How is a Property Appraisal Different from an Automated Valuation Model?

In the lending world, a major part of the credit adjudication process is assessing the value of your security. Some lenders use automated valuations, some lenders rely on CMHC’s concurrence with the value stated in the application, and still others will request that an appraisal be performed – whether it be a full appraisal or a drive-by. Some lenders will use all of the above and here is how they are not only different from one another but in many ways complement one another.

AVM + agreement from insurer + appraisal = the most probability that you know what the property you are loaning on is worth. Let’s drill down and take a look at each resource and the nuances.

An automated valuation model, or AVM, is a program which produces a property value derived from mathematical calculations. AVMs are most useful at the application stage because, not only can you validate the property value indicated in the application but you may also learn that the property was not worth the value stated or that it is worth more and an upsell opportunity is present. Because AVMs can generally be produced online they are sometimes pulled multiple times over the course of a mortgage transaction.

If the AVM wasn’t requested at the application stage – it generally will be shortly thereafter as the deal proceeds through the closing process.

If you have requested an AVM and it agrees with the stated value on the application then it is highly likely that the insurer will not dispute the value of the property.

Appraisals involve a certified professional going out to the property, so appraisals can reveal applicants with: properties in very poor condition, undisclosed construction/renovation, rental properties that are listed on the application as principal residences and much, much more. On the flip side, an appraisal can be great for a property that is in excellent condition.

Now, the reason that appraisals complement AVMs is because, while there is some overlap in that both derive a property value, they are very different. An AVM is analytical and based on formulas – it is not swayed by personal opinion, nor does it take into consideration the interior and exterior condition of a property.

So as you can see, while it can seem like the 2 outlined in this blog do the same thing, they actually don’t and leveraging both will see you close more deals and identify more opportunities.

For more about the difference between an AVM and an appraisal please contact Teranet today by calling 1.855.787.8439.

How an AVM is Different From a Property Appraisal

A large part of properly underwriting and administering mortgages is evaluating risk – not just as it relates to the borrower but also as it relates to the property. AVMs (Automated Valuation Models) have become a common and integral part of workflow in various departments within lending institutions. AVMs are often used when validating property information both on their own and also in conjunction with an appraisal. So if an AVM can be used on its own then does it replace an appraisal? The two are really apples and oranges. 

AVMs provide an estimate on a property’s value using mathematical modeling. They produce a statistically derived estimate of value based on an analysis of public record data, property location, market conditions and real estate characteristics at a specific point in time.  An AVM typically compares the subject property to the property attributes and sales data within the database to produce an estimate of value. 

Most AVMs calculate a property’s value at a specific point in time by analyzing values of comparable properties. Some can also take into account previous appraisals, historical house price movements and user inputs (i.e. number of bedrooms, property improvements, etc.).  The results of each are weighted, analyzed and then reported as a final estimate of value.

AVMs are different from appraisals because they do not consider factors like specific improvements that have been made to a property that may increase the value, or problems with the property that may decrease the value. This is why some lenders and insurers will consider both the data retrieved in the AVM and also have a full appraisal performed of a particular property.  

An AVM is unbiased, versus the human bias which can occur with an appraisal – an AVM cannot commit fraud or make mistakes with calculations.  Depending on the situation, an AVM can be used to replace, supplement and/or audit the traditional appraisal process. 

You can use AVMs at many different stages in the process of underwriting, funding and facilitating a mortgage. 

·        When pre-approving a mortgage you can save an incredible amount of time. You know as well as we do that sometimes homeowners can be way off on what their home is worth. An AVM can flag this before considerable time is spent underwriting a deal only to find out later that the value is just not there.

·        While some private lenders don’t realize that they have access to the same tools as the banks and rely heavily on appraisals, they too can leverage AVMs. When working on an equity deal with a low LTV an AVM can be used to estimate the validity of your equity position.

·        During the collateral adjudication stage, AVMs can be used to assess collateral risk related to a mortgage.

·        AVMs can also be used to assess the value of your overall lending portfolio.

·        Upsell – over time property values change. AVMs can be used, much like a soft hit on a credit report, to assess further lending opportunities like the ability to offer a client a home equity line of credit for example.

For more information about how you can integrate the use of AVMs into your lending institution please www.purview.ca/lenders or call 1.855.787.8439.