Mary Cummins, Real Estate Appraiser, Real Estate Appraisal, Los Angeles, California, Mary Cummins.

Mary Cummins is a real estate appraiser in Los Angeles, California with 38+ years of experience. Cummins provides real estate appraisals for banks, lenders, mortgage brokers, Appraisal Management Companies (AMCs), lawyers, Courts, factors and private parties for lending, lawsuits, probate, estate planning, divorce and all types of litigation. Cummins provides 1004, 1073, 1025 and other form reports, narrative reports and historical appraisals besides real estate research and appraisal advice.

Showing posts with label automated valuation method. Show all posts

Sunday, June 25, 2023

Quality Control Standards for Automated Valuation Models, AVMs, Comment by Mary Cummins

RIN-2590-AA62, fannie mae, freddie mac,mary cummins,real estate appraiser, appraisal,avm, automated valuation method, dodd frank act,1125,los angeles,california

Type:Notice of Proposed Rulemaking

Number:RIN-2590-AA62

Group:Fannie Mae; Freddie Mac

Comment: Quality Control Standards for Automated Valuation Models

Comment: Quality Control Standards for Automated Valuation Models RIN-2590-AA62

This is a comment letter about the proposed change in the Dodd Frank Act section 1125.

I'm a certified and licensed real estate appraiser with over 40 years of experience. Automated Valuation Models (AVMs) should NOT be used by mortgage originators and secondary market issuers in determining the collateral worth of a mortgage secured by a consumer’s principal residence or any real property. The main reasons are because they are not reliable indicators of market value, the data can be manipulated and there are conflicts of interest.

AVMs are not accurate because the AVM never sees the actual property and doesn't know all its attributes. The actual size, effective age, condition, amenities, view, lot type, specific location in a neighborhood ... are not known or considered. These factors can affect the value by up to 100%. There is no quality control that can account for vital missing data which can only be known by a live licensed appraiser. AVMs are GIGO, i.e., Garbage In Garbage Out. In this case there just isn't enough data going into the valuation to make it accurate.

Dodd-Frank Act added section 1125 to the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA); that section requires that AVMs meet quality control standards designed to: (1) ensure a high level of confidence in the estimates produced by automated valuation models; (2) protect against the manipulation of data; (3) seek to avoid conflicts of interest; (4) require random sample testing and reviews; and (5) account for any other such factor that the agencies determine to be appropriate. This letter is a comment on the change in section 1125.

AVMs don't ensure a high level of confidence in the home value estimates produced. They don't protect against the manipulation of data. There is a conflict of interest. AVMs currently can only consider address, tax size, tax bed/bath count, original tax age, pool/no pool and site size at most. Sometimes not all of this information is available. AVMs don't know if the property still exists or was burned down and demolished last year. AVMs don't know if it's in original 100 year condition with deferred maintenance or if the property was fully renovated, upgraded and expanded. AVMs don't know if the property is next to a water tower, power line, dump site or major freeway.

AVMs are even less accurate if the property is older, over/under improved, fair C5 or very good C1 condition, has a view or no view, is in an area with few recent sales or varies from the average home. Even the AVMs owners such as CoreLogic, Zillow,... state the AVMs are flawed and no substitute for a real estate appraisal by a licensed appraiser. Below is the disclaimer of Zillow.

"The Zestimate® home valuation model is Zillow’s estimate of a home’s market value. A Zestimate incorporates public, MLS and user-submitted data into Zillow’s proprietary formula, also taking into account home facts, location and market trends. It is not an appraisal and can’t be used in place of an appraisal."

As a real estate appraiser with over 40 years of experience I look at the different AVM values after I have finished an appraisal just for comparison. I can definitely state that AVMs are not a reliable indicator of value. I've seen AVMs state $2,000,000 value when the home just sold for $35,000,000 and appraised at $34,500,000. I've also seen AVMs state $1,500,000 value when the home just appraised at $500,000. The only time I've seen AVMs be close to accurate is when they are for average newer tract homes in average condition near median neighborhood values in an area with a sufficient number of recent sales. Even then they don't match actual market value.

Here is but one example. There are two identical homes on the same block in a development built in 1950. One is in original condition with deferred maintenance and no view. The other has been fully renovated, upgraded with an addition and has an ocean view. The difference in value would easily be 50% using an experienced appraiser. For a good measurement system, the accuracy error should be within 5%. AVMs are not accurate. There is no confidence in their valuations.

The data used in the AVMs can be easily manipulated. Zillow and other AVMs allow the homeowner, anyone, disgruntled ex tenant to edit the data for a property. If you edit the size, condition or other characteristics of the home, you can drastically change the value. The data can also be manipulated by Multiple Listing Service (MLS) data. Some AVMs consider MLS size, bed/bath count, view... As a real estate appraiser and past broker I can definitely state that MLS data is not accurate. Agents want to sell homes so they make them appear larger and newer. They Photoshop out power lines, water towers, freeways from the photos. They digitally stage them with pools, new lawns, new kitchens...which don't exist.

The AVM doesn't see the home or view so it values them the same if they are the same size in the same area. The person who owns the home in original condition will be happy because it will appraise over market value. The person who owns the upgraded home with the ocean view will not be happy because now they have to apply for a different loan with a full appraisal in order to get a higher loan or lower rate. I've been in this exact situation many times. The owner ends up paying two "appraisal" fees even though the first was just an AVM. They also waste time.

The ability to manipulate the data creates huge conflicts of interest. Sellers, agents want to sell home for the highest price. AMCs, Lenders want the highest value so they can easily make the loan to make money. Zillow is both an AVM and seller, agent. CoreLogic sells AVM data to Lenders and others. They want to make the deal to make money. The independent real estate appraiser only cares about actual market value. They don't make money on the transaction besides a small appraisal fee which is paid if they hit the value desired by the borrower or not.

Have we learned nothing from the Zillow fiasco? "The evidence is there for anyone wishing to look. In a disastrous bet made by Zillow – one in which the company staked its future on investing in residential real estate based on its own algorithms – the company lost $32 billion in market capitalization from February to November 2021. What did Zillow learn about its “Zestimates” when its own money was at stake?" (https://appraisersblogs.com/dazzled-by-wizardry-federal-mortgage-regulators-ignore-zillow-debacle )

I've studied AVMs in depth as have others. There is a lot of research already done on the inaccuracy of AVMs. Here's an article I wrote about AVMs which cites some of that research. https://mary--cummins.blogspot.com/2022/03/what-is-avm-automated-valuation-method.html

The Dodd Frank Act is the result of the 2008 Great Recession and Financial Crisis. The purpose was to protect consumers, banking and our economy so that would never happen again. The public will lose trust in the real estate industry, mortgage market and mortgage backed investments. This will negatively affect the real estate industry, banking industry, stock market and our economy. Please, do not use AVMs to value property which will be collateralized by loans.

Sincerely,

Mary Cummins
California Certified Real Estate Appraiser

My letter finally showed up in the comments

https://www.mortgagetranslations.gov/sites/default/files/rulemaking_comments/Attachments/16263/Mary%20Cummins%20letter%20AVM%20Comment%2006252023.pdf

Mary Cummins of Cummins Real Estate is a certified residential licensed appraiser in Los Angeles, California. Mary Cummins is licensed by the California Bureau of Real Estate appraisers and has over 35 years of experience.

Mary Cummins, Mary K. Cummins, Mary Katherine Cummins, Mary, Cummins, #marycummins #animaladvocates #losangeles #california #wildlife #wildliferehabilitation #wildliferehabilitator #realestate #realestateappraiser #realestateappraisal #lawsuit real estate, appraiser, appraisal, instructor, teacher, Los Angeles, Santa Monica, Beverly Hills, Pasadena, Brentwood, Bel Air, California, licensed, permitted, certified, single family, condo, condominium, pud, hud, fannie mae, freddie mac, fha, uspap, certified, residential, certified resident, apartment building, multi-family, commercial, industrial, expert witness, civil, criminal, orea, dre, brea insurance, bonded, experienced, bilingual, spanish, english, form, 1004, 2055, 1073, land, raw, acreage, vacant, insurance, cost, income approach, market analysis, comparative, theory, appraisal theory, cost approach, sales, matched pairs, plot, plat, map, diagram, photo, photographs, photography, rear, front, street, subject, comparable, sold, listed, active, pending, expired, cancelled, listing, mls, multiple listing service, claw, themls, historical appraisal, facebook, linkedin

DISCLAIMER: https://mary--cummins.blogspot.com/p/disclaimer-privacy-policy-for-blogs-by.html

Mary Cummins

Mary Cummins of Cummins Real Estate Services has been in real estate since 1983, over 35 years. She is licensed by the Bureau of Real Estate Appraisers. Mary Cummins was an agent and broker licensed with the California Department of Real Estate selling residential income, commercial buildings, raw land and homes for Merrill Lynch Realty in Beverly Hills and Westside Properties in Los Angeles before concentrating on appraisals. Mary Cummins currently provides real estate appraisals, expert witness testimony, historical research, legal real estate research for mortgage brokers, banks, lawyers, factors, insurance companies, financial consultants and private individuals. Mary Cummins was born and raised in Southern California. Cummins attended Beverly Hills Good Shepherd Catholic School and Beverly Hills High School. Besides being on the Dean's list, Mary Cummins was a top ten national swimmer and competed on the men's water polo team. Mary Cummins began college at the age of 15 attending the University of Southern California on scholarship, majoring in Psychology/Sociology. http://www.animaladvocates.us http://www.facebook.com/AnimalAdvocatesUSA

Thursday, March 3, 2022

What is an Automated Valuation Model AVM? The Good, the Bad and the Ugly, by Mary Cummins Real Estate Appraiser

automated valuation method, avm, appraisal, mary cummins, los angeles, california, real estate appraisal, appraiser, zillow, redfn, trulia, realtor, realist, realavm, fha, corelogic

automated valuation model, automated valuation method, robot appraisal, algorithm, math formula, avm, appraisal, mary cummins, los angeles, california, real estate appraisal, appraiser, zillow, redfn, trulia, realtor, realist, realavm, fha, corelogic

Automated valuation models (AVMs) are statistically based computer programs that use real estate information such as comparable sales, property characteristics, and price trends to provide a current estimate of market value for a specific property.

Most people are familiar with Zillow and Zillow's Zestimate of home value. Zillow themselves have stated the Zestimates are not an appraisal. Below is their main disclaimer.

Real estate appraisers have always said "the 'a' in 'Zillow' is for 'accuracy.'" In light of Zillow's recent ibuyer program failure everyone now realizes they are not accurate. So what is the problem with AVMs?

The main issue with AVMs is the quality of the data. We all know Garbage In, Garbage Out or GIGO. Zillow and other AVMs such as Trulia, RedFn, RealAVM, Realtor, CoreLogic use a proprietary formula and public data to make their estimates. They also allow the public to edit their data and use false MLS data from real estate agents. They do not actually look at the home. They don't know the condition. Is it a full high quality remodel or ready to be demolished. They assume average condition. They don't know the amenities, upgrades, view (ocean, lake, freeway, back of an industrial building), additions, neighborhood boundaries (Bel Air proper or the flats of Los Angeles), exact location/neighborhood (on the ocean, a lake, in a gated community, built on an old landfill, next to the freeway and industrial properties)...and many other very important factors. They assume all properties in area have the same view and specific location. They don't even know if the home actually exists or burned down last year.

This of course makes their estimates vary widely and results in an inaccurate and biased valuation. Zillow's own research has shown that their accuracy is not as good in areas with little public data. Not all Tax Assessors, Building and Safety, MLS list data or more important recent accurate data online publicly. Some states don't report sales prices publicly. This goes back to GIGO.

I have found and Zillow has admitted publicly that their accuracy is lower in the extremes. Homes which fall on the lower and higher end of the price ranges for areas tend to have less accurate estimates. Zillow also admitted that they are less accurate in areas with older homes. There is no way for a computer program to tell if a home has been fully remodeled or needs to be demolished. This makes it less accurate in areas which are revitalizing. Some call revitalization "gentrification."

Inaccurate valuations are bad for everyone. If you're a homeowner and the bank offers to waive the appraisal in exchange for using an AVMs, this can cause problems. If you upgraded your property, you probably won't be getting added value for all your upgrades especially if most homes in the area aren't upgraded. If your home has one of the best views in the area or the largest lot, the AVM won't see that value either. You will get a lower valuation. The rate you pay for the loan is based on the loan to value LTV ratio. The higher the appraised value, the lower the LTV and the less risk for the bank. The less risk, the lower the cost of the loan, the lower the rate, the less likely you are to have to pay mortgage insurance. If you're looking to get some cash out, you would get less cash out of the deal with a lower valuation. Using the AVM just puts $350-$500 more money into the hands of the lender. It doesn't save YOU any money no matter what they say.

Now if you have the worst house in the neighborhood in bad condition, an AVM would be to your benefit. They will most likely over value it. If you are buying said home, you might incorrectly over pay for the home assuming it's worth more. This is why investors should never rely on AVMs. An appraisal by a licensed appraiser is like $350 insurance. You will get an unbiased independent full valuation of the property. $350 is a lot better than paying $100,000 more than what it's really worth.

I'll quickly go into how appraisers valuate homes so you can understand the basic AVM algorithm a little. This is a basic simplified search. We generally search for sales and listings as similar to the subject as possible. We use the computer to search for sales, listings within a 1/2 mile radius from the subject that have sold within the last 90 days which are +/- 15% difference in gross living area. We then choose the best comps based on location, size, bed/bath count, view, condition, amenities... Sometimes there are no recent sold comps so we have to go back a year or so and adjust for appreciation/depreciation over time.

This is where having someone who has inspected and actually viewed the subject property is so important. This is also why it's so important to have an appraiser with years of experience who knows the area very well. A math formula can't see the condition, view, real bed/bath count, upgrades, amenities, specific location in a neighborhood... They generally only see tax roll and MLS size, bed/bath count, number of garages, pool. Those are very rarely accurate. Tax roll is generally the original size. Real estate agents lie in MLS ads about everything. You won't know the real full bedroom and full bathroom count of the subject or comps without an appraiser.

The appraiser also views the sold and listed comparables. Are they tear downs selling for land value or totally remodeled with new additions that don't yet show up on the tax roll? Does the subject have an ocean view but sold comparables face a loud ugly freeway? Is it a full bedroom with it's own door or a walk through bedroom or just a den? Is it a half bath, full bath or just a toilet in the basement? These are very important factors which can make the value differ by up to 100%. The AVM will never know all of those things about a property. This is why they are not accurate.

Recently I saw a property with AVMs that varied from $750K to $1.9M. Zillow, Trulia, RedFn came in way too high at about the same price. Realtor, CoreLogic RealAVM came in at market based on my own valuation after looking at the property. I realized the problem with the values when I saw the comps that Zillow, Trulia, RedFn showed for the subject. They were using comps from 1.5 miles away in a neighborhood that sells for twice as much as subject's neighborhood. That neighborhood sells for so much more because the homes are very high quality, they have the best school system in the state, lots of local shopping and a low crime rate. This was a Beverly Hills versus Watts comparison. Clearly Zillow, Trulia, RedFn algorithms are wrong. They cannot define a comparable neighborhood.

The issue had to do with the size of the subject and recent sales. It was larger than most homes that had sold recently. The homes directly around subject were all the same size built at the same time but they hadn't sold recently. Instead of going back in time to find an older sale of a similar size and time adjusting for appreciation, Zillow kept widening the search until it found comps of a similar size that had sold recently. That was a huge mistake. An appraiser would never base their value on homes from a totally different neighborhood which generally sells for twice as much. Remember, the three main indicators of value are location, location, location. This is why AVMs are so inaccurate and should not be used for valuations.

AVMs are just an algorithm based on a math formula. Some of the math formulas like Zillow are deeply flawed. They don't know neighborhood boundaries or the true characteristics of the properties. A math formula is only as good as the data used in the calculations. Because the AVM is not a live experienced licensed appraiser who has actually inspected the property and neighborhood the resulting value will never be accurate.

Please, do not rely on AVM valuations for real property values. If you are refinancing your home and your home is upgraded or has superior features than most homes in your area, you will be better off requesting a full appraisal. The lender will be paying for the appraisal so it costs you nothing. The lender just wants to save a few dollars for themselves by going with the free AVM. If your home is almost a tear down, use the AVM ;-)

References

List of different AVMs

Freddie Mac: Home Value Explorer® (HVE®)
Zillow: Zestimate
Realtor.com: Collateral Analytics, CoreLogic Total Home Value for Marketing, Quantarium
Redfn: Redfin Estimate
Trulia: Trulia Estimates
RealAVM™ is a CoreLogic® product
Fannie Mae: AVM 1 (data assessment/ integrity checks, comparable selection, comparable adjustment, and reconciliation), AVM 2

CoreLogic actually has a few patents related to their AVMs as does Zillow. Here is the patent for their main AVM model. The description is very interesting. It deals with the issues of geographical neighborhoods and number of sales during set time periods, i.e. spatial and temporal distinctions. This is why they're more accurate than Zillow and had the correct AVM for the Marin, California property noted above. They have a better spatiotemporal understanding of the nature of real estate. They even stated that a "property value given by an appraiser can vary, sometimes erratically, depending on the comparable properties chosen in performing the appraisal." They stated sometimes there are no sales during the short range of time used by appraisers. This is why it's better to go back in time and time adjust if there are no sales rather than widen the geographical search area. The location factor carries a lot more value weight.

https://patents.justia.com/patent/20130144798

Here's one Zillow patent which goes into their algorithm, math formula. They're clearly mainly relying on median and average calculations.

https://patents.justia.com/patent/8676680

Great article on the issues and problems with AVMs. They're not standardized especially their reported confidence scores, Forecast Standard Deviation FSD and error rates.

https://vegaeconomics.com/webfiles/Principles%20for%20Calculating%20AVM%20Performance%20Metrics.pdf

Mary Cummins

Mary Cummins, Real Estate Appraiser, Animal Advocates, Los Angeles, California

Sunday, June 25, 2023

Quality Control Standards for Automated Valuation Models, AVMs, Comment by Mary Cummins

Thursday, March 3, 2022

What is an Automated Valuation Model AVM? The Good, the Bad and the Ugly, by Mary Cummins Real Estate Appraiser