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What is an AVM appraisal?

In recent years, a new electronic appraisal process has gained in popularity, especially with larger financial institutions. Known as “AVMs” or “Automated Valuation Models”, they are a type of software that can give a lender an estimated value range on a property just by having the lender key in some basic information about the property, most of which can easily be found in the local multiple listing service. These AVM data bases contain information which is derived from MLS and is used in situations where the borrower is putting a substantial down payment on the property and the overall credit profile and loan package is such that default is mitigated by those factors.

That is actually the primary reason a lender has an appraisal performed, anyway; to determine if the market value of the property is adequate to collateralize the mortgage. Most borrowers don’t actually understand this concept. While the home buyer may want to be assured that the property is worth what they are paying for it, and will be advised by their Realtor that the contract to purchase be made contingent on a satisfactory property appraisal, that’s not really the lenders concern. For example: suppose the home is selling for $300 thousand and the borrower is only taking out a mortgage for $150 thousand, half of the property’s selling price. The lender is only looking for enough value to protect their loan principal. In most cases that would be around $200 thousand. So an “exact” value is not as significant as it would be if the buyer was only putting a minimal down payment, or perhaps no down payment at all, on the home in the case of certain loan programs for first-time buyers. The loan versus the property value is known as the loan-to-value ratio and that’s really what the lender is considering in making the home buyer a mortgage. An “AVM” may in fact be more than adequate to satisfy their requirements.

By the same token, in many situations, again where the buyer is either putting a substantial down payment on the property, or refinancing their mortgage where the loan-to-value ratio (LTV) is quite low, lenders will often waive the requirement to have any kind of appraisal performed and go with the estimated value based on either the purchase agreement or whatever the local taxing authority’s “assessed value” is per the tax records. However, just because the lender isn’t requiring an appraisal to be performed, a prudent home buyer may wish to have one performed anyway and their buyer representative will typically suggest that and make the contract contingent on the “property appraising for at least the asking price” . (Or the contract may be re-negotiated.) These are all things that the buyer needs to discuss at length with their Realtor and be comfortable with in terms of making the offer to purchase and understanding the process.

Barbara Cunningham

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