one had an inferior neutral residential view.

Vacant land sales were used to extract the likely market reaction to the view influence because these vacant land sales had no significant variances other than view after accounting for market variation from each comp’s respective sale date and variances in lot size. After accounting for these variances, the remaining adjusted sale price difference could reasonably be attributed to the view influence variance.

The first vacant land sale with the beneficial territorial view was a 0.82 acre parcel. It sold for $122,000 in September of 2017.

The second vacant land sale with a beneficial territorial view was a 1.15 acre parcel. It sold for $135,000 in October of 2016.

The vacant land sale with the inferior neutral residential view was located on the subject’s street. This sale was a 0.52 acre parcel. It sold for $75,000 in November of 2016.

The vacant land sale with the beneficial territorial view on the 0.82 acre parcel sold within the last month so it was not given a market variation adjustment.

The vacant land sale with the beneficial territorial view on the 1.15 acre parcel sold in October of 2016. This comp was adjusted upwards to account for the rate of market variation between its sale date and the sale date of the comp on the 0.82 acre parcel with a beneficial territorial view (typically contract dates are better than sale dates when making market variation adjustments but the contract dates for these sales were not available). Market research revealed the year-over-year rate of appreciation within the subject’s neighborhood boundaries to be 3.6% among homes deemed to be generally similar to the subject property. This equated to a monthly rate of appreciation of 0.0030048 per month. The vacant land sale with the beneficial territorial view on the 1.15 acre parcel sold 9 months prior to the vacant land sale on the 0.82 acre parcel with a beneficial territorial view. Because of this, the monthly rate of appreciation was multiplied by 9 which gave a product of 0.0270432 and this was multiplied by the $135,000 sale price of the comp. The product was $3,651 and this was the indicated market variation adjustment which was added to the $135,000 sale price.

The vacant land sale with the inferior neutral residential view sold in November of 2016. The vacant land sale with the inferior neutral residential view sold 10 months prior to the vacant land sale with the beneficial territorial view. Because of this, the monthly rate of appreciation was multiplied by 10 which gave a product of 0.030048 and this was multiplied by the $75,000 sale price of the comp. The product was $2,253 and this was the indicated market variation adjustment which was added to the $75,000 sale price.

After market variation adjustments, this is how the three vacant land comps adjusted out:
Beneficial View on 0.82 acre parcel: $122,000
Beneficial View on 1.15 acre parcel: $138,651
Neutral Residential View on 0.52 acre parcel: $77,253

The next step was to analyze variances in lot size. The subject’s lot size was located on a 0.66 acre sloped lot. No significant variance in overall utility was noted between the subject’s 0.66 acre lot and the 0.82 acre lot because both lots were sloped and both comps had a similar amount of level / usable lot.

The 1.15 acre parcel was also sloped but not as much as the 0.82 acre parcel and it had greater overall utility / usability. Because this was its only significant variance from the 0.82 acre lot, a lot size adjustment of $16,651 could be extracted using paired sales ($138,651-$122,000 = $16,651).

The 0.52 acre parcel was much smaller than the 0.82 acre and 1.15 acre parcels but it was level. Its utility was similar to the subject and the 0.82 acre parcel and adjusted 1.15 acre parcel. Thus, no lot size variance adjustment was deemed necessary or found to be adequately supported.

After lot size variation adjustments, this is how the three vacant land comps adjusted out:
Beneficial View on 0.82 acre parcel: $122,000
Beneficial View on 1.15 acre parcel: $122,000
Neutral Residential View on 0.52 acre parcel: $77,253

The beneficial territorial view sales adjusted out at $122,000 (although, no adjustments were deemed necessary or found to be supported). The inferior neutral residential view sale had an adjusted sale price of $77,253. The difference was $44,747. Adjustments are made by comparing a comparable sale to the subject which means that comps with inferior neutral residential views required upwards adjustments of $44,747 in each instance.