4 Key Differences Between Appraisals and AVMs, BPOs

Home_Value1To help their customers, lenders might be tempted to choose a less time consuming and potentially lower cost – real estate valuation method than an appraisal. But while alternative valuation options – such as automated valuation models and broker price opinions – might be cheaper, are they better?

AVMs and BPOs can play roles in real estate valuation, but there are many reasons they should be regarded as supplements to, and not replacements for, appraisals … which remain the valuation profession’s “gold standard.”

Here are four differences to help homeowners and lenders understand how BPOs and AVMs compare to appraisals:

  1. Unlike broker price opinions, which are performed by real estate agents on a part-time basis, appraisals are conducted by duly certified valuation professionals who have met extensive education, experience and testing standards in valuation, including continuing education.

BPOs do have a role to play in the disposition stage; lenders can use BPOs to help price REO assets. In most situations, however, lenders would be well advised to seek an appraisal.

  1. BPOs are a largely unregulated service. BPOs and the agents performing them often are not subject to effective federal and state oversight. While real estate agents performing BPOs usually face no legal ramifications for non-credible and unreliable price opinions, banks using largely unregulated valuation services are exposed to compliance and audit risks. Institutions relying on potentially non-credible and unreliable BPOs for real estate valuation usually have no effective legal recourse in the event of fraudulent price opinions.

BPOs are useful particularly in cases of national mortgage lenders who may not have a familiar valuation professional near the property. Lenders also may use them to help price real estate owned assets.

  1. AVMs can be non-credible and unreliable. AVMs are only as good as the data that generates them. Their end results rely on publicly reported data that are frequently inaccurate, incomplete or out of date.

AVMs also may pull information from FMLS or MLS that does not correspond to data requirements and regulations governing a physical appraisal.

  1. AVMs can’t factor in property’s physical attributes. AVMs cannot consider physical factors that can affect property values such as a recent kitchen remodel, the quality of the neighborhood, convenient access to public transportation or the motivation of the seller.

An actual appraisal typically requires an appraiser to visit the property and to perform a visual inspection. This enables appraisers to accurately report property information, which they can verify.

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