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Valuations Remain Essential as Housing Market Recovers

MAR 8, 2013 3:29pm ET
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Optimism is high for 2013. I believe it is the year the housing market will see even stronger recovery. Home prices in the U.S. are at the highest levels since 2006. While this news is certainly positive, it is important to not lose focus on the long road still ahead.

As the industry continues to recover, proper valuation methods remain vital to ensuring long-term stability. Too often sales fail due to valuations coming in under the contract price, and with the growing interest in rental strategies, poor valuations can create significant risk.

One trend that continues to gain popularity is the hybrid valuation method. We are no longer seeing strictly traditional valuation products, but rather a combination of several approaches. Introducing creativity into the process can ensure a stronger end result. Increasingly, we are finding that using a single, traditional valuation method, such as automated valuation models and broker price opinions, will not offer the best result on their own. Instead, using hybrid products that combine tactics or bring in strong analytics will result in clearer, accurate values.

While it is true that prices are up, the areas that were hit the hardest such as California, Florida and parts of Atlanta are still experiencing considerably low prices. In many of these areas, investors are quickly entertaining the idea of joining the rental market. Recently, a Freddie Mac executive revealed in a blog post that more than one-third of U.S. households are renters; this is the largest share since 1997.

Investors’ hope is to grab a distressed property for an extremely low price, fix it up and rent the property. When buying pools of properties to rent, many investors already expect a turnaround of three to six years. However, without the correct valuations, their plans to make quick returns on their investments become considerably more risky.

In some cases, investors spend up to $10,000 or $15,000 on repairs simply to make a property appealing to renters. They need to ensure that in the end, their decisions and actions will pay off and these properties remain affordable housing options to renters. A strong valuation is a crucial first step for investors to eliminate some of the risks involved in this growing rental market.

Whenever you travel, it is wise to ask the locals for advice on restaurant recommendations or other activities. They know their area the best. This practice should also be applied in the valuation process; local appraisers understand the national market, but also have keen insight into the local housing market.

By using a local resource, rather than simply relying on analytical data, the chances of getting a true, honest opinion are much higher. These individuals live in the area, have friends and family in the area and have seen their community evolve through the years. Combining their intuitive information with analytical data is an example of using a hybrid model which can provide a more accurate assessment.

The National Association of Realtors conducted a study in which 87% of those polled cited owning a home as the No. 1 one criterion for defining the “American Dream – The Good Life.” It is important to note that no matter where the market stands, consumers still value home ownership.

While the housing market is on an upward climb, the industry will always rely on valuations whether it relates to an origination, a modification or a foreclosure.

Because this process will remain essential, we must continue innovating and bettering the valuation process. Using technology alone is not nimble enough; instead, companies need to infuse the right systems with the knowledge of expert appraisers and continue developing new, customized methods based on unique circumstances. When it come to innovating, valuations are too important for the industry to leave behind.

 

Angela Hurst is senior vice president of business development, RES.NET.

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