Advances in technology are helping businesses around the world to operate more efficiently, smarter, and more effectively than ever before. In the real estate industry, supporters of Automated Valuation Models (AVM) and appraisal software suggest they can reduce human error and significantly reduce risk for appraisers. But, is there a danger the software can get it wrong? What level of human engagement is needed to oversee the software?
In this blog, we explore the benefits and risks of using AVM and appraisal software. We’ll also provide insight into what appraisers can do to protect themselves and their businesses.
What are Automated Valuation Models and Appraisal Software?
Automated Valuation Models (AVM) are an accepted method of valuation in the modern real estate industry. Lenders, appraisal staff and investors frequently use software-based pricing models to determine property valuations, based on mathematical modeling and algorithms. Most AVMs use the current/recent values of similar properties to determine the appraisal value, along with other information such as sales history, market trends, property characteristics and the age of the property.
The main benefits of appraisal software are that it’s a fast and cost-effective way to complete an appraisal. There’s no need for a human to physically inspect the property, and no desktop research is required because the system is completely automated.
Some in the industry think using appraisal software also reduces the incidence of human error. Software isn’t influenced by bias and it doesn’t have a bad day — it’s purely based on the facts and the modeling algorithms within the system
A traditional property appraisal is an informed opinion. This opinion may also include an analysis of similar home prices, recent sales, and other information, but ultimately it’s an opinion of one person.
Using appraisal software instead of human judgment can also help to reduce the incidence of fraud. For example, to avoid a situation where an appraiser may manipulate the appraisal report, so it’s beneficial to them (or their client).
According to the National Association of REALTORS®, Automated Valuation Models (AVM) are useful for lenders and secondary markets to confirm valuations, and they may also be useful for refinancing purposes or to verify appraisal reports. They warn, however, that they shouldn’t be the sole method used in a real estate transaction that involves a new mortgage.
Appraisal software doesn’t take into consideration the condition of the property — the quality, the materials used, or any special features. It can’t see if the home needs to be updated, if the ceiling has water damage, or if there’s a highly sought-after school a short walk away. Appraisal software can only determine a price on the data available within the model.
As appraisal software generates pricing based on previous/current values of similar properties in the area, it can be difficult to appraise new neighborhoods and estates. If there isn’t sufficient data about the area, the appraisal may not be accurate. Similar issues are experienced with very unique properties — where the properties surrounding them are in no way similar and therefore can’t be used for modeling purposes.
Keep in mind that the credibility of an automated appraisal is dependent on the quality of data used in the modeling process — garbage in, garbage out. There’s also a danger that your IT systems may be hacked, which could manipulate or compromise the appraisal software’s valuation outcomes.
Tips to prevent a lawsuit
Appraisers are most often sued for incorrect appraisals that result in a financial loss or other damage to a client. Lawsuits for fraud, negligence and other reasons can also occur.
Whether you’re using appraisal software or doing traditional appraisals (or some combination of both), here’s what you can do to prevent a lawsuit:
- Use a mix of valuation techniques to optimize accuracy and crosscheck to verify your results.
- Have review processes in place to ‘test’ appraisal software assumptions and results to ensure the system is working as it should.
- Make sure the data you use in appraisals is accurate before you start the appraisal process.
- Have cyber security policies in place to protect your IT systems from being hacked.
- Make sure you have adequate insurance in case something goes wrong (including Appraisers Errors and Omissions insurance and cyber liability insurance).
- Keep up to date on valuation techniques through ongoing professional development.
Protect Yourself With CRES Real Estate Appraisers E&O + ClaimPrevent®
Having an E&O insurance policy is essential for appraisers to protect you if something goes wrong. All it takes is one incorrect appraisal, an oversight, or a difficult client, and your appraisal business could be turned upside down.
As part of one of the largest insurance brokers in the world, we have unequaled access to E&O and cyber liability insurance options that others just can’t give you.
CRES includes pre-claim access for members to our expert team of qualified real estate attorneys with every E&O + ClaimPrevent® policy. This means you can proactively seek advice about risk management and stop lawsuits in their tracks. Cyber Liability Insurance is also available to protect your business against IT risks.
CRES policies are fully customized to suit the risks each business faces every day. Contact the CRES team today at 800-880-274 for a confidential discussion.