Fast and Accurate Valuations Are Key for Real Estate Investors

New and Improving Tools Are Arriving Just in Time by Katie Brewer In a buyer’s market, the advantage goes to the purchaser who can make a wise decision faster than other potential buyers. So, for investors in today’s market, time has become the crucial obstacle to success. Some have called it a modern-day Gold Rush, and just as in olden days, prospectors who can sift through the national inventory of properties faster and spot the hidden nuggets more clearly are the ones who will prosper. The combination of historically low interest rates and shifting demographics has triggered a buying spree in single family homes that has accelerated during the coronavirus pandemic. As a result, inventories are low across the country. According to the Radian Home Price Index, there are currently 40 percent fewer homes on the market, on average, than any time over the past decade. High demand and low supply have inevitably driven prices skyward. During the month of April, the Radian Home Price Index rose 10.4 percent, with the median home in the U.S. now costing $277,365. But perhaps the most illustrative measure of the real estate market’s velocity is the time between the listing of a property and a pending purchase offer. According to Zillow, in April, nearly half (47 percent) the homes for sale in the United States were on the market for less than a week before going under contract and more than three quarters (76 percent) were on the market less than a month. Evaluating any property in days—or even hours—adds a level of risk that many would be unwilling to take in a normal market. Doing it at scale locally, regionally, or nationally requires either a prospector’s instinct or a technological edge. Most choose the technology. AVMs, AI, Machine Learning One solution is to use an automated valuation model (AVM) that applies mathematical models to a database of real estate information such as current and historical prices, number of bedrooms, and property improvements. With an AVM you can run estimated values on properties in a matter of moments. When a new property hits the market, an investor can quickly identify its essential characteristics and make a judgment about its suitability for their real estate portfolio. But AVMs are only as good as their data inputs. While they have the potential to deliver objective valuations without human bias, most models analyze data that has been collected in-person, and that can result in a distorted valuation. This is most consequential when the owner of the property is a member of a historically marginalized group. According to the Urban Institute, a Washington, D.C.-based think tank focused on social and economic policy research, AVMs have produced larger pricing errors in majority-Black neighborhoods than those in majority-white neighborhoods, “potentially contributing to the wide housing wealth gap between Black and white homeowners.” To correct for bias, AVM operators often look for ways to expand or augment the data sets their model is analyzing. The more data that is available, the more accurate the final analysis will be.  But a new approach, using artificial intelligence (AI), promises the fastest and most accurate analysis and valuations short of an in-person inspection. Modern AI can analyze an enormous amount of structured data such as price histories, property attributes and surrounding market data, but also unstructured data like photographs, floor plan sketches and text or speech.  Analysis of images in particular can help to establish the condition of a property and objects that differentiate value using consistent and repeatable tools without the in-person challenges. These tools can also evaluate newly built properties that have no price histories or recent comparables.  One of the most intriguing benefits of AI and Machine Learning (ML) is a model’s ability to refine and improve the process of identifying the best sales comparables to help establish a current price. Reinforcement learning allows models to improve accuracy simply through use and more data. And, unlike the human-based valuations, models can be independently tested in very large samples to ensure bias and other unintended consequences are limited or mitigated. Considering how many billions of photographs of properties there are on MLS listings nationally alone, the possibility of “better than in-person” accuracy through AI is a very real possibility.    The real estate Gold Rush shows no signs of diminishing. The Commerce Department recently reported that the median price of a new home sold in April of this year was 20.1 percent higher than a year earlier, the strongest annual gain since 1988. At the same time, the majority (54.6 percent) of homes in the middle price tier and almost half (48.0 percent) of homes in the top price tier went under contract in a week or less, up 60 percent and 71 percent year-over-year, respectively. Just like prospectors for gold, Investors looking for fleeting opportunities in this scorching hot market need faster and more accurate ways to judge the true value of their finds. Fortunately, new and improving tools are arriving just in time. 

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Valuing Your Rental Opportunities

How the Industry is Shifting to Help Investors Reduce Their Risk by Frank Guarnera After what has been a unique year to say the least, the future is looking like it may be ripe with opportunity and risk. Which is why it is so important to understand your assets now more than ever. As we may have some volatility or changes over the next year, it will be important to understand long term investment potentials. Anticipating this, the valuation industry has continued to evolve to provide solutions that can deliver valuable intel to help investors make more informed decisions. By integrating local rental data into traditional valuation products, it helps paint a clearer picture of whether an asset may be better suited as a short-term or long-term investment, or one to avoid altogether. Understanding the intrinsic value of a property is the cornerstone of the decision-making process along with knowing your Net Operating Income and Capitalization Rate. Several different products are available in the industry to provide important data in addition to the typical FNMA 1004+1007. The Desktop Appraisal Desktop appraisals, sometimes referred to as hybrid appraisals have been available to home equity lenders, servicers, and loss mitigation for several years. These products are fast becoming the preferred valuation tool with private lenders for fix and flip, long term lending and single-family rentals. While the products have a lower price point and faster turn times, the reliability and quality are on par with traditional appraisal products. Many of these desktop appraisals are USPAP (Uniform Standards of Professional Appraisal Practice) compliant and the data contained in them is much more user friendly than the traditional GSE format. The desktop appraisal bifurcates the appraisal process by leveraging a third-party data collector and the expertise of the local appraiser creating significant efficiency resulting in quicker turn times and lower appraisal cost without sacrificing quality. Valuable insight is also gained when these products provide additional forecasting data that considers both historical data trends and economic factors. This allows you to get a general idea of the expected appreciation/depreciation in an area. Combining all this data in an easy-to-read format helps investors make better informed decisions on these types of long-term decisions. Knowing the market value of the asset will help direct your investment strategy. Is this an asset I should sell now, rent for a period, and then sell, or keep as a rental property indefinitely? A desktop/hybrid appraisal can help answer those questions for less money and time than a traditional appraisal without compromising the quality. The Broker Price Opinion A Broker Price Opinion with a rental addendum has also shown to be a reliable source of information. In many situations, they are used as a low cost and fast resource to secure an inspection, property data, and rental information for the area. Leveraging the expertise of a local real estate agent, these are a valuable resource for anyone looking to secure more relevant data and get feedback from an agent in the area. By also receiving a BPO, you are gaining insight about the asset itself. With the rental addendum, you can pull in intel to perform a market-extraction which can help inform a reasonable capitalization rate for the area and your property. AVMs for Rental Market Trends Rental AVM’s have also continued to improve and can provide good insight of rental market trends. A robust dataset that can provide both historical and current rental trends can help establish what would be a credible rent price for an asset which will in turn, when combined with a property valuation, can help shine light on how good the investment may be based on the equity in the property and the future potential of the area. These will typically require you to do much of the deep diving but to the savvier investor, these tools have shown to be valuable. When it comes to identifying potential rental rates, there can be many challenges as the rental market is less liquid and transparent than the traditional real estate market. Rental data continues to become more reliable, but validation remains an important component of rental valuations. Getting a clear picture of what is occurring in the local market is a powerful indicator of what local market renters are interested in, willing to pay, and how long they stay. Further investigating vacancy rates and other value influencing features is paramount in reducing risk for long term investment strategies. Focus on what is going on in the local area regarding city migration and real estate development, inventory, economic conditions, and overall rates of appreciation. Do not let a lack of data be the reason you miss out on a great property or choose a strategy that does not yield the best return. Valuations continue to be an essential component with investment properties and there are a host of products to get you the information you need to make the best decision.    

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