|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.
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
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
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,"
BPOs, AVMs and GIGO
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
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
"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