Pricing, Valuation Fundamentals Provoke Debate

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Controversy about what method leads to higher real estate valuation accuracy and realistic pricing is keeping up competition between vendors striving to custom fit their tools to the changing needs of their lender and servicer clients. The debate is open.

What is haunting the mortgage industry today, according to housing analyst Edward Pinto, is the need to somehow take care of valuations that were based on the boom induced comparable sales prices of the pre-crisis years when appraisers had to determine the price at which a property may be sold based, not on its value, "or more importantly,” not on the maximum amount that may be prudently lent on a property.

Especially distressed property pricing is key to servicers who are still dealing with large portfolios of delinquent loans and REOs, says COO of Equator John Vella. Judging from Equator’s data, he says, servicers are trying to maximize profits by improving their ability to price a for sale property based on current data and cash flow analysis before opting for a short sale, third-party sale or REO sale.

When it comes to valuations, there are certain impediments in collecting and analyzing data for each of these three types of transactions, says Brian Coester, CEO of CoesterVMS. The issue is generally with the data available on the MLS or and the data available publicly.

"The REO sales aren’t always in great condition and this leaves an appraiser wondering what’s on the inside of the property,” he says, which was not the case traditionally because in the past they would have access to interior photos or more detailed comments about a single family home. “It leads to possible issues with the comparables not being valued properly.”

Everyone knows an appraisal is both the most accurate and the most expensive valuation method, Coester said, but when dealing with thousands of properties cost is a factor so lenders also use AVMs even though they are “not considered very credible.”

As a rule different types of valuations are implemented for different types of transactions. Traditionally servicers favor BPOs while lenders favor appraisals, he added and cost is a leading factor. The average price is: $10 for an AVM, $100 for a BPO and about $400 for an appraisal.

Valuation and pricing can be both accurate and cost effective, argues Eric Lichtenheld, president of Integra Group Real Estate. He finds sometimes BPOs are perceived poorly and seen as unimportant compared to appraisals.

In fact most agents do not understand the basics of BPOs so they do not even do them, he said, but putting in the due diligence necessary can pay off. If and when they are done by a knowledgeable and skilled real estate agent BPOs are highly accurate and often match appraisals. Which is why, in his view, servicers and investors should take notice of well-done BPOs. 

Ultimately, adds Coester, nothing fundamental has really changed in the real estate valuation and pricing market. High sales translate into high values and vice versa. Also, valuation strategies implemented for the three aforementioned types of transactions change along with market conditions, “which are reflected in the appraisal.”