The Journal explores what role computer-generated valuations play in the market and the impact they have on the industry.
Property valuation could be described as art rather than a science. An expert valuer will take into account a multitude of criteria when assessing a property. These will range from the condition of the property through to its proximity to amenities. A site visit is integral to conducting a full valuation in the traditional sense.
On the flip side, online tools that generate a valuation of a property based on computer analysis of data could be viewed as science. Companies like RP Data, onthehouse.com.au and Australian Property Monitors all offer services that allow you to obtain a property valuation within minutes for minimal cost.
Algorithms
Both buyers and banks place great emphasis on valuations being the basis for their bidding and lending. But just how are online valuations calculated?
“It’s not a black box,” Australian Property Monitors (APM) General Manager Anthony Ishac said. “APMs Automated Valuation Model (AVM) is designed to behave in a similar way as a valuer does. The model is a highly sophisticated mathematical algorithm that factors in as much data as possible.”
According to Mr Ishac, APM’s AVM takes into consideration many different factors, from the number of bedrooms, bathrooms and how far the property is from a body of water, through to whether the property is on a main street or not.
However, he admits that it is not an exact science and in some cases the figures produced may not be an accurate reflection of the property’s value – this is why they are referred to as price estimates and not valuations.
“AVMs are accurate in the majority of cases and are valuable when used as intended,” he said. “However, when dealing with a unique or recently renovated property, a more traditional valuation is recommended.”
Methodology
There are many different valuation options available, ranging from a full valuation conducted by a qualified valuer to a desktop assessment report, according to RP Data Head of Corporate Affairs/Legal Counsel Craig Mackenzie. Like Mr Ishac, he advises that the public contact a property professional if they are in doubt.
“Understanding the difference between these solutions and knowing when each solution is best for you is crucial when trying to determine an accurate value for your property,” Mr Mackenzie said.
On the ground
REINSW has become increasingly concerned that consumers’ lack of understanding of online valuations are having an adverse impact.
Alarm bells were first raised for Jennifer Aaron Real Estate Principal Jennifer Aaron in 2011, when a property in her portfolio was valued significantly lower than expected by an online system, which placed the value of the property at $1.211m. A qualified valuer was later despatched, but the initial damage was already done.
According to Ms Aaron, the property in question eventually sold for just under $1.5m, but four potential buyers were lost in the meantime. She lays the blame squarely at the feet of online valuations, which she feels are not fully representative of the truevalue of a property.
“It has a huge impact on an agent’s ability to sell,” she said. “If someone wants a property badly enough they won’t care what these systems say, but there are people who are very influenced by what they read on the internet.”
More recently, Ms Aaron has been in debate with an online valuation company relating to a property that appears to be valued based on a part sale that occurred in 2004.
“The owner of the property [and I] have been in contact with the companies in question for more than 12 months. We’ve not been able to resolve this,” Ms Aaron said.
“This was a part sale, but the company is taking it as a full sale. As a result, the online valuation is showing the property at a fairly unrealistic value based on a part sale nine years ago.
Consumer angst
Wilson Property Principal Adrian Wilson also views the increasing popularity of online property valuations with concern.
“Each building in the Sydney CBD is its own marketplace, and comparing say The Hyde with World Tower is just not going to stack up, even though they are literally 350m from each other,” Mr Wilson said.
“Then factor in at least 20 residential buildings within a similar radius, each with their own values based on age of the building, who the developer was, building demographics, property presentation, renovations, building facilities and common area condition, views and aspects, strata levies, value of parking and storage, number of smaller units compared to larger units, level of owner occupiers verse investors, the list goes on.”
According to Mr Wilson, online property valuation systems cause “undue confusion amongst potential buyers in the marketplace” due to the aggregated nature of the valuation figures.
“I see it causing increased buyer angst and a reduction in buyer confidence due to lack of clarity linked to an aggregated approach,” he said.
Buyer beware
Coopers Principal Paul Cooper has heard many tales of potential buyers debating valuations with his agents and attributes this to online property valuation systems. However, he believes these systems have greater impact on the consumer than the agent as they give false hope to buyers that they might be able to afford a property.
“People will go out and see a property and they’ll say ‘I love this’”, Mr Cooper said. “They will then go to the online valuation system, which will tell them the property is worth ‘x’ amount of money. They then go to an auction and compete, only to be not the number one bidder, not the number two bidder, not the number three bidder, but likely the fifth, sixth, seventh bidder.
“They must understand the computer isn’t right all of the time,” he added.
Value for money?
Mr Cooper acknowledges online that property valuations are a cheaper option for banks, but does not believe they will ever tell the full story of a property.
“Online valuations are going to be cheaper to do for anyone who wants to do them, but they really aren’t going to tell the whole story,” he said.
Agents, he argues, can only legally give an “opinion of value” as opposed to a valuation (however, there are lots of agents that are qualified as valuers) and so questions whether computer generated figures should be allowed to call themselves ‘valuations’.
“Without a human element assessing it, I can’t see a computer valuation being anything other than an “opinion of value” and they should not to be relied on,” he said.
What’s in a name?
The naming convention is something Australian Property Monitors take seriously. Mr Ishac told the Journal: “We are very pedantic about referring to them as price estimates. We only use the term ‘valuation’ when referring to the methodology.”
National President of the Australian Property Institute (API) Tony Gorman believes a true valuation should involve an inspection of a property.
“It requires experience and reasonable analysis to form an opinion,” he said.
“I actually put a lot of faith in the public as to how they’d like their assets valued. I’m not totally convinced that the public is entirely comfortable with the idea that the asset they worked 20 years for is being valued by a computer.”
REINSW CEO Tim McKibbin has recently been vocal on the subject of online property valuations. He also questioned whether these tools should be allowed to use the name ‘valuation’.
“While there’s a degree of sophistication with online solutions in this area, online property valuations can never be a true valuation because a valuation requires some human assessment and intervention,” Mr McKibbin said.
According to Mr McKibbin, the valuation will take into consideration a litany of items that the online system, because it’s a computer program, will not. He added that the valuation will give specific weighting that a computer program cannot. “That’s what makes it part art and part science,” he said.
“REINSW is not trying to discredit or have these online valuations banned from consumer consumption, but what we are trying to do is make sure consumers realise an online valuation is not, in our view, a valuation.”
Mr McKibbin believes it is important to educate consumers as to the limitations of these online tools.
“Properties are very much like fingerprints, they are all unique in some way,” he said. “These online tools have their place, but I think it’s dangerous to rely on them heavily. They are simply a guide.”
Computer generated valuations vs Traditional valuations
What are the key components that go into each?
Computer generated valuation (for example, Automated Valuation Model by RP data)
RP Data outlines their Automated Valuation Model as follows:
- Comparable sales
- Property price index
- Condition of property (assumed average)
- Last known sales date and price
- Physical attributes of the property ( as reported in public and private databases)
Full valuation (carried out by a qualified valuer)
Conducting a full valuation can take between four to five hours, according to Richard Wood & Associates owner Richard Wood. He outlines the process as follows:
- Base valuation (assessing comparable sales)
- Inspection
- Take into account the considerations (outlined below)
- General comments
- Valuation
Key considerations for a valuer:
- Location
- Surrounding area
- What environment is like (local and state)
- Land details (lease/title)/details of tenancy
- Town planning
- Environmental considerations
- Improvements
- Services
- State and repairs
Banks vs buyers?
It has been reported that banks and buyers are placing an increasing emphasis on the importance of Automated Valuation Models.
“The institutions and banks have adopted AVMs as part of the lending process,” Australian Property Monitors General Manager Anthony Ishac said. “The majority of banks utilise several AVM suppliers and have built a structure around when it is suitable to rely on this technology.
“For the banks, AVMs are used as a risk management tool, but for other users, it’s recommended they are treated as a price guide.
Each bank is highly specific about how they are used and are often risk averse. In cases where the AVM outcome meets their lending policy rules, it enables banks to provide a faster turnaround for loan approvals. AVMs are not suitable for every property, and there is a very select criteria where banks will rely on them in lieu of other types of valuations.
“There is always going to be a place for technology such as this, but for home buyers and sellers, the engagement of a certified practicing valuer and a real estate practitioner is necessary to provide context and place price estimates in perspective.”
This article was first published in the February 2014 edition of the REINSW Real Estate Journal.