Digital home value estimations could be officially accepted over an appraisal from a real live real estate appraiser. In a world where technology is rapidly replacing human-placed jobs, this is a frightening horizon for all property appraisers. Is there really anything to fear?

What are Home Value Tools?

Home value estimators or tools are also called Automated Valuation Models (AVMs) which are algorithms that will estimate the value of a home based on the data it’s programed collect. This can include, but is not limited to: recently sold homes, price trends in the relevant neighborhood and other public sources. In past years, AVMs were not usually accepted as true estimates in the loan process. However recently there’s been a proposal to change that fact.


A Proposal for Change

In November 2018, the Federal Deposit Insurance Corporation (FDIC) released a notice that proposed a rule to raise the threshold for residential real estate transactions from $250,000 to $400,000 and to use AVMs instead of live real estate appraisers for these types of homes.  If this passes, lenders for $400,000 or less homes would accept an AVM estimation of the sale price rather than a traditional estimation, aka an appraisal from a professional real estate appraiser.  There is an exception: this rule would not apply for loans on home that would be federally insured and that’s at least 46% of residential mortgages alone from both Fannie Mae and Freddie Mac combined. Yet that’s still about 54% of the housing market to compete with and that’s what has worried many professional appraisers across the country.


Appraisers vs. Algorithms

In truth, a live appraiser is the only individual that’s both autonomous and non partisan in a transaction. One issue alone with AVMs is without full transparency to the consumer over what data points are being measured, there is no way of truly knowing if the estimated value an AVM provides is accurate. In fact, one AVM’s algorithm could be measuring data points that are vastly different from another AVM’s algorithm.  For example, a specific AVM may be measuring tax assessments, recently sold properties and other public data to provide a valuation, meanwhile another AVM may measure the same data points and also include facts like air quality, nearby traffic volume and other environmental data that would make their valuation much different in sale price, good or bad.

Secondly, an AVM cannot inspect a home in real-time and verify any physical damage or mistakes left off of public documents it’s algorithm already measuring. This fact alone gives property appraisers a huge advantage over these digital home value tools.

AVMs would only be a good solution to use in certain scenarios:

  • The potential homeowner wants to use an AVM as a precursor to compare their estimate to that of the lender’s before hiring a professional appraiser to complete a final, formal valuation.
  • If the situation is low risk or the homes are more “cookie-cutter”, like condominiums or tract housing.
  • A live appraiser has already completed a recent estimate on the home.

The Bottom Line

An AVM estimate is not a substitute for certified, professional appraisal. For meticulous buyers, using both estimates may give the most well rounded valuation for their bank loans, but the traditional way is professionally considered the best route for all home buyers. A licensed appraiser will always have a better understanding to integrate the market value of a consumer’s interest, motivations and preferences better than any computer could.