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» VISIT US ONLINE @ DSNEWS.COM 61 she said, "and I might pay $10,000 for a horse that is valued at $2,000. A house is the same. I might be willing to pay $600,000 for a $500,000 house." She said appraisers need to distinguish between what is value and what is price. "We think that value and price are the same, but they're not," she said. "Value is what someone will pay. Price can be driven by consumer demand, but that doesn't mean value has increased. I think there is a huge difference." However, for people to understand and accept this concept, Sorenson said, it will take a major mindset change and a refined definition of market value. SOLVING APPRAISAL CHALLENGES One of the biggest challenges in determining property value occurs with REO and distressed properties, according to Randy Perry, VP of business development at Asset Valuation and Marketing in Grand Junction, Colorado. "Many of these properties have been neglected or abused, and typically that can be challenging to the appraiser because sometimes only comps for REO properties in good condition can be found," he explained. "In this type of situation, it's sometimes difficult to determine an accurate value." When choosing which method to use, Perry believes appraisals are the most reliable and credible solution to determining value. "e main disadvantages associated with appraisals are that they require the most time and are the most expensive method," he explained. "Although AVMs and other alternatives are less expensive and instantaneous, the challenge for these methods comes in finding consistently good data." Despite favoring appraisals, Perry said the product an appraiser chooses to use depends on the purpose. "Appraisals—BPOs, and AVMs— all of these valuation products have a place in the appraisal arena, but they are not interchangeable," he explained. "A BPO does not replace an appraisal, particularly if there is something unusual about the house. There are situations where an appraisal is the best way to go." In addition, he said, "Some people think that BPOs and appraisals are adversaries, but that is not necessarily so, and each has its own place in determining values." Perry stated sometimes a BPO is considered to be a knockoff replacement for an appraisal. However, BPOs and appraisals are designed for two different purposes and two different clients and can be quite effective in certain situations. "People ordering a BPO don't need a full-blown appraisal," he explained. "For instance, if you have a house in a tract subdivision where all the houses sold for between $190,000 and $200,000, you don't need an expert to tell you the exact value." For those applying for a new mortgage loan, however, an appraisal is always required. Determining the value of a bundle of assets can be more difficult and depends on the purpose and the client, but a mix of products can be used for this value determination, Perry explained. "For example, an asset manager may need the value on 300 assets, and there are time constraints and cost considerations. Depending on the client and the intended use of the valuations, alternative valuation products may work fine for this scenario." A veteran of the appraisal industry, Perry, like others, feels there are many challenges to be met, and these challenges can be diminished by the increased availability of credible data, better valuation training, and responsible regulation. COVE R STORY INDUSTRY INSIGHT DATA & RESE ARCH M ARKET PUL SE HOW TO ENSURE ACCURACY WHEN RELYING ON AVMS A Little Due Diligence Goes a Long Way By Sandra Lane CoreLogic is a major creator of AVM programs, and in fact, it presently offers eight to 10 AVM programs that can be used for a variety of purposes. "It's important to stress to the industry that not all AVMs are created equal," Jacqueline Doty, VP of Collateral Strategy, said. "The performance and accuracy of an AVM depends heavily on the amount of data being used as well as the proficiency of the modelers and the freshness of the data. This determines the performance of an AVM," she added. Before using any AVM, Doty recommends testing to determine its accuracy. She recommends obtaining a sample of recently- closed purchase money transactions that are not yet known to the AVM model and send the addresses to the AVM to be tested. "Then you should compute the variance of the AVM to the values of the properties," she explained. An AVM that is able to name the price within 10 percent is considered accurate compared to another AVM that is not able to predict the sales price on a large number of properties. As an example, she said, "If a property sold last week for $200,000, and you run two different AVMs, let's assume that one said the property is valued at $199,000 and the other said $250,000. Next you do that on a large population so you can build a performance chart. By doing this, you can tell which one is more accurate." AVMs are frequently used when a lender wants to know the value of each property in a portfolio. "This falls under the category of quality control," Doty explained. "When a company wants to determine if the value of these properties is inflated or deflated, they may run an AVM to see how these values compare to values previously determined by an appraisal. If the AVM produces different values, then they will perform due diligence." The big difference in using this method and other appraisal methods for portfolio valuation is the cost. Doty said an AVM costs less than $25 per property and is available instantaneously. An appraisal will cost from $400 to $600 for each property and take at least a week to complete.

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