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Automated valuation model technology has been around for more than a decade, but it’s only been over the last few years that the mortgage industry has embraced it so deeply. Not only has the technology penetrated the secondary and subprime markets, but AVMs are beginning to make inroads into the first mortgage arena as well. In addition to all that, consumer access to new, online valuation services makes the technology available to anyone with a computer and a connection to the Internet.

While this all might seem scary to some appraisers, it shouldn’t be because this technology is also available to appraisers and can be used as an integral part of the appraisal process.

Technology guys like Darius Bozorgi, president and chief executive officer of Santa Monica, Calif.-based Veros Real Estate Solutions, have argued for years that AVMs will not put appraisers on the dole, but instead will enhance the business that they already do. Some appraiser pioneers realized all this a decade ago. Unfortunately many appraisers have been slower to adapt.

There is a misperception that AVMs were developed to put appraisers out of business, says Bozorgi. In fact, most AVMs were initially conceived and developed by appraisers.

At conferences, Bozorgi often volunteers to take part in presentations where there is to be a strenuous debate on the confrontational subject, AVMs versus appraisers. However, there is usually no debate. Every time I, or another AVM advocate, goes first with a presentation, recalls Bozorgi, the moderator turns to the appraiser representative, who then says something to the effect, ‘I am a large supporter of AVM technology because it is helpful to my work.’

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The resell

James Kirchmeyer, chief executive officer of the appraisal company, Kirchmeyer & Associates, Inc. in Buffalo, N.Y. runs a second enterprise called RealInfo Inc. which is a real estate information and AVM company.

We saw this coming, says Kirchmeyer. With the data that was out there, we saw that computer programs could be written to analyze data and prove within certain parameters a certainty of value, especially in homogenous neighborhoods where homes were similar in style, age and condition.

He adds, We saw we were either going to be fighting against companies that are doing AVMs or doing it ourselves. We have always been of the opinion that any valuation tool in regard to real estate should be in the hands of appraisers.

Appraisers should be the ones selling AVM tools, Kirchmeyer stresses. An appraiser in, for example, Columbus, Ohio, should be the one walking in the door of a local lender or credit union with AVM reports, saying, ‘We will sell them to you in our package and if you want to go with an appraisal, we can do that as well.’ An appraiser can make money every time the AVM is run by the lender, he says. And if they put the package together properly, they can get the upgrades for the drive-by and full appraisal.

What appraisers should be thinking about is how they can come up with a way to resell AVM technology to credit unions and community banks, small financial firms that are not going to go to big tech companies to get that service, says Appraisal Institute associate member William King, president of William King & Associates, a Federal Way, Wash. appraisal, brokerage, consulting and home inspection company.

As can be seen by the variety of services offered by his company, King takes a wide, entrepreneurial view of the real estate service business. My observation is that those who really understand [automated] valuations recognize it is just another tool in the valuation tool box. It’s another reason a client or lender will use your services, King says.

King suggests AVMs and appraisals need to be viewed as one package. People tend to want to call this an appraiser-assisted valuation model, but I’m not sure I like that description because I’m not sure the appraiser actually assists the AVM, he says. The evolution is toward a service where the AVM technology is being run by an appraiser to produce tiers of service levels: straight AVM output, desktop appraisal, full appraisal, etc.

The hybrid

Others agree that the term appraiser-assisted valuation model, or AAVM, already appears outmoded, being quickly replaced by the single word hybrid. Part of the problem with the old acronym was, as King pointed out, it denigrated the appraiser’s connection to the technology.

Vicky Cassens Zillioux, for one, prefers the word hybrid. Zillioux had been an appraiser before turning to the consulting business. She’s now managing director of the Real Estate and Lending Consultancy at Strategic Development Worldwide, a San Diego consulting firm, but she still talks on appraisal subjects. In June, Zillioux presented a couple of papers at the European Real Estate Society’s annual conference; the subject of those presentations was the integration of appraisal expertise with automated valuation models.

Appraiser-assisted valuation models have been turned around by the industry to recognize that the appraisal is the stronger piece, says Zillioux. The AVM is what is assisting.

Joan Trice, SRA, president of Allterra Consulting Group, LLC, in Cincinnati, also says the word hybrid best sums up the new trend line. Appraisers by themselves are doing a great job and AVMs by themselves are doing a great job, so let’s see if we can merge the best of both to get something that is accurate, reliable and based on local expertise.

This is a win-win situation, adds Trice. AVMs are a sophisticated tool and if having it as another arrow in the quiver allows the appraiser to increase fees, why would an appraiser be against that?

This is an opportunity for appraisers to get business back that they have already lost, she asserts. So they really do need to understand the product and not be left behind.

In a hybrid world, Trice suggests, the best thing would be to get lenders, software developers and appraisers all talking together to create products designed for appraisers.

Entrepreneurial spirit

Apparently, some appraisers aren’t waiting around for that to happen and, like RealInfo’s Kirchmeyer, are embracing the technology and offering their own products.

James Eaton, chairman of Irvine, Calif.-based Landmark Equities Group, says he’s been an appraiser for almost 40 years, and, in fact, calls himself old school. But that didn’t prevent him from learning new tricks. In February, his company unveiled a hybrid electronic appraisal report that he claims provides the quickest, most credible valuation in the market today. The difference, Eaton says, between his own product and other AVM models out there today is that his product combines the experience of the licensed appraiser with the most recent property data and aerial imagery.

Basically, Eaton’s The Landmark Report uses a format that includes sales data and appraiser input. In our product, the appraiser starts and ends the product. There is no AVM except for data banks, says Eaton. We have four data banks and a report-generation system proprietary to Landmark that generates the data with satellite images and location maps to create a report.

The link to the appraiser is very important to lenders, Eaton emphasizes. Some lenders are moving away from the strict AVM model, Eaton claims, because the results are sometimes inaccurate and misleading. We don’t take an AVM and put a Band-aid on it, because bad data in creates bad data out.

Despite Eaton’s assertions, AVMs are increasingly being used by the mortgage industry, especially at the secondary and subprime levels. This is especially so in the secondary market where AVMs automate the process, resulting in reviews of thousands of mortgages quickly and inexpensively, says Robert Cranston, vice president of AVMax, a Colchester, Vt. automated valuation solutions company. Batch processing is one of the strengths of AVM. Within 48 hours, a lender can batch 50,000 properties or more.

AVMs are also being used with HELOCs (home equity line of credit) and subprime. They are even making slow inroads into first mortgages, but Cranston notes that lenders still have to validate that a house actually exists. Satellite imagery is dated, and if Katrina and recent tornadoes taught us anything, it is how quickly a home can disappear.

Fannie Mae and Freddie Mac, Cranston says, have unveiled a pilot program to accept purchases done according to AVM data. The government-sponsored enterprises are considering AVM products and accepting them for first mortgages, Zillioux adds, but they would much prefer to do that with appraisers involved than with appraisers not involved. If the GSEs start accepting these hybrid appraisal products, that will open the door for greater AVM use in general.

The future will be a marriage of the appraiser and the AVM, Cranston maintains, because it will increase the number of product offerings by the appraisal industry. Instead of doing a full appraisal on one end or just an AVM run-through on the other, the combination of the two offers a number of hybrid solutions on a continuum of services—a mid-tier of quicker, high-value products.

The back-ups

There are a number of hybrid strategies to consider and as an appraiser, it’s important to map out an area of expertise. Consider subprime as an example. That product, as reported in the press, has jumped from 5 percent of the mortgage market in 2001 to almost 40 percent in early 2006, and key lenders are deep into AVM technology—but not to the exclusion of appraisers.

Long Beach Mortgage, the Anaheim, Calif-based subprime wholesale subsidiary for Washington Mutual, uses what it calls a centralized collateral valuation process. Charles Freeman, Long Beach Mortgage’s chief credit officer, explains the procedure: 1) Appraisal comes into the bank; 2) It is reviewed through an automated system that checks for mismatches, discrepancies, etc. 3) The mortgage is sent either to an appraisal administrator to check further or to desk-top review.

In a sense, in the Long Beach mortgage process, AVMs are used to check original appraisals, and if a problem arises the appraiser is brought back into the mix.

This has become a common methodology. At Option One Mortgage, an H & R Block subsidiary based in Irvine, Calif. most of its business is wholesale driven, and the AVMs are used, once again, as a review tool. The AVMs get compared to the original appraisal through an in-house process, says Lewis Allen, a vice president and chief appraiser for Option One Mortgage.

Veros’ Bozorgi envisions a number of strategies beyond the hybrid or back-up models. First off, he says, AVM technology is beginning to make inroads in the appraisal world as a work-flow efficiency product. Progressive appraisal outfits now attach AVM data to their appraisal reports as additional support for the determination of value. The client not only has the appraiser determination of value but the independent support of an AVM and that significantly cuts down on any follow-up that the appraiser is required to do. The supporting documents, says Bozorgi, should reduce the number of those phone calls that begin, How did you come up with this number that necessitate a lengthy explanation.

Secondly, AVMs support index models, which show adjustments in a property. One of the biggest areas where appraisers are questioned is on adjustments made for market conditions (two homes are similar, but one has two baths instead of three) that are done to equate comps for valuation purposes. Index analytics that some AVM companies offer can answer those questions. The index model is attached to the appraisal report to add support for the market changes that have been made.

Consumer technology

One technology development that has cast a long shadow over the appraisal industry is the sudden appearance of free, online services where Web browsers can zoom down on a photo of a house and get a recent determination of value.

Probably the most famous of these is Zillow.com based in Seattle, but it is not the only one.

Zillow, launched in February 2006, clocked 2.8 million visitors to its site in the first three weeks of operation. While not the first such site, it had the most immediate impact; but even that was short-lived. In March, www.RealEstateABC.com, a division of Internet Brands in El Segundo, Calif. unveiled ABC Values, another free, Web-based home valuation tool. Both sites have already attracted a lot of press and blogosphere attention.

Once again, this is new technology that is not designed to put appraisers on unemployment lines, but can be adopted to make work easier, the developers claim.

This won’t take any business away from appraisers, declares Chuck Hoover, senior vice president of marketing for Internet Brands. This is a consumer application tool and banks are not going to be lending based on what the ABC value is.

Hoover says his company consulted with appraisers and Realtors when developing the site. They said it would be helpful to them in that they could see where to find comparables quickly and where they were mapped, Hoover says. Potentially, it could have use for the appraiser. After a quick scan of the map to find comparables, they could then go and do their detailed work.

Zillow is quickly working to make its site applicable to appraisers as well, at least in terms of marketing. We will have the opportunity for appraisers to get in front of the consumers who are looking at our site, says Jorrit Van der Muelen, vice president of partner relations for Zillow.com. Imagine a consumer looking at our maps with a reminder saying, ‘If you want to get an official appraisal on this house click here and we will put you in touch with someone who can do that for you.’ We think this will be a great vehicle for appraisers to be in contact with consumers.

Asked if Zillow could, perhaps, deter people from hiring an appraiser when they can get an estimated appraisal for free, Van der Muelen responded, The analogy we like to use is this, if you have an ailment, you will do some research online then go visit a professional to heal you. It’s the same thing with our real estate information. Consumers can research for free and then when they are ready to take the next step with an appraiser or Realtor, they’ll dial that professional. We are just step one.

Allterra Consulting’s Trice is of the opinion, Appraisers don’t know what tools are out there and as a result are fearful of them. Whether www.zillow.com and www.RealEstateABC.com will be useful to appraisers remains to be seen, but at least they should be reviewed because, for appraisers, it’s time to start making technology a friend and not an enemy.

Steve Bergsman is a freelance writer who has covered the real estate industry for Valuation Insights & Perspectives, Barron’s, Wall Street Journal Sunday, Urban Land and National Real Estate Investor among others.

RELATED ARTICLE: June 27 Kick-off for Appraisal Institute’s Technology Shared Interest Group

The Appraisal Institute’s Technology & Appraisal Practice shared interest group will hold its kick-off event Tuesday, June 27, 2006, in Dallas, Texas, with a three-hour education session on current issues in AVMs with a question-and-answer session. Mark Linne, MAI, and Stephanie Coleman, MAI, SRA, will focus on matters like methodology, standards, legislation and common misunderstandings.

Overall, the shared interest group (SIG) will provide a forum for members who are interested in technology developments like AVMs, open standards, MISMO and CMISMO, databases and emerging trends. The SIG provides a place for members to build professional community though a variety of means, including education, panel discussions, links and online forums. Members who attend the June 27 kick-off will have the chance to help shape the future of this dynamic group via an an ice cream social and a town hall meeting where members can provide their suggestions for future programming. More information on the kick-off is available at www.appraisalinstitute.org/membership/techevent.asp.

To sign up for the Technology & Appraisal Practice SIG, which is free to Appraisal Institute members, visit www.appraisalinstitute.org/membersonly/sigs/enroll.asp. Upon joining, SIG members have access to a central location on the Appraisal Institute Web site that brings together information on the issues and resources specific to their interest in appraisal technology. SIG members will also be able to build community with other Appraisal Institute members through the SIG’s dedicated online forum. There are many threads for forum discussion, including AVMs and appraiser-assisted AVMs, office technology, hardware, data standards and other issues.

This SIG is part of a larger pilot program of Shared Interest Groups that includes Valuation in the Government Sector and Valuation & Litigation Services. Visit www.appraisalinstitute.org/membership/sigs.asp for more information on the newly launched SIG programming.