Getting Back to Basics: Automated Valuation Model 101

The Automated Valuation Model is something that every mortgage agent and broker would be well served to understand and make a part of their workflow.

Lenders, from private lenders all the way to institutional lenders, have been using the Automated Valuation Model for years and you may remember CAAMP touching on them when completing your mortgage agent or brokers studies.

The Automated Valuation Model is an automated program that can produce an estimate of a property’s value. The value is statistically derived using mathematical modeling and in the case of Teranet comes from public record data found in the POLARIS database. The AVM compares the subject property to that of comparable sales data of similar properties to produce the value estimate.

There are many different types of AVMs that gather information from different sources and formulate estimates using different formulas.

These include:

·         The House Price Index Model which uses data from house price indices

·         The Tax Assessed Value Model which uses tax assessment data

·         The Hedonic Model which uses similar property sales to generate its value estimate

Because AVMs involve a value estimate, some make the assumption that the purpose of an AVM is to replace the need for an appraisal and its accuracy.

AVMs are extremely accurate because the numbers don’t lie and their values are generated based on data with no human element. With that said, they are not an appraisal and are often used at different stages in the underwriting and funding processes.

Many lenders, mortgage agents and brokers alike will use AVMs at the application stage to validate the value stated on the application and determine if it is worth proceeding with the approval and funding process. Many times an AVM will come before an appraisal is ordered. In instances where equity permits, sometimes there is enough equity for the AVM to be relied upon on its own.  Based on the accuracy of AVMs, there is also wide spread usage amongst mortgage insurance providers to evaluate their ability to insure new deals

Appraisals have a human element which means that the appraiser will use their chosen comparables, and render their professional opinion on interior and exterior conditioning. Appraisers can also uncover properties under construction and even properties that have undisclosed tenants.

Since comparables are chosen by the appraiser, it makes good sense to review an appraisal against an AVM because an AVM will consider all comparable sales – not 2 or 3 as is the case with an appraisal.

AVMs have not historically been available to brokers but in recent years this has changed. Mortgage agents and brokers can now obtain and review an AVM before they even submit a deal to a lender.

Using both and AVM and an appraisal at different stages in the process can be quite valuable, and save you time and money on broken deals. Purview For Mortgage Brokers’ AVM provides accurate data you can rely on. Contact us today at 1.855.787.8439.