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Valuation

Valuations 101

Optimizing Your Valuation Strategy to Maximize Profit and Minimize Risk By Kade Clark Over the past two years, the COVID-19 pandemic has accelerated the adoption of technology and digital processes across the real estate industry, from search to close. For investors, evaluating properties at scale locally, regionally, or nationally requires a technological edge. New valuation tools leveraging the latest advances in artificial intelligence (AI) and data science are making it easier for investors to make intelligent decisions based on data and insights. There is now a wide range of valuation types available to investors that can help reduce cost, streamline their processes, and more appropriately offset risk. The trick is to use the right tool for the specific scenario. That is why many investors leverage a “waterfall” of multiple valuation products arranged in a cascading order to create a balance of cost, time, and quality that is customized to the organization’s unique needs. This strategy is most beneficial when cost is a concern or constraint, when staff resources are limited or lack expertise, or when time and efficiency are critical. Let’s review the different valuation tools widely available in the market and where they might fit in an investor’s waterfall: Home Price Index A home price index (HPI) is a tool designed to measure changes in single-family home prices across a designated market. Some of the well-known legacy indices have been around for decades, but there are also newer indices that use modern methodologies to deliver faster, more accurate results. An example of this is the Home Price Index provided by homegenius Real Estate LLC, which uses the latest data science and analytical technologies to produce micro-market level insights based on the estimated values of more than 70 million unique addresses. Investors can use HPIs to understand trends in real estate markets and see pockets of investment opportunity and to build a portfolio that increases in value over time. The modern HPI can provide instant viewpoints on thousands of geographies, including ZIP codes. It can generate a custom index profile for any investor buy box and apply it across markets, provide early indicators of market changes, and can isolate the value difference by attributes within a geography to help identify areas where the cost to renovate an investment or rental property will generate an acceptable return on investment. Automated Valuation Model An Automated Valuation Model (AVM) applies statistical modeling to a database of historical property values and sales information to generate an estimated property value. The most popular modeling methodologies are based on average and median house prices, repeat sales or hedonic valuations. AVM results may vary based on the type of statistical modeling incorporated and also by the depth and history of data in the reference database. Because an AVM is entirely technology-driven, it can be the fastest and most cost-effective way to get a quick value estimate of a home. There is no fieldwork or analysis by an appraiser or real estate agent — which may reduce cost and time and decrease human bias and fraud risk. AVMs are also tested rigorously for accuracy. AVMs include a “confidence score” that indicates how close the estimate is likely to be to the final sale price. Because of their speed, AVMs are especially useful for bulk portfolio valuation analysis. Interactive Tools Since an AVM does not include an inspection of the subject property, it does not account for property condition — including any damages or recent improvements — in the price estimate. Simply put, an AVM will not be as successful if the property’s condition is significantly different from the surrounding comparables. In scenarios like this, an interactive valuation platform can provide a more detailed view of the property and comparables. These platforms give the user access to photos, maps, and other data simultaneously, leveraging thousands of data points to identify patterns that can be measured and translated. Unlike an AVM, an interactive tool lets users see the condition of the property and hand select the best comparables to reconcile and conclude an estimate of value. Technology and automation make interactive valuation platforms a quick and affordable option as well. Interactive tools with a rental analysis module can also be helpful to determine the ROI for a potential rental opportunity or help set proper market-rate rental prices. With visibility into comparable rental properties and their prices, interactive tools can provide a complete picture of the rental environment around the subject property. Broker Price Opinion A Broker Price Opinion (BPO) is an estimate of the potential selling price of a property that is performed by a local licensed real estate agent or broker. A BPO is typically done as an exterior drive-by but can occasionally include an interior walkthrough. The agent or broker will examine the property at a high level and leverage comparables and basic neighborhood information to develop an estimated opinion of price. Although the processes sound very similar to an appraisal, the main difference is the professional providing the valuation. Whereas a BPO constitutes the opinion of a real estate agent or broker, an appraisal represents a valuation provided by a licensed real estate appraiser. Incidental differences may include the extensiveness of the inspection, the level of analysis, and the regulations involved. For these reasons, a BPO is cheaper and typically will have a faster turnaround than a full appraisal or hybrid appraisal. Many investors are familiar with the BPO as it is commonly utilized for single-family rental due diligence because it offers speed and flexibility to get funding quickly. A BPO can be used in place of an appraisal in specific cases, such as a mortgage-backed security review, asset- or portfolio-management or other mortgage loan situations that don’t involve a credit decision. Hybrid Appraisals Hybrid appraisals—also sometimes called bifurcated appraisals or evaluations—split the property inspection and appraisal report between two separate parties. First, a property inspection is done by a third party, usually a local real estate agent. Then, they will report their findings to the

Alternative Investing

Hybrid Valuation Tools Are Making Remote Appraisals Easier for the BTR Market

Cost Effective Alternatives for the BTR Investor by Kade Clark Historically low interest rates and thin inventory of available homes to buy have pushed up home prices, creating a hurdle for Americans who want more space for working from home, remote learning, and maybe a treadmill to stay in shape. This combination of factors has attracted investors to the single-family rental market and forced some to create their own opportunities in the burgeoning build to rent (BTR) segment of the market. In the third quarter of 2020, construction started on roughly 14,000 rental houses, according to the National Association of Home Builders. That’s up 27% from the 11,000 homes built in the third quarter of the previous year. Accelerating BTR activity has put pressure on obtaining valuations at a time when social distancing requirements make in-person property inspections especially problematic. Fortunately, there are new and compliant alternative valuation tools that are making remote appraisals more efficient and reliable for the BTR market. Using Artificial Intelligence to Evaluate Value The Radian Real Estate Services Inc. suite of digital valuation services available from its Red Bell Real Estate, LLC subsidiary uses artificial intelligence to draw insights from nearly two billion real estate images to more accurately and quickly evaluate the value of residential real estate across the country. BTR investors typically shy away from ordering traditional appraisals due to the expense and turn time. The introduction of hybrid appraisals in the BTR space now fills that gap and provides other valuation alternatives that are cost effective. Through Red Bell, Radian offers interior and exterior Amplified Appraisal Reports (AAR) and Appraiser Reconciled Broker Price Opinions (ARBPO). The difference between the two is that the AAR includes a property inspection completed by a local real estate agent while the ARBPO begins with a Broker Price Opinion (BPO) completed by a local agent. An appraiser then reviews the information and determines the market value using Radian Interactive Value (RIV) which is integrated with the products.  Radian’s subsidiary Red Bell is a member of more than 400 MLSs nationwide, most of which update their feeds every 15 minutes for close to real-time information. The RIV runs the subject property through a similarity index and provides the appraiser with 20 of the closest comparables in terms of property characteristics, distance, etc. for three categories of property—sold, listed and under contract—for a total of 60 comparable properties, if available. The appraiser has the ability to review all photos associated with the comps as well as their listing history and choose those that best align with the subject property. The appraiser can also expand or reduce the market area and enter specific filters in order to narrow the comparable selection. These hybrid appraisals are both Uniform Standards of Professional Appraisal Practice (USPAP) and The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) compliant and are completed by appraisers who are licensed and/or certified in the state of the subject property’s location. The turn time for hybrid appraisals is similar to that of a regular BPO—about five business days—and priced in line or just slightly above that of a BPO depending on the product. Unique Challenges with BTR Valuations In the BTR space, appraisers are well equipped to handle the valuation for properties that have yet to be built because their rigorous training allows them to identify comparable market alternatives that are similar in quality of construction, design, location and overallcharacteristics. They have the knowledge and ability to review builder floor plans, build-out amenities, and locational influences in order to select the most appropriate comparable sales. In some instances, the client is the sole development in a community and doesn’t market the properties for sale but instead creates a rental market within the community. As a result, identical development market transactions are not available. When that is the case, an appraiser completing the ARBPO and/or AAR can look to adjacent developments in the area for market data. They can locate and utilize sales with similar locational appeal, similar access to retail, commercial development, and recreational activities. Additionally, they can select sales that are comparable to the subject property in characteristic similarities. In most cases, they are able to bracket main features/amenities in a pair-sales analysis approach with positive/negative, and weigh consideration for differences that impact value. With large-scale BTR communities popping up across the country, the challenge for investors and appraisers is in accessing the enormous range of information necessary to make an accurate property valuation. This challenge is compounded by the public health crisis that makes in-person analysis difficult or impossible.  Fortunately, the new digital valuation tools available now can streamline this process and make alternative appraisals accurate and cost effective even when done remotely. 

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