Guide to AVMs

Automated valuations driving pressure for same day mortgages

Guide to AVMs

AVMs will be standard for most properties within the next five years and they will be standard for 90 per cent or more of properties at some point within the next 15 years. The reason I can make such a bold statement is because the technology already exists; what doesn’t exist at the moment is 100 per cent reliable data to populate it.

The introduction of AVMs has, however, created competitive pressures, which some lenders just can’t handle. New lenders have no legacy technology issues and are applying the pressure on traditional lenders. And, for many, it will be the introduction of AVMs that breaks the proverbial camel’s back. Prior to AVMs, some lenders could, by running processes in parallel, compete effectively. However, now with AVMs, and the application of automated underwriting, newer lenders can produce a binding offer. The whole process could be completed in a matter of hours, or minutes if necessary.

AVMs the catalyst for change

On average, around 5 per cent to 6 per cent of properties are sold each year with the average household moving every 18 years. Within two decades we will have data on most properties in the UK. However, much of this data will be accumulated far faster as almost directly comparable properties will exist. 27 per cent of the UK housing stock is terraced and a further 34 per cent is semi-detached with 21 per cent being detached and 13 per cent being purpose-built flats and 5 per cent converted flats.

AVMs are currently used in around 20 per cent of mortgages and AVM data providers have estimated that this may grow to as much as 60 per cent within the next few years. The Council of Mortgage Lenders’ more conservative belief is that AVMs will account for just 40 per cent of all property valuations carried out by 2012.

How AVMs work

AVMs pool data from several sources such as the Land Registry and previous valuations. However, at the moment, this data is limited and can only be regarded as providing a reasonable estimate for many properties. However, as the collection of data improves and broadens, as it will when AVMs start to morph with the data contained within the Home Information Pack, the accuracy will improve.

By looking at the USA and Canada we can see where we are heading, but importantly not where we will get to, as this will continue to evolve. In these countries, detailed statistical information, such as property size, location, characteristics, orientation, social statistics and demographics are gathered. This information comes from official sources including the Land Registry and historical valuations, as well as sales prices relating to type of property or area. The information can then be analysed in order to make an accurate valuation of the property taking into account any current developments.

For example, by having general property details, and overlaying other external factors, it will be possible to give a fair and accurate price reflecting anything from the Olympic effect, to that of London’s Cross rail or even, in years to come, the micro economic implications of access to a highly rated Ofsted school.

Currently, the data held is not as detailed as it will be and, therefore, AVMs use an upper and lower valuation confidence limit, which does take into account some contemporaneous factors, such as market confidence and the number of sales in a given area.

Power to the people

AVMs are the final piece in the jigsaw for handing power to the consumer and early on in this article I think it’s worth stating that AVMs will not just be a lender tool. I firmly believe that there will be increasing consumer demand for a number of reasons. An AVM, and a knowledge of your own credit history, means that a consumer can now reasonably expect a lender to give them an immediate offer and, as more lenders do, they will be the ones that are chosen.

AVMs will also gain popularity from consumers and their financial planners as, increasingly, their property is seen as a major part of their financial planning and, although often misguided, many are also looking at it as their pension pot.

Buy-to-let landlords will utilise AVMs to assess the capital appreciation of their portfolio in order to release further equity and gear the portfolio effectively. Although, relatively speaking, in its infancy, the provision of rental income assessments via AVMs will enable the buy-to-let sector in the future to benefit from the automation, and efficiencies offered to the residential sector. These elements combined with predictive local indicators will supplement and enhance existing portfolio management techniques.

AVMs as a value added customer service

As already stated, some clients will want regular AVMs for their investment strategy. In addition, many lenders will find that some customers will be curious enough on a regular basis, say every two to three years or so, to invest in an AVM. Likewise their financial adviser, accountant or solicitor may also request a regular update in order to provide a greater degree of accuracy for such things as estate planning.

I would also expect to see buy-to-let lenders providing portfolio management tools as an added value service. Investors with more than a certain number of loans could receive an annual investment report, similar to those provided by the investment managers.

AVMs and customer retention

While AVMs are seen as a key sales tool for lenders, they should also be used as a retention tool. When customers’ incentive periods come to an end, instead of using a simplistic pricing index to assess the value of the security, lenders will obtain a more accurate valuation by carrying out an AVM. Based on the results, unconditional offers on attractive retention products can be issued to customers well before they consider alternatives.

AVMs and the regulator

Many organisations have seen the statement by the FSA with respect to AVMs as cause for concern. I would argue that the FSA is taking a prudent step with respect to the use of an independent Valuer, but only until such a time as the technology is proven. The Basel II regulations are designed to protect, but not inhibit, such that the insurance industry is not being asked to have all its household building policies double-checked to ensure that the correct premium is being charged for the exact rebuild cost of the property and its fixtures and fittings.

Legacy systems no longer a barrier

A Decision-in-Principle is no longer acceptable as clients want immediate unconditional offers. Speed will be critical and lenders with the technology will win more business regardless of whether they have a better rate (within reason). Legacy technology is not a barrier to having the latest systems. Expensive re-engineering is unnecessary as the new platform technology ‘bolts’ on to existing systems, both internal and external.

Property suitability for AVMs

Currently, AVMs are not suitable for many properties, and some commentators use this as a reason to condemn the whole principle of an AVM. From my perspective this either demonstrates a complete lack of understanding or a blinkered inability to accept that their current business model may be flawed.

In fact, AVMs are currently not suitable for many properties, specifically those that have a low turnover, which would include rural locations, high value properties, listed buildings etc. Likewise, there will be specific locations that need an ongoing watch for environmental conditions, such as flooding. For some of these, the turnover will be so infrequent, or the environmental risk so high, that an AVM will never (ever) be practical. However, because a country estate in Scotland has not been sold for 400 years, this is not a reason to scrap AVMs, regardless of what certain individuals think.

Over time, what we will see is an increase in the number of properties that can be covered, and the spread of confidence levels decreasing. Furthermore, the accuracy of the data will allow buyers and sellers to predict more accurately the average consumer’s value for a property. For example, what difference does a South-facing garden or corner plot make, or what is the correlation between access to a bus stop or tube station, etc?

AVM versus surveys

One of the greatest benefits of an AVM will be to clear up in the consumer’s mind the difference between a valuation and a survey. I personally believe that, conceptually, the introduction of the Home Inspection Report was one of the Government’s most insightful moves as the prospective buyer will have access to more information about what needs to be done to the property than the traditional valuation survey afforded.

Cost benefits

This is generalising, because every lender will have different arrangements, but a full valuation on a £300,000 property, will cost in the order of £400. The AVM will cost up to £20 but, unlike the physical valuation, which will rise in the future, the cost of the AVM will fall. Looking at the HPI check used for vehicle purchase, the cost to the consumer varies between £40 and £10, depending on where it is purchased. A similar pricing model will exist for AVMs but, with a likely greater competition, the pricing will be keener.

Longer-term implications

Rates, Poll Tax, Community Charge… they all have their flaws but, as the access to data improves, so will the government’s ability to provide a more personalised pricing structure, should they wish to ever go down that route.

Lender portfolio values, by and large, are not prone to large swings at a micro level, being much more sensitive to macro conditions, such as consumer confidence and interest rates, etc. However, for lenders who have specific criteria, such as regional building societies or buy-to-let lenders, micro conditions may have a greater impact, both positively and negatively. For example, the negative impact of a new runway could be quickly plotted on a portfolio; likewise, the possible regeneration (or otherwise) due to the location of a Super Casino, can be quickly analysed.