I have worked within real estate field for over 30 years and have sold, appraised, taught, managed AMC QC/Compliance and then assisted in the development and education of new valuation tools. The process of valuing residential properties has remained relatively unchanged since the Society of Real Estate Appraisers and the American Institute of Real Estate Appraisers were formed in the 1930’s to st
andardize the process. Historically, because of an appraiser’s training, education and certified stature in the industry, their “opinion of value” was considered the gold standard in property valuation. With the advent and standardization of modern data sets, the opportunity for some form of unbiased, scientific or analytic support for the appraiser’s “opinion of value” is now needed to reinforce and validate that the value conclusion is highly credible and reliable. Considering the wide spread use of sophisticated Automated Valuation Models and abundant access to data, the appraiser is noticeably lagging behind other valuation services by following a “forms approach” to valuation. To truly improve the credibility of the appraiser’s final value conclusion within the
inclusion analytics, the appraiser now needs to complete their reports with use of analytics. By incorporating regression analysis into the process, appraisers will start the shift from the “art of appraising” to the “science of appraising”. Instead of comparing a few properties, hundreds of properties can be analyzed with a statistical degree of accuracy, strengthening the final value conclusion. The valuation industry is being confronted with challenges that are unprecedented in its history. In particular, residential appraisers are facing a level of scrutiny, competition and regulation that some have characterized as the “perfect storm”. At the center of this “perfect storm” lies the fundamental issue: The GSE’s and mortgage industry’s reliance on the Uniform Residential Appraisal Report as the definitive, “gold standard” means of property valuation is being challenged. Appraisal books and classes that have been written and developed to teach appraisers how to produce this report are now obsolete. Sophisticated software has been developed to produce new reports with remarkable efficiency to use alone or to augment the abilities of the field appraisers. Specialized portal technology has been created to efficiently transport these reports between appraisers and their clients and advanced review processes have been developed to ensure its compliance. Most recently, the data that defines these products have been standardized, further increasing its efficiency, but at the same time commoditizing it even further. Residential appraisers are discovering that they have left the door wide open for outside competitors to enter the market with advanced, less expensive, and faster services. Though the URAR business may be declining, the property valuation business is booming, and appraisers are missing out because they cannot adequately compete with a 25-year old product, regardless of how efficiently and cheaply it is produced. Additionally, the narrow focus of the URAR which do not confine other property valuation services in general, residential appraisers are finding that the very infrastructure that was built to so efficiently produce (and protect) the URAR is now keeping them from innovating and providing other valuation services. If residential appraisers are to survive and thrive once again, they will need to jettison their appraisal myopic tendencies and commit to providing the full range of valuation services faster and better than their non-appraiser competitors. When the appraiser or individual driving the valuation tools creates the regression model or valuation model specifically for a subject market, this process is known as Interactive Valuation Modeling. The resulting model is known as an Interactive Valuation Model or IVM. Interactive Valuation Models or IVMs are superior to Automated Valuation Models (AVM) in that a person with local market expertise builds and “fine-tunes” the model to accurately account for the localized market characteristics. Contrast this to an AVM where the AVM may not even have adequate market boundaries, let alone account for the local characteristics. The neighborhood or market can be more precisely defined by overlaying a polygon depicting the market boundaries on a street or satellite map. This simply eliminates any confusion that might arise by trying to describe the boundaries as it is traditionally done. With the advances in technology, much more advanced market analyses can be performed by Automated Valuation Models (AVM) and Interactive Valuation Models (IVM) with a high level of sophistication. Adjustment values have traditionally been based on “handed down” values but, by using regression these adjustments can be analytically derived for each market area. In regression terms, the adjustments are known as the coefficients of value and would represent the adjustment values for the differences in GLA or Site size, for instance. Additionally credibility is attained by providing their statistical significance and accuracy. Banks and appraisers need to understand and harness this analytical power and incorporate it within their valuation process which requires a new level of education and training programs industry wide. Sophisticated technology has been developed to make filling out appraisal forms very efficient however, very little has been developed to improve the actual valuation process. Mostly, the process has been left to the individual appraiser to perform at their own discretion as long as the process was USPAP compliant. Technology and Computer-Aided Appraisal Software attacks the problem of improving valuation reliability by doing things a computer does best and focusing the appraiser on market analysis instead of form-filling. This process paired with an AVM or IVP will be driven and understood by all. This is a dramatic shift in perception and brings full transparency to the valuation appraisal process in addition to statistical support to add the credibility and compliance to the components of value, market trends and most importantly, the value conclusion.
