The value of Automated Valuation Models (AVMs) in lending decisions is well understood and has been in practice for some time. These sophisticated models are extremely popular in home equity lending and widely used across the lending spectrum, such as origination, quality control, mortgage servicing, and capital markets. There is also a growing interest in using the same types of valuation models and technology to improve prospecting and marketing.
In the first of this two-part series on AVMs, we will take a deep dive into how savvy businesses are using AVMs from First American Data & Analytics in more targeted prospecting campaigns to grow their business.
Different AVMs for Different Tasks
AVMs are considered the workhorse of the home equity industry. Because of their affordability and high accuracy, they are widely used to underwrite home equity lines of credit and closed-end second mortgages — two very popular lending products. Not surprisingly, AVMs are also a very effective tool in helping lenders with front-end marketing to identify qualified prospects for home equity offerings. These same type of marketing programs are now also being used by reverse mortgage lenders and new entrants in the Home Equity Investment (HEI) market to identify prospects for their programs.
AVM usage in marketing is becoming more mainstream as other non-lending verticals have realized the benefits and ROI these sophisticated models can provide. That’s why First American Data & Analytics developed an advanced AVM suite – First American Data & Analytics Procision™ AVM — that includes three different AVMs designed to fit the needs of various types of businesses that want to develop targeted, data-based lead generation and prospecting efforts, regardless of industry.
Highest Potential for Conversion, Maximizing ROI
Procision Power is a general-use, lending-grade AVM that is ideal for day-to-day lending operations and portfolio mining. Although widely used by mortgage lenders for lead generation, it is also used by solar lenders, contractors, home improvement companies like pool installers and landscapers, and other big-box retailers looking to target homeowners to market their services. Specifically, the AVM can identify homeowners with high equity in specific geographic regions who are likely to benefit from renovation or big-ticket remodeling services based on equity levels. This information can also be further enhanced with other data elements, such as property age, year purchased, and neighborhood-market trends.
The Accessory Dwelling Unit (ADU) market is a relatively new, but growing, subsector of the current real estate market. Today, the market is valued at $3.3 billion nationwide, and it is expected to triple in size over the next five and a half years. Because home equity is often used as a financing source for ADUs, combining AVM values with demographic data will help ADU builders identify prospects.
Many forward-looking financial institutions are committed to building deeper, life-long relationships with current customers, and AVMs can play a central role in this process. After a period of significant homeowner appreciation, like the one we have just experienced, lenders can build goodwill and trust with customers by proactively identifying homeowners who no longer need mortgage insurance, for example.
Similarly, once first mortgage rates decline, loan officers will no doubt use a combination of public record data and AVMs to identify the best prospects for refinancing.
AVMs As a Planning Tool
In addition to prospecting, AVMs can be used in customer situations to enhance decision-making. Here are some examples:
Personal bankers can use AVM information to advise customers on the advantages of using home equity to improve their personal balance sheets by paying off higher-interest credit card, auto, and student debt.
Financial planners working with older customers can also leverage AVM data to quickly assess those who may benefit from a reverse mortgage. Armed with AVM data, financial planners can offer personalized advice on whether a reverse mortgage aligns with a customer's financial goals and retirement plans.
Trust and estate experts looking for a true picture of a client’s total net worth for retirement planning and wealth transfer might also benefit from AVM-related insights.
Government agencies and municipalities can use AVMs to accurately value properties within their jurisdictions to ensure fair taxation, allocate resources efficiently, and make informed decisions to support sustainable growth and development.
Finding Prospects for Lead Generation
Similarly, we have built another version of the AVM in the Procision suite, Procision Direct, that is gaining popularity with real estate and online lender clients. Procision Direct is a marketing-grade AVM that can be embedded into consumer-facing websites. This type of AVM serves as a quick reference tool to help consumers understand what their home is worth and discover potential financing options.
By embedding this tool onto their websites, online lenders and real estate agents can appeal to tech-savvy consumers who would rather self-serve and do preliminary research before engaging with a live professional.
Help Identify Risks or Make Buy/Sell Decisions
Last but not least, is Procision Premier, the “full” lender-grade AVM that is used in sophisticated underwriting loan transactions by lenders. This type of AVM has the most stringent data requirements and the tightest tolerances for the highest confidence levels. This AVM does not take in subject values such as listing or sold data, therefore, it is the most accurate in real-life situations when the property has not transacted in a long period of time. Procision Premier is used in place of a full appraisal and can be combined with an inspection for some low loan-to-value (LTV) refinances. Servicers and investors are also leveraging Procision Premier to manage their portfolios to identify risks, assist in distressed asset management and disposition, or help make buy/sell decisions.
New Testing Procedures
Judging the accuracy of an AVM is more nuanced than one may assume; tests require a comparison to the model’s result. The most obvious choice would be to take the AVM’s estimate and compare it to an arm’s length transaction. This practice, while theoretically correct and widely agreed upon, is no longer the best practice because AVMs take in subject listing data, including list prices. It may seem like the AVM is performing well because the results land very close to the final sale price.
The good news is that the industry is beginning to focus on testing to address potential overreliance on listing data. For example, AVM Metrics is rolling out a new testing procedure to combat this issue: “To address the influence of listing prices on AVM predictions, we’ve integrated a national MLS database into our methodology. By pinpointing the moment when AVMs gained visibility into listing prices, we can assess predictions for sold properties just before this information influenced the models, which is the key to isolating confirmation bias.”
What does this mean? If an AVM changes drastically once the property has been listed, then it’s clear that AVM is using listing data to “snap” near that price. If the goal is to get a good estimate of what price a sale will close once the listing price is known, then traditional AVMs are great for this use case.
However, if you’re looking for an objective estimate of property value for a refinance or to calculate equity, current testing mythology cannot determine how accurate they are. This is why Procision Premier does not use listing or sold data. It is a way to get a truly unbiased and objective estimate of value that is not swayed by listing or sold prices.
The Secret Sauce
For added accuracy and currency, First American Data & Analytics runs Procision AVM valuations against every residential property in the U.S. every day and updates the underlying data that fuels the Procision AVM suite daily. An automated surveillance system constantly monitors both data and valuation quality and performs extensive testing to validate the accuracy of the valuations produced for different property types in various geographic markets. All of this is to say that no matter what “flavor” AVM you’re using, you can be assured that you’re getting the most current insights into the value of a subject property when you need the information.
For additional information about First American Data & Analytics’ AVM offerings, visit https://dna.firstam.com/solutions/avm/procision.