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 Appraisal Adjustment Process), is that a computer can't think nor use logic, reason, or 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).

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 to Cover Your (their) Assets 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:

  • 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.

  • 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.

  • 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.

  • 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.?

  • 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.

  • 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 Realtors and other third parties.

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