Over the course of last few years the worst nightmare of many Real Estate Appraisers is that they’re being replaced by a “black box” that won’t require them to appraise the properties in future and will act as the “final value determining factor” for any property. This thing has come to life to some extent, but it hasn’t replaced appraisers.
Alternative Valuation Products or AVPs in short have been doing this from quite sometime. But it doesn’t mean that AVPs may replace appraisers in the future. According to The Appraisal Foundation of US, the definition of an AVP is as follows:
“AVP is a product that communicates an opinion of value or price other than the traditional appraisal.”
Now let’s learn a bit more about these AVPs:
What are some common examples of AVPs?
Given below are some common examples of AVPs:
Broker Price Opinions or BPOs: Next time when you hear BPO in any real estate related talks, don’t misunderstand it as Business Process Outsourcing. Broker Price Opinions are the most commonly used AVPs today. There is no specific form or format for BPOs – several were built and tweaked according to the requirements of users over the course of years.
Comparative Market Analysis or CMAs: Very similar to BPOs, CMA is a product that was used in a similar fashion but by the agents. But in recent years its usage has expanded. Pending sales and active listings may also be used in addition to closed sales for assisting homebuyers and lenders in CMAs. And just like BPOs, there’s no universally utilized form or format for CMAs too.
Automated Valuation Models or AVMs: To a large extent, the credit of that worst nightmare about which we talked above in this article goes to AVMs. This is because AVMs make use of several mathematical formulas and data for calculating the value. Although many appraisers retain negative feelings about AVMs, still the truth is that they have been making their mark in the valuation marketplace from a steady pace due to their accuracy. The only downside of AVMs is that they rely largely on data and in some circumstances data may require filtering by an appraiser.
What type of clients use AVPs?
For clearly understanding that what type of clients use AVPs you should first understand where AVPs are not allowed. Under the Title XI of FIRREA, all federal transactions and real-estate related transactions (transactions which include sale, lease, renting or refinancing of real property) must be conducted after a USPAP-compliant appraisal. So AVPs are not requested in such transactions. AVPs are usually requested by loan servicers, government-sponsored enterprises and hedge-fund companies. Sometimes they’re also used by potential homebuyers, insurance companies and marketing agencies.
Why do clients use AVPs instead of appraisal?
If said in one line then mainly because it saves time and money. But there may also be some other reasons too in specific cases (i.e. for analyzing additional analytical values).
Are AVPs USPAP-compliant?
The short and dirty answer to this is “Maybe”. According to The Appraisal Foundation, no product or format can always be USPAP-compliant. Different valuation techniques should be used for different circumstances.
So can AVPs replace appraisals in the future?
In short, the answer is “No.” The Appraisal Foundation still believes that a properly conducted appraisal by professional appraisers is the “gold standard.” But yeah, in some certain circumstances we may see the increased usage of AVPs in future instead of appraisal.
By Andrew Watson