Things an automated or non-appraiser valuation won't tell you

Lenders and brokers using Automated Valuation Models (AVMs) and homeowners using "free online home values" to determine the value of a property need to know what those results aren't telling them.

THE MAIN PROBLEM IS WHAT COMPUTER PEOPLE CALL "GARBAGE IN, GARBAGE OUT" or GIGO. AVM programs search databases from local taxing authorities nationwide, and distill the information into their own uniform databases. Some county appraisers list the number of bathrooms, and some list the number of fixtures. Some mention swimming pools, and some don't. As a review appraiser, Mr. Street has encountered this kind of nonsense more often than not, and it would be comical except that it occasionally damages the reputations of competent appraisers and lenders, while diverting attention away from the problem practitioners.

Your property may be your largest investment. Let's dial it up here, and talk about your health, and that of your family, which is more important than anything. Would you prefer to have a computer in a remote location, basing its opinion on keystrokes, decide whether you were healthy, or would you prefer to have a doctor check you out - someone who actually at least gets a good first-hand look.

A couple of honest-to-Pete problems with AVMs:

1. Whether the house is really there. A computer can't so much as drive by a house to see if it's actually located where it's supposed to be, has four walls and a roof, and really is a four bedroom split level and not a one bedroom shack.

2. Whether unique features of a property might add to or detract from market value. So a computer returns an estimated value of $150,000. Did it account for the sewage treatment station next door? The railroad tracks nearby with trains that blow their whistles every night? The school district? The desirability of its tree-lined street versus the next street over?

3. How long ago the property was assessed. Many AVMs and free online services rely on public assessment records. In many states, for example, assessments may only be required every three years — the value may be nearly three years old in that case. Some states mandate that an assessed value not increase beyond a certain percentage, even if sales activity indicates the property has appreciated far more. When you use an AVM or free online service, you risk a lower value than reality. THIS PROBLEM HAS BEEN GROSSLY EXEGERATED OVER THE LAST 24 MONTHS BY THE RAPID RUN-UP IN VALUES. NOW THAT THE MARKET HAS COOLED IT IS EVEN MORE IMPORTANT NOT TO ASSUME VALUES ARE STILL GOING UP. ONLY AN EXPERT CAN HELP YOU WITH THESE DRASTIC MARKET EFFECTS!

4. What makes the comparables comparable. A computer might compare your subject property to another property with similar square footage sold three months ago a quarter of a mile away. Even if that "comparable" property is in a different, less desirable school district, fronts a four-lane, 55 M.P.H. street, and is flood-prone. Or even if the property was sold under duress, such as in a divorce situation, or not at arm's length, such as to a family member. A computer simply does not know all the adjustments that might need to be made to a "comparable" property's sales price.

5. Whether a market is declining. Automated valuations use data from recent, nearby sales. If those sales were completed at the peak of a local housing market, the computer will think the trend is going up. Even if a professional appraiser knows that the overall neighborhood is beginning to experience a downturn. As a lender OR A BUYER[!!!], don't get stuck with a property that's been overvalued by a computer. The same argument applies if you are selling or refinancing: the freebie "whatsyourhouseworth.com" valuation may seriously and adversely affect your judgement.

6. Whether there is a conflict of interest. Free online home values are often farmed out to real estate agents in your area, who use the service to get your listing when you decide to sell. The best way to do that is to impress you with their confidence that they can get a higher price for your property. If they tell you your property is "worth" the high end of what they believe they can sell it for, the theory goes, you're more likely to sign a listing agreement. With most things, it's best to "under promise and over deliver" — but the opposite is true when you use a free online home value service.

7. What qualifications, designations, experience and education the preparer of the value has. When you work with an appraiser, you can be confident we're highly qualified, ethical and prepared to complete your assignment professionally and with good judgment. Most of the time, you don't know the qualifications of whoever is behind those free online values, and they couldn't compare to an appraiser's if you did. And if you're relying on an automated valuation, you're cheating yourself out of an appraiser's education, experience and expertise.