#AMA | Are Appraisers Becoming Obsolete?

#AskMarcAnything. Freddie Mac recently announced they would waive the need for an appraisal in certain home-purchase loans. Homebuyers would save approximately $500 per transaction and minimize closing delays. But this has drawn up some speculation and criticism with the biggest question being: What does the future hold for the appraisal industry?

 

I recently received a question after I shared an article from the SF Chronicle about the recent announcement by Freddie Mac that for certain home-purchases, they will waive the appraisal requirement. According to Freddie Mac, this will save time within a transaction and save the home-buyer approximately $500. So let’s break this down.

First, I will explain Freddie Mac briefly. Freddie Mac is a government sponsored buyer of mortgages. When a bank lends out money using guidelines provided by Freddie Mac, the bank can sell the loan to Freddie Mac. The bank gets their money back and can re-lend it to another buyer. This process is extremely critical to our housing market because between Freddie Mac and Fannie Mae, another government-sponsored buyer, they purchase 80% of conventional loans.

So.. Will it save time within a transaction? Yes it will. Right now, so many transactions are delayed due to the appraisal process. I cannot tell you how many banks and loan officer promise to get this done quickly yet 75% of the time the appraisal delays the transaction. Appraisers will get the order and they are too busy so it takes weeks to get done or they are simply not a good appraiser. Instead of using an appraisal, Freddie Mac will use an Automated Collateral Evaluation, also known as an Automated Valuation Model. Basically an algorithm that estimates the value of a home similar to what Zillow uses for their Zestimates. With an automated valuation model, a value is generated within seconds.

So what is wrong with this? Opponents are claiming this will eliminate many appraisers from the industry due to less demand, and the biggest criticism is that the automated valuation models are not always accurate.

Here is my opinion.. automated valuation algorithms are not always accurate. Yes there are some valuations that are completely off target but I also see a lot that are extremely accurate. It is all based on available data and as this world continues to move into a data-driven world, more data becomes available and these algorithms will get more accurate. One of the biggest complaints from people about these algorithms is that these algorithms do not know if a home has been updated or modified. So it generates values based on simple data like beds, bath, square footage and recent sales. Being at the recent Inman Connect conference in San Francisco, I can tell you that is going to change.

Google and other companies have the technology now that can identify upgrades and material used in housing based on simple photos. For example, if you take a picture of your kitchen, their software can identify the difference between granite or tile counters. Vinyl or laminate floors. Stainless steel appliances or not. Imagine this.. instead of an appraiser getting paid $500 to do an appraisal, someone (it can be anybody.. maybe Uber jumps on this) is paid $50 to take interior and exterior photos of a house. They submit photos to this software that identifies EVERY upgrade possible. Then the software is tied to an algorithm that is able to create an automated valuation model based on on data and recent sales of other properties with similar upgrades. It will give you an accurate value at that point. People.. this is coming sooner than you think.

And remember.. I just said Uber can jump on this on-demand service. Wink wink.

 

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