Is it deja vu all over again for electronic appraisals? Let's hope not.

There have been a lot of changes over the past 10 years in the residential real estate business – most of it good, I think. But we had to go through a lot of pain and suffering during the financial crisis to learn from our mistakes and make the business better and safer for all. Unfortunately, some bad ideas still resurface every so often, indicating that not everyone has

learned the bitter lessons of the past. Maybe some people weren’t in the

business then or are too young to remember what happened. Others believe that

technological advances since the crisis have been so great that comparisons to

the past are irrelevant.

Case in point: The growing use of computer-generated alternative valuations that purportedly save time as

well as money by taking human appraisers out of the process. While those

methods may indeed save time, it’s highly questionable whether they save money

in the long run.

Nearly 10 years ago I

wrote an article for the November 13-26, 2007, edition of the New York Real Estate

Journal just as the residential real estate industry was starting to collapse

under the weight of fraud and poor underwriting. I pointed out then the dangers

of too heavy a reliance on computer-generated property valuation models, which

can certainly be cheaper and faster up front but also wildly inaccurate, which

can lead to loan defaults that can cost tens of thousands of dollars, not to

mention leaving people homeless.

Not much has changed

since then to alter my assessment.

Perhaps it’s a good

idea to revisit that and reiterate the dangers of these alternative models.

Statistics-based

programs rely on data that is often incomplete, inconsistent or outdated.

Garbage in, garbage out, as they say. Have you ever checked the estimated value

of your house on any of the many websites that purport to tell you how much

your home is worth? I guarantee you that if you go to three different ones,

you’ll come up with three – often dramatically different – values.

Another

thing: although people sometimes confuse assessment value as market value,

assest value is not market value.

There’s no disputing

that technology in the real estate industry has come a long way over the past

10 years – we now have Google Maps and other global positioning systems, drones

and other systems to look at properties remotely. While

Google can indeed give you a bird’s eye view of the house, there’s still no substitute

for a real appraiser, standing outside the house and surveying the immediate

surroundings – or see what’s going on inside.

Technology

also can’t tell you if the property has unique features that add to or detract

from its value.

Many alternative

valuations still rely on public assessments. In many areas, assessments are sometimes

done every 10 years. That’s practically worthless.

These

valuations compare your property to recent transactions in your area, but don’t

take into account if those properties were sold to a relative or friend at a

reduced price, under duress, or are in another neighborhood or school district,

which can radically alter the property’s real value. Moreover, an automated

valuation does not always take into account a home's condition, style or

renovations.

By contrast, appraisers

know all the nuances of a neighborhood, how one house may differ in value just

a few blocks away from a similar house. They can look at a roof and know how

long before it needs to be replaced. Many of these alternative methods cannot

do that.

Alternative

valuations also can’t determine whether the local real estate market is rising

or falling. If recent sales transactions were captured at the peak of the local

housing market, the computer will think the trend is still going up when in

fact it may be going down. An experienced, local appraiser would know that.

So what

an alternative valuation may save up front in time, it may lose big time in the

long run. How?

As

lenders should know by now, loans based on inaccurate – i.e., low – appraised values

are much more likely to wind up under water and in default than loans where the

buyer paid a fair, realistic price. The cost of a bad loan can total in the

tens of thousands of dollars, many times the cost of a real, hands-on

appraisal. Home equity firms that

relied heavily on automated valuation technology before the financial crisis were

the first ones to take the hit when the real estate market collapsed.

All of these new technologies

are nice in theory, but they are no substitute for a real appraiser on the

ground. The industry should have learned its lesson during the crisis.

Instead, what seems to be happening is that some in the industry want to

further push out appraisers at a time when the number of qualified people in

the profession keeps shrinking. Even if there is a short-term benefit to some

of these technology-based efforts, in the long term it will further hurt the

appraisal industry – and the accuracy of appraisals, which hurts everyone.

Computer databases,

no matter how many elements are included, can never provide the high-quality

assessment and up-close service that a human being with years of experience can

bring. That hasn’t changed, no matter how much new technology has been

introduced.

To learn more about appraisals and Nadlan Valuation, visit www.nadlanvaluation.com or email me at [email protected].