Appraisals and AVMs – Finding and Determining Value is Challenging

A neighbor called me a few months ago inquiring how much his home was worth; I asked if they were moving and he said that no, they weren’t moving, but his bank had frozen his home equity line. The bank’s valuation was wrong, because they depended on an AVM –

Now those AVMs are being questioned. In court. From the Wall Street Journal:

Lenders use computerized appraisals primarily for home-equity loans, preapprovals for mortgage refinancing, loan modifications and mortgage originations of less than $250,000. Automated appraisals are cheaper and faster than in-person appraisals. They run as little as $20, whereas appraisals done by people can cost hundreds of dollars.
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Borrowers also have sued J.P. Morgan Chase & Co., Wells Fargo & Co. and other big lenders, claiming that banks are misusing automated valuation models in order to cut home-equity lines of credit. J.P. Morgan Chase and Wells Fargo declined to comment.

Automated valuation models were pioneered by Yale economist Robert Shiller, who developed the first systems in the early 1990s. While arguing that these appraisals are more objective than human appraisers, Mr. Shiller and others say that in some situations the models may be providing unrealistically low values, prompting lenders to reject loan applications or lend less money on particular properties.

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“The main difficulty is that I need two or more sales prices for a property, and if I’m not able to find it, it doesn’t fit into the sample used to calculate the index,” says David Stiff, chief economist at Fiserv, one of the largest providers of automated appraisals using this methodology.

I wrote in September about AVMs’ inaccuracies, mainly from a Charlottesville real estate consumers’ point of view; those words can be applied to the banks’ usage of AVMs.

There are so many various forms and methods of valuation:

– Appraisals
– Assessments (get ready for this discussion in the Charlottesville – Albemarle area – continuing declines of property values will lead to a big conversation about the property tax rates in our localities)
– AVMs – Zillow, Cyberhomes, Realtor.com, RPR

Determining and defining fair market value is more and more challenging.

Curious – have you checked out what your home is “worth” on any of these sites?