AVMs vs. Appraisals: A U.S. Perspective 11/7/2018 AVMs vs. Appraisals: A U.S. Perspective TEGoVA Fall Conference Oct. 26-28, 2017 Scott Robinson, MAI, SRA, AI-GRS Immediate Past President, Appraisal Institute

Highlights Automated Valuation Models AVM vs. Appraisals 11/7/2018 Automated Valuation Models AVM vs. Appraisals Technology’s Impact on Appraisers Future of Appraisers Today, I’ll be discussing automated valuation models, or AVMs, and how they are impacting the U.S. valuation profession. Here are some highlighted areas of interest: Automated Valuation Models AVM vs. Appraisals Technology’s Impact on Appraisers Future Role of Appraisers I’m excited to talk about these topics, along with others, and would welcome questions afterwards.

Automated Valuation Models 11/7/2018 Automated Valuation Models

11/7/2018 What is an AVM? According to The Appraisal of Real Estate, 14th Edition, an automated valuation model, or AVM, is a computer software that queries property and market data, analyzes comparable property and market information to assign a value or range of values to a particular property, or generates metrics applicable to assessing the credibility of valuation-related statements or conclusions.

Advantages of AVMs Quick Inexpensive Widely accessible 11/7/2018 Advantages of AVMs Quick Inexpensive Widely accessible No special training required AVMs have advantages: Within minutes AVM websites can produce an estimate of property value. Consumers can get free valuations through online websites. Anyone with a computer and internet access can use an AVM. No special valuation training or license is required. Anyone with basic computer knowledge can create a valuation using an AVM.

Disadvantages of AVMs Data may be inaccurate 11/7/2018 Disadvantages of AVMs Data may be inaccurate Cannot factor in property’s physical attributes Appraisal still required AVMs rely on public information, such as records in county courthouses or on the internet. The data aren’t confirmed by a person and can be wildly inaccurate or out-of-date. Computer models cannot factor in the physical attributes such as a remodeling, access to public transportation or motivation of the seller, which can be noted by an appraiser’s visit to the property. The federal Dodd-Frank Act signed into law in 2010 requires a complete interior inspection in all “high risk” loans. Under Dodd-Frank, the term’s definition has been expanded to potentially cover as much as 10 percent of today’s market.

11/7/2018 AVMs vs. Appraisals

AVM vs. Appraisals AVMs are NOT appraisals Clear difference in quality 11/7/2018 AVM vs. Appraisals AVMs are NOT appraisals Clear difference in quality While AVMs have their place in real estate valuation, they are not appraisals. Professional standards note that “the output of an AVM is not, by itself, an appraisal.” There is a clear difference in quality between an AVM and an appraisal; the two are not comparable.

Advantages of Appraisals 11/7/2018 Advantages of Appraisals More credible Relies on physical inspection Requires trained experts Valuation professional organizations’ designations An appraisal is considerably more valuable than an AVM when seeking to generate a credible, reliable opinion of value. An appraisal is more accurate than an AVM which relies on public information that may be inaccurate or out-of-date. Appraisals typically requires a physical inspection of the property to perform a visual inspection. This enables an appraiser to accurately report property information which can then be verified. Appraisers are trained and licensed experts who use their experience, expertise and education to determine what data and comparable sales to use, and what adjustments, if any, to make a credible and reliable opinion of value. In the case of Designated Members of the Appraisal Institute, the designations of MAI, SRA, AI-GRS and AI-RRS represent advance knowledge and a commitment strict professional ethics and standards.

Use of an AVM Source: The Appraisal of Real Estate, 14th Edition 11/7/2018 Use of an AVM AVMs may be used as part of an appraisal or appraisal review assignment. According to The Appraisal of Real Estate, 14th Edition, professional standards do not require appraisers to know or be able to explain an AVMs algorithm, but appraisers should be able to explain the overall estimation process and verify that the AVM consistently produces results that accurately reflect market behavior. If an AVM is used, the appraiser needs to be able to answer affirmatively to the following questions: Does the appraiser have a basic understanding of how the AVM works? Can the appraiser use the AVM properly? Are the AVM and the data it uses appropriate given the intended use of assignment results? Is the AVM output credible? Is the AVM output sufficiently reliable for use in the assignment? Source: The Appraisal of Real Estate, 14th Edition

Technology’s Impact on Appraisers 11/7/2018 Technology’s Impact on Appraisers

Technology’s Impact on Appraisers 11/7/2018 Technology’s Impact on Appraisers Valuation among professions affected by technology Appraisers must be proficient in many types of technology Appraisers need to adapt Real estate valuation is among many professions affected by technology. Appraisers must be proficient in many types of technology. Appraisers need to be able to adapt.

Technology’s Opportunities 11/7/2018 Technology’s Opportunities Opens doors Work faster and smarter Big data can open doors to additional opportunities for valuation professionals. New software can help appraisers work faster and smarter.

Advantages of Technology for Appraisers 11/7/2018 Advantages of Technology for Appraisers Developing technology can help appraisers: Time Performance Results Developing technology can help appraisers: Save time; Make performing a function easier; and Produce higher-quality results.

11/7/2018 Future of Appraisers

11/7/2018 Future of Appraisers Does advanced technology help or hurt valuation profession? Will appraisers still be needed? As technology continues to advance, many people are asking if growing technology is helping or hurting appraisers, and if they will be needed in the future. From “Man Versus Machine: Who Wins in the End?”, Valuation Review, Oct. 9, 2017

Future of Appraisers Appraisers needed as inspectors 11/7/2018 Future of Appraisers Appraisers needed as inspectors Role increases in importance with “sight unseen” AVM estimates Reliability of AVM numbers questioned Indicators say the answer is ‘yes’ – there will continue to be a need for appraisers to serve in the role of inspectors. The role of inspector is crucial in the valuation process, and will increase as far as “importance” is concerned. This role magnifies, in particular, when the process involves relying on information surrounding a sight-unseen AVM-generated estimate. Reliability is something most lenders and clients will question in terms of the numbers a machine will deliver as it relates to the value of the property being appraised. There can be various levels of doubt as to whether or not the AVM took into account all that was needed to determine both a fair and accurate valued result. From “Man Versus Machine: Who Wins in the End?”, Valuation Review, Oct. 9, 2017

Future of Appraisers Machines can’t replace all tasks 11/7/2018 Future of Appraisers Machines can’t replace all tasks Always need for human communication An important aspect of technology changes is that machines can’t replace all tasks. Tasks that aren’t replace can be complemented by machines. There always will be the need for human communication regarding explaining the underlying algorithm. From “Man Versus Machine: Who Wins in the End?”, Valuation Review, Oct. 9, 2017

Use of Technology Reduce confirmation bias 11/7/2018 Use of Technology Reduce confirmation bias 30 percent of appraisals equaled contract price Help in appraising difficult properties Technology can also play a crucial role in enhancing and improving the quality of the valuation process. Digital appraising can reduce confirmation bias, which occurs when the appraised value is at or near the contract price because the appraiser was consciously or unconscious influenced by the contract price. A research paper from the Federal Reserve Bank of Philadelphia showed that 30 percent of all appraisals came in at exactly the contract price. Many appraisers already use some form of automated valuation model in their work, and for difficult properties these will enhance their approach. For routine appraisals, artificial intelligence could possibly replace in-person appraisals. From “Man Versus Machine: Who Wins in the End?”, Valuation Review, Oct. 9, 2017

Attracting New Appraisers 11/7/2018 Attracting New Appraisers High barriers to become appraiser Large time and cost commitment Discourages new professionals “While restricting the inflow of new appraisers protects those already in the industry, it leads to relatively higher costs, making the incentive for automation that much larger from the lender’s standpoint.” - Benjamin Keyes, The Wharton School of Business, University of Pennsylvania Obtaining certification in appraising is a huge time and cost commitment. The appraisal industry has enormous barriers to entry to reach certification, and this directly reduces the inflow of new people into appraising. As Associate Professor Benjamin Keys of The Wharton School of Business noted, the reduction of new appraisal professionals encourages automation. From “Man Versus Machine: Who Wins in the End?”, Valuation Review, Oct. 9, 2017

AVMs are Not Replacements for Appraisals 11/7/2018 AVMs are Not Replacements for Appraisals AVMs can’t substitute for: Education Experience Peer Review Supplement to tools and education that develop competency AVMs can play a role in the valuation process, but they cannot replace the education, experience and peer reviews of a trained appraiser. They should be used as a supplement to the appraiser’s tools and education that develop competency.

Conclusion Automated Valuation Models AVM vs. Appraisals 11/7/2018 Automated Valuation Models AVM vs. Appraisals Technology’s Impact on Appraisers Future of Appraisers I appreciate your time today. To recap, I discussed automated valuation models, or AVMs, and how they are impacting the U.S. valuation profession. I specifically addressed several key points, including: Automated Valuation Models AVM vs. Appraisals Technology’s Impact on Appraisers Future Role of Appraisers I’ll be glad to answer any questions.

AVMs vs. Appraisals: A U.S. Perspective 11/7/2018 AVMs vs. Appraisals: A U.S. Perspective TEGoVA Fall Conference Oct. 26-28, 2017 Scott Robinson, MAI, SRA, AI-GRS Immediate Past President, Appraisal Institute