DID I GET YOUR ATTENTION? If your first reaction to the title ran along the lines of "that must be a misprint," then read on. [paragraph] Property valuation in the United States is a fascinating ecosystem. By my rough calculations, we spend more than $3 billion each year creating and reviewing appraisals. Yet many participants in the ecosystem rank property valuation among their top concerns.
Innovation in property valuation methods is virtually nonexistent, as it is essentially precluded by regulations that only permit limited types of valuations for financial transactions. I won't recount here the dissatisfaction expressed by real estate agents, borrowers, appraisers, appraisal management companies (AMCs), lenders, regulators, insurers, ratings agencies, private investors and agencies--because it is already well known to industry participants.
But I will make the bold assertion that it doesn't have to be this way. Really.
There is a future state within our reach where well-respected, professional appraisers can quickly and consistently deliver property valuations that meet the guidelines of all downstream stakeholders. A future where appraisal reviews are extremely limited and valuation-related repurchases are virtually eliminated. A future where we leverage data, analytics, technology and experts as needed to each do what they do best.
Silos and incomplete knowledge exchange
At the root of much of the dissatisfaction with property valuation are two factors. First, the creation of the appraisal, establishment of review criteria and review of the appraisal all occur in silos. Second, only a small fraction of the relevant knowledge is exchanged among participants:
* Borrower--Typically with the assistance of a real estate agent, the borrower reviews homes listed for sale, visits homes of interest and establishes an offer to buy based on the current choices and his or her preferences. This knowledge gathering happens outside of the lending ecosystem. Once the offer is made, the only information provided to the appraiser is the sale contract with information on the sale price and any concessions.
* Appraiser--The appraiser independently determines the best data source and the tools needed to complete the assignment. The appraiser uses his or her self-selected tools, considers all available data and leverages the appraiser's local market knowledge to create the appraisal. Only a fraction of the knowledge created and used...