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What is today's blog about?
In this week’s blog, we look at the RICS Automated Valuation Models (AVM) roadmap. This is part of RICS’ response to the growing use of AVMs by the property industry and likely to lead to new guidance, standards and content.
This is essential reading for RICS APC and AssocRICS candidates pursuing the Valuation and Loan Security Valuation competencies.
You can download the full paper here.
What is an AVM?
Valuation is both an art and a science.
It is ‘an art because of the need to make value judgments concerning the intangible features that attract certain buyers; a science because it is possible to establish trends and analyse how these are interpreted by buyers and sellers, including the value placed on particular property characteristics’ (RICS, 2021).
AVMs are a form of computer modelling and part of the science of valuation. They are viable where there is sufficient, accurate data which facilitates higher quality valuations and reduces exposure to litigation.
RICS describe an AVM as ‘using one or more mathematical techniques to provide an estimate of value of a specified property at a specified date, accompanied by a measure of confidence in the accuracy of the result, without human intervention post-initiation’ (RICS, 2021).
The International Valuation Standards Council (IVSC) is currently working to agree an industry-wide definition for AVMs.
What types of AVM are there?
Some AVMs require human input, others are completely automated, as demonstrated below.
What is a confidence score?
A confidence score relates to the accuracy of an AVM’s estimate of value. If it is low, then there is likely to be limited market evidence, e.g., due to location or if the property has unique physical characteristics.
Confidence scores are usually based on two key metrics:
The relevance, quantity and transaction dates for the comparable data used in the AVM
The forecast standard deviation (FSD) of the individual output, usually relative to a valuation carried out by a valuer or a transacted sale price
What are AVMs used for?
New mortgage / secured lending – at the outset to assess proposed figures and risk before instructing a physical valuation by a surveyor
Revaluation or remortgage – during the mortgage term to check how property values have changed
Arrears assessment by lenders – to check the value of a property held as security to facilitate arrears planning
Secured lending valuation audits – to cross check a physical valuation for a single case or range of properties
Mass appraisal for local taxation purposes
Valuation estimates for individual capital taxation purposes / planning
Identifying fraudulent activity, e.g., valuations that do not follow market trends
Portfolio valuations, e.g., local authority properties or sale of a mortgage book (securitisation)
Estimating compensation payments, e.g., compulsory purchase
Cost benefit analyses for potential public expenditure
Capital adequacy ratio calculations by a lender for a financed portfolio
What are the benefits of using an AVM?
For lenders, they can support lower risk applications and be built into existing electronic processes
AVMs can reflect statistical analysis or nuances that may not always be observed by valuers
Efficient in terms of time, money and resources
Creates a level of certainty
Removes the human element in relation to fraud risk
What are the challenges of using an AVM?
The property is not physically inspected, so the assumption of average condition may be inaccurate or the property may have unique physical characteristics
A reliable AVM requires a large amount of accurate market data, which is not always available
Little consumer transparency, particularly in the residential market where consumers do not clearly understand the difference between a survey and a valuation
Can still be subject to fraudulent activity
Low confidence scores can be the result of poor quality and limited quantity comparable data
The type of data is the AVM based on may not be at the top of the hierarchy of evidence or at arm’s length, e.g., completed transactions or historic valuations
The source data may not be regularly updated
An AVM cannot explain the valuation process in the same way that a valuer can
What does RICS Valuation – Global Standards (Red Book Global 2020) say about AVMs?
PS 1 requires all written valuations, including AVMs, to comply with the Red Book Global 2020.
The use of an AVM (i.e., no physical inspection undertaken and the inherent limitations of this) must be recorded in the Terms of Engagement (VPS 1) and valuation report (VPS 3).
What does the UK National Supplement say about AVMs?
UK VPGA 13 Residential secured lending guidance for other related purposes including RICS HomeBuyer Service includes a section on valuations without internal inspection. These are also known as desktop, drive-by or pavement valuations or external appraisals and they be undertaken using an AVM.
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N.b. Nothing in this article constitutes legal, professional or financial advice.