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diane · Guest

I live in oregon. How accurate are the eappraisals online?

nemmar · Site Admin

Diane,

That's a great question since there are many people out there wondering the same thing. Many consumers use electronic appraisals because they incorrectly think e-appraisals are as good as a human appraisal done by a licensed appraiser. Here is a section from my "Real Estate Appraisal From A to Z" book that talks about the accuracy of electronic appraisals:

Electronic Appraisals - Fact or Fiction?

In 2003 some major mortgage lenders began using electronic appraisals which are touted as an “alternative” to traditional, full-cost appraisals. For some mortgages, like refinance loans, the lenders started using these “insured”, exterior site-inspected electronic appraisals at deeply-discounted prices. The basic concept of electronic appraisal services is that they tap into large database sources that have comparable sales data throughout the entire country. They can search by criteria location, price, date of sale, etc. to find recent comparable sales that are located near the subject property. Some (not all) of these services and/or mortgage lenders follow up the electronic appraisal by sending a Realtor or appraiser to the property for an exterior assessment of the house and the surrounding neighborhood conditions. An exterior checklist must be filled out on-site answering questions about traffic, quality of the property maintenance, and any conditions that could decrease, or increase, the market value of the property.

Some lenders justify the use of these electronic appraisal services because it’s much cheaper for them (about 50% less than paying a trained, qualified appraiser), and because the turn around time for the finished valuation on the property is a few days instead of a few weeks. Well, the major problem with using electronic appraisals, (as I’ve already mentioned - see section The Adjustment Process of my book), is that a computer can’t think nor use logic, reason, nor common sense based on experience. Only a human being with a brain and many years of training can properly and accurately appraise real estate. Moreover, the Realtor or appraiser sent to view the exterior of the subject property does not go into the interior of the house. They merely view the exterior and the neighborhood. (Human appraisers are required to view the interior of the subject property but not the interior of sales comps). As a result, the electronic appraisal report has no accurate data on the condition, appeal, functional utility, etc. of the inside of the subject home. The Realtor or appraiser also are not required to view the sales comps, neither interior nor exterior, that are used in the report. This further severely limits the validity of electronic appraisal service reports. And if that’s not enough, these lenders may add insult to injury: If they send a Realtor involved in the deal to do this exterior assessment, then obviously you’re going to have a serious conflict of interest! That Realtor will certainly want to make sure the deal goes through so they get their sales commission. The “intelligent” lenders using these low-budget appraisals are stepping over dollars to pick up pennies!! Using electronic appraisals is a huge mistake for mortgage lenders. Being ONLY concerned about the cost paid for the appraisal report may come back to haunt these lenders later with foreclosure loans and enormous financial losses – as it did in the late 1980’s. (See section You Get What You Pay For on page 388 of the Real Estate Appraisal From A to Z book).

I checked the Internet web sites for some of these electronic appraisal services. This you’ll find interesting about how on the one hand these services, and the lenders hiring them, verbally market electronic appraisals as being equal to the quality and accuracy of a live, trained, human appraiser. Yet, on the other hand, they use written caveats in case of lawsuits due to inaccurate property valuations. Here is the wording some of these sites use to describe their services to consumers and the public:

1) What are the benefits of your service? Did you ever wonder what your home was worth or what homes have sold for in your neighborhood? It used to be that only large institutions had access to critical public record information that could be used to determine real estate values. They say knowledge is power, now electronic appraisals put information in your hands and provide a powerful automated valuation analysis. This is the same information used by banks, appraisers and realtors to make lending, valuation and other important decisions.

1a) My comment: Notice the last sentence, “This is the SAME info used by… important decisions”. So basically what they’re trying to convince you of is that electronic appraisal valuations are EQUAL to the quality of human created appraiser reports.

2) What is an appraisal? An appraisal is an estimate of a properties fair market value prepared by a licensed professional who takes into consideration many items, including: recent sales of comparable properties, location, home size and a physical inspection. An appraisal may run anywhere from $250-$500.00 or higher and usually takes from 1-3 weeks to prepare. Appraisal standards are set by the Appraisal Institute and are required by lenders under various federal and state banking laws. Our reports are not an appraisal, but an excellent and inexpensive way to help determine value.

2a) My comment: Notice the last sentence, “Our reports are NOT an appraisal, but an excellent… way to help determine market value.” So let me get this straight now because I’m confused. Didn’t they just tell me in the prior paragraph that their “powerful automated valuation analysis” info is the SAME as those used by appraisers, banks, lenders, etc.?

3) What is a comparative market analysis? A comparative market analysis is an unscientific and informal estimate of the market value of a property prepared by a real estate broker/agent based on their knowledge of a particular market area and recent sales of similar properties in that market. Realtors often use this method when advising clients what the listing price of homes for sale should be.

3a) My comment: Well, this I have to agree with since it’s telling people that the CMA’s performed by Realtors are not appraisals. “A CMA is an UNSCIENTIFIC and INFORMAL estimate…” They must be telling people this to promote the use of electronic appraisals instead of people relying on the Realtor’s CMA. If you’re in a situation where you can’t hire a human appraiser, then I would choose an electronic appraisal instead of a CMA. At least the computer database that creates the electronic appraisal report doesn’t lie, mislead people, or compromise their morals to earn money – unlike some dishonest Realtors and other third parties.

4) What is an automated valuation analysis? An automated valuation is what you get when you buy a report from us. We prepare our automated home valuations through a continuously updated nationwide data store of billions of records, we gather specific data on the subject property and then estimate the value of that property in real time. Our valuations are based on comparable sales data, a price and time comparison and a complex valuation engine. Our reports are the most accurate in business, second only to a physical inspection and opinion by a qualified professional. An automated valuation is not an appraisal and no human interaction or inspection is involved in such an analysis; however banks and lenders routinely use such analysis to check the accuracy of appraisals in what is known as the appraisal review process. Further, appraisers and realtors use the same type of information when conducting valuations and market analysis.

4a) My comment: OK, so now they’ve finally ‘come out of the closet’ and ‘spilled the beans’ in the fine print! Let’s break it down line by line.
4b) ”We prepare our… valuations through a continuously updated nationwide data store of BILLIONS of records, we gather SPECIFIC DATA on the SUBJECT PROPERTY…” The ‘billions of records’ and ‘specific data on the subject property’ phrases certainly give the impression that these people know every important detail about the subject home. It’s as though they’re practically living there themselves or are relatives of the property owner!
4c) “Our reports are the MOST ACCURATE in business, SECOND only to a physical inspection and opinion by a QUALIFIED professional.” They write that their appraisal reports are the ‘most accurate’ BUT they are ‘second’ to a ‘qualified professional’. Well, now wait a second because I’m getting confused again from the mixed messages they’re sending. What happened to the ‘billions of records’ and ‘specific data on the subject property’ phrases? So now we’ve got the real facts that they put in the written caveats about their service. They’re now admitting that an appraisal report done by a trained, human appraiser with two eyes and a brain is better and more accurate then their computer database with ‘billions of records’ and ‘specific data’. I wonder what the chances are of their salesman verbally explaining this when they are marketing their electronic appraisal services to banks, lenders, consumers, and real estate professionals?
4d) “An automated valuation is NOT an appraisal and NO human interaction or INSPECTION is involved in such an analysis…” There you have it. Straight from the horses mouth! ‘An automated valuation IS NOT an appraisal…’. That is a very clear and direct statement in the caveats or fine print. Moreover, it’s coming from a service company that some lenders and consumers use since they’re led to believe electronic appraisals are as good as a human appraiser’s report.
4e) “…however banks and lenders routinely use such analysis to check the accuracy of appraisals in what is known as the appraisal review process. Further, appraisers and realtors use the same type of information when conducting valuations and market analysis.” OK, this I will agree with. This is a valid purpose and logical reason to use electronic appraisals. ‘…routinely use such analysis to check the accuracy of appraisals in what is known as the appraisal review process.’ An appraiser, lender, and real estate professional has a fiduciary responsibility to do the best job they can when obtaining information to present a report to a client. Using electronic appraisal data to ASSIST with an appraisal report, a mortgage loan, appraisal review process, etc. is perfectly fine, and makes a lot of good business sense. An appraiser has to rely on many different data sources to make sure their market value estimate is accurate and reliable. As an appraiser, the data available from an electronic appraisal service can certainly assist you with your report, but it cannot do the report for you; nor can it replace you!

5) How is the automated valuation analysis limited? The automated valuation analysis is not an appraisal and no site inspection is completed as part of the process. Excess depreciation or wear and tear as well as property upgrades which are not contained in public record information will not necessarily be reflected in the automated model and the analysis is limited in discerning these types of conditions.

5a) My comment: OK, here they’re giving you the straight talk without the hype – in the written caveats. They again state that an electronic appraisal, ‘…is NOT an appraisal and NO SITE INSPECTION is completed…’. That’s a key problem. It’s NOT an appraisal and NO site inspection is completed. Even the electronic appraisal services that do send someone by for the exterior site inspection of the subject property, do NOT send their inspectors inside the subject home to evaluate the interior. Why is that a major problem with the accuracy of their appraisal reports? Well, I’ll let the electronic appraisal service answer and tell you why: ‘Excess depreciation or wear and tear as well as property upgrades… will not necessarily be reflected… and the analysis is limited in discerning these types of conditions.’

6) How is our service different from an appraisal or comparative market analysis? A licensed appraiser certifies to the estimate of value in an appraisal based on a physical inspection during an onsite visit. The automated valuation model is designed to duplicate and take into consideration the same functions as an appraisal but is limited in the things it can discern as noted above. A comparative market analysis is a “guesstimate” of value based on the particular level of expertise possessed by the realtor preparing the analysis and this may lack critical information not available to the realtor at the time. A comparative market analysis lacks the complex valuations analysis that you get when completing a valuation through electronic appraisal services.

6a) My comment: Here again, the problem is stated.
6b) An electronic appraisal report ‘…is LIMITED in the things it can discern as noted above…’. Yes, it is a limited tool that can assist in decision making and estimating market value. But it cannot replace a human appraisal report for accuracy.
6c) ‘A comparative market analysis is a “guesstimate”… and this may lack CRITICAL information…’. This I agree with. A Realtor CMA is only a ballpark range of the market value estimate of a property done by someone that does not have any experience as a licensed appraiser.
6d) ‘A comparative market analysis lacks the complex valuations analysis that you get when completing a valuation through electronic appraisal services.’ Yes, I agree. An electronic appraisal may be better than a Realtor CMA. However, an electronic appraisal, and/or a CMA, are definitely NOT more accurate than an appraisal report done by a trained human appraiser!

OK, so let’s recap here. As you can see they tell you three times in their written caveats that an electronic appraisal is not an appraisal!!! They didn’t write it once or twice, but actually three times! Clearly, they’re trying to CYA and notify people about that very important fact. So my next question that I would like to ask these electronic appraisal companies is: If it’s not an appraisal, then why do you market it and call it an “Electronic Appraisal”? That is a misleading name because it gives people the impression that you’re doing an appraisal report. The reason the National Association of Realtors doesn’t call a CMA a Comparative Market Appraisal is because they are well aware that a CMA is not an appraisal and it would be misleading to the public if they used that term.

In 2004, there was a State that actually forced these electronic appraisal services to change their names and remove the term “appraisal” from their service name!! This was because the State appraisal laws do not allow the use of the term “appraisal” for any report or market value estimate unless the work is done by a State certified/licensed appraiser. A computer database cannot be a certified/licensed appraiser, but a human being can. As a result, the electronic appraisal services had to remove the word “appraisal” from their names when doing business in that State. It would be great if more States or the Federal government enforced the same laws for the use of the term “appraisal” so consumers would not be misled.

I’m not trying to discredit electronic appraisal services (you probably find that hard to believe after reading this section). Electronic appraisals can provide valid and useful services to the real estate profession. I’ll repeat what I said earlier to stress the point I’m trying to make: If electronic appraisal information is used to ASSIST someone, then that is a valid purpose and logical reason to use electronic appraisal services. ‘…banks and lenders routinely use such analysis to check the accuracy of appraisals in what is known as the appraisal review process.’ An appraiser, lender, and real estate professional has a fiduciary responsibility to do the best job they can when obtaining information to present a report to a client. Using electronic appraisal data to assist with an appraisal report, a mortgage loan, appraisal review process, etc. is perfectly fine, and makes a lot of good business sense. An appraiser has to rely on many different data sources to make sure their market value estimate is accurate and reliable. As an appraiser, the data available from an electronic appraisal service can certainly assist you with your report, but it cannot do the report for you; nor can it replace you!

This explanation of e-appraisals is from a section of my "Real Estate Appraisal From A to Z" book.