Technology is good. I love it almost to a fault. One of the skills of using new technologies is understanding where its use is appropriate, cost effective, reliable, etc. One of the technologies that has polarized the appraisal industry is the use of AVM’s aka Automated Valuation Models. Just check how many entries in [Google](http://www.google.com/search?hl=en&q=avm+%22real+estate%22&btnG=Google+Search) come up using the words avm “real estate”? About 111,000 entries at last count.

Here’s a [simple summary of AVM’s in the appraisal industry](http://www.orps.state.ny.us/about/env_scan/industry/orpsappraisalindustry2002.htm)

AVM’s or Automated Valuation Models are computer programs that use relevant real estate information (sales prices, property characteristics, demographics, etc.) to calculate a value for a specific property. Public records are the primary data source. One weakness in AVM’s is the lack of a physical exterior or interior inspection of the properties utilized. AVM’s in the private sector are primarily used for residential home equity or credit loans.

They also have been popular with homeowners trying to find out a value of their home [for a nominal fee [LA Times]](http://www.latimes.com/classified/realestate/selling/valuing/la-re-tangled-pricing,0,2301089.story?coll=la-realestate-valuing)

Appraisers seem to be generally against AVM’s because they are viewed as a threat, syphoning off potential business. For example, how much home equity work have appraisers done in the past 5 years? Not much, its pretty much all done by AVM’s.

But lets be honest here, based on the ever loosening lending practices, it doesn’t matter what the result of the AVM search is, the home equity deal is relatively low risk and the deal usually gets done. AVM’s reduce upfront costs and can handle higher volume (I am not addressing costs of defaults and additional exposure for the lender).

Yet there has been [resistance to the use of AVM’s in the first mortgage business.](http://www.valuationreview.com/issues/4_10/4_10/cover/4257-1.html?type=pf) Why? Because the accuracy is not there.

Here’s the problem: There’s not a great way to test the results. The data is often flawed. I have had conversations with a number of lenders who indicate that of the 8 to 10 national AVM services, 1 is fairly reliable, 1 is barely acceptable and the remainder are not worth the paper they are reported on. However, an AVM report is still something that can be placed in the files for the regulators.

In a rising market, “rising waters float all boats.” As the real estate market begins to weaken across the country, this is the moment of truth for AVM’s.

Don’t get me wrong, AVM’s are here to stay and have their purpose and function. What I object to are the overpromises and inappropriate use of the technology perpetrated by the industry, especially from appraisal management companies seeking out new revenue streams. Remember, these are the same firms passing off poor quality appraisal reports as the real thing – AVM’s are a lot more complicated to manage.

>Remember the AVM mantra: Garbage in, garbage out