Are AVMs Putting Your Clients at Risk?
There are many elements of the homebuying process that could benefit from greater automation, but the rise of automated valuation models (AVMs) is an area where we should perhaps be concerned.
It’s worth remembering that a mortgage valuation is for the protection of the lender, not the borrower and the type of valuation undertaken therefore depends on that lender’s risk appetite and commercial demands. On a low loan to value (LTV) transaction on a low margin product, for example, a lender may be comfortable with a very light touch valuation and may indeed have a commercial imperative to take this route to minimise fees and ensure it achieves profitability on the deal.
Here’s some information on the different types of valuation that are currently being used by lenders. You may also find it useful to visit the website of the International Valuation Standards Council, which is the independent global standard setter for valuation practice and the valuation profession.
An automated valuation model (AVM) is a statistical valuation of the property based on past performance of similar properties in the area. An AVM is the ultimate light-touch valuation, based entirely on data and an algorithm and lenders will not generally charge for an AVM.
A desktop valuation is relatively new and is the next step on from an AVM, using a combination of online data, local knowledge and services like Google Street View.
The most light-touch physical valuation is a drive-by valuation, in which a valuer will literally drive past the property to check on the external condition and ensure that the property is consistent with its surrounding properties.
A full inspection is a physical inspection as part of the mortgage process and could cost between £200 and £1000. It is worth noting however, that this is still for the benefit of the lender and is not as comprehensive as a homebuyer report or building survey.
Lenders are increasingly deferring to AVMs, particularly on lower LTV cases and often they don’t even offer buyers the opportunity to upgrade to a physical inspection of the property. Consequently, my experience of the market is that on half of valuations, nobody even goes through the front door to review the property.
This might seem advantageous for your clients, who see physical valuations as a hold-up in the homebuying process, but that isn’t necessarily the case.
If nobody is going into the property, who is going to point out that walls have been removed or a loft converted without meeting building regulations, for example. Or pick up on areas of poor condition that could be costly to rectify.
A lender might be happy to take on the risk, based on an AVM, but your client could be taking on a liability that they might not be able to afford.
In an environment of low property transaction volumes, there is greater emphasis on client retention by delivering exceptional customer experience and also maximising conversions. If you are not discussing the value of a physical inspection of a property, you could be letting your client down and may even leave yourself open to potential claims in the future from clients who claim, “Why didn’t you tell me that I needed to have a survey done?”
Addressing whether or not a client should have a survey early in the process could even help to improve the success rate of transactions. Purchasers are currently required to confirm that a survey has been at least considered when they sign the title. The problem is that this is at the end of the process and can cause additional delays if, at this stage, they do decide they want the property to undergo a full inspection.
So, rather than wait for the tail end of a transaction when delays can be critical, raising the issue at day one can provide buyers with more confidence and help the process to run more smoothly.
Not every buyer will want a physical inspection, but at least by talking about the options early on in the process, you can demonstrate that you are working in the best interests of your client and protecting their investment.
Examples of different types of property survey are available here.