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Automated appraisals: Does the accuracy match the speed?

Would you lend money on a house without taking a look inside? Some lenders do.

In the quest to make home loans cheaper and quicker, lenders don't order labor-intensive, full appraisals as often as they used to. Lenders increasingly rely on computers to help determine fair market value. Some appraisers think that's not such a hot idea.

Depending on the type of loan you seek and your creditworthiness, a lender might request anything from a full-blown appraisal to a "drive-by" inspection by a real-estate broker.

In some cases, a home equity loan might not require a visit to the house at all.

You probably won't have much say in how the lender verifies the property's value, but it doesn't hurt to ask.

"I'm sure if a customer says to the bank, 'I'd like to have this as cost-effective as possible,' they'll try to order the least expensive appraisal they can, according to their regulations," appraiser Allan Bredice says. Bredice is director of the appraisal division of Integrated Loan Services, which develops alternative appraisal products.

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The human touch
Home purchases and refinances almost always require at least some type of appraisal conducted by a licensed appraiser, although they don't always require an interior inspection. It's the world of home equity loans where the computer has made the most inroads.

In many purchases and in some home equity loans, a licensed appraiser conducts what is called a complete summary appraisal. The appraiser inspects the inside and outside of the house, takes pictures, looks at three comparable nearby properties and produces a report with a location map, a drawing of the house's layout and supporting details to justify the appraiser's opinion of the house's value.

When done by a competent appraiser, a complete summary appraisal is the most accurate opinion of a house's value. It takes time and usually costs hundreds of dollars.

To save time and money, the mortgage industry came up with the "2055 form," in which a licensed appraiser prepares an analysis that is more condensed than a full appraisal. Sometimes a 2055 form appraisal requires an interior inspection and sometimes it doesn't. That decision is made by computer programs used by lenders and developed by Fannie Mae and Freddie Mac, the financing giants that buy bundles of loans from lenders.

The better your credit score, the less likely the software is to require an interior inspection. Glitches happen. "Sometimes I'll get a request from a lender for a 2055 drive-by with interior photos, which is kind of an oxymoron," says Patricia Lennon, an appraiser and owner of Ameristar Appraisal Services in Conroe, Texas.

Lennon's company charges $100 less for a 2055 form appraisal than for a complete summary appraisal, and can deliver it faster. "Also, the appraiser, when they get out there to develop the report, if a problem arises they can contact the lender and say, 'I think it's best to get a full-blown appraisal," Lennon says.

When it comes to home equity loans, licensed appraisers aren't always involved in the process. Occasionally a lender will order a BPO -- a broker price opinion -- in which a real-estate broker looks at a house and, based on the broker's knowledge of home sales in the neighborhood, estimates the value of the house.

After BPOs comes the world of high technology, where experts extol AVMs and skeptics warn about GIGO -- garbage in, garbage out.

AVMs, or automated valuation models, are computer programs that estimate house values. They analyze a lot of information about a house -- size of the building, the size of the lot, location, amenities such as pools, construction materials, sales prices of nearby houses.

"In a way, an appraiser is doing the same thing in a much cruder fashion," says Michael Sklarz, chief valuation officer for Fidelity National Information Solutions, a developer of AVMs. He means that the computer can take a more refined look at a property's value because it can crunch data from tens or hundreds of comparable properties where an appraiser might look at three.

The advantage of an AVM, Sklarz says: "It's less expensive and fast. You give me a property and I'll give you a value in 10 seconds."

Lenders mostly use AVMs to support home equity loans for relatively small amounts and with low loan-to-value ratios.

"If someone is going for a $15,000 loan and they tell the bank that they estimate their property is worth $250,000, in most cases the bank will think they know what they're talking about and they might order an AVM," Bredice says.

Sklarz says a few lenders use AVMs as a replacement for appraisals for certain loans "and I think that's where the industry is heading, at least for typical properties." In other words, not a house on a cliff overlooking the Pacific, "but for the typical house in a big subdivision where values tend to be concentrated, or a condo where the floor or the view is the differentiating factor."

An AVM is only as accurate as the data it depends on. "It's the principal of garbage in, garbage out," Lennon says. "If what you're putting in is good, what you're getting out is going to be good, too."

And when what you're putting in isn't good, you get what Lennon ended up with when she bought her house. Out of curiosity, she ran an AVM.

"It noted that we didn't have a garage -- and we actually have a one-car garage and two-car carport. It said we have 11 rooms and we have nine." The location map pinpointed the house at the wrong place.

"That was kind of scary," Lennon says.

Developers of AVMs say they'll get more accurate over time. They shoot for about a 5 percent margin of error on the valuation for each property -- and for many home equity loans, that's good enough.

-- Posted: March 28, 2001
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