The Impact of Digital Appraisal on Investment Property Valuations
The Benefits of Property Data Collection
By Mark Walser
The valuation of investment properties in private lending has and will always be one of the most critical aspects of investment property transactions. However, in recent years, getting accurate and timely valuations has become more challenging due to many factors.
Perhaps the most significant factor is the growing appraiser shortage, which is largely due to retirement. As it stands now, this issue will only intensify. According to the U.S. Bureau of Labor Statistics, the median age of appraisers is 53. In 2023, the Appraisal Institute reported that over 66% of appraisers are over the age of 50 and only 7% are under the age of 35. This reveals the compounding issue: Not only are appraisers aging out, but trainees are not rising in enough numbers to replace them.
Investors should understand that this problem has been building for the past 10 years and is systemic across the entire lending industry, from GSE forward mortgage lending to every other part of the profession.
Further exacerbating the situation in private lending is the fact that the appraisals in the REI space tend to be more complicated than the standard Fannie Mae 1004 SFR appraisal used in a conventional real estate loan. Often, the appraisals in investment/rehab properties will need more complex analysis, two values for “As Is” and “As Repaired” value, and require deeper knowledge of factors like rental value and building/flip considerations that many appraisers do not specialize in.
Paired with accelerating retirements, this limits the number of appraisers that can serve investor loans in many areas, creating chokepoints for price, turnaround time, and quality in the appraiser availability. An easy visual of this paradigm can be seen in the GSEs’ tracking of appraiser capacity. As demonstrated, the number of active appraiser licenses has decreased significantly, which is driving the need for change.
Appraisal bias is another huge issue for regulators, and they want to see appraisers and lenders address the issue along with mitigating high fees and turnaround times for borrowers.
What is the solution to these issues? The answer is appraisal modernization.
The technology underpinning appraisal modernization addresses much of this concern by giving the appraiser immense property data to review and allows them to create a valuation without physical interaction with a potential tenant.
As the market recovers, the appraisal industry is transforming to use 3D imagery, location-based data collection, and AI to reduce turn times, enhance property risk mitigation, and reduce the need for appraisers to physically visit properties. The technology is able to create detailed interior and exterior imagery and virtual tour walk-throughs of homes and identify home condition and quality along with amenities and finishes in a consistent manner.
The term “appraisal modernization” often refers to any combination of this data collection paired with a property appraisal waiver decision, or paired with a full appraisal analysis done by a licensed local appraiser who resides at their office desk and uses the entire data packet to create an appraisal report on the Hybrid or Desktop Appraisal forms. It is important to note that these appraisals are considered “Full” appraisals and are equivalent in analysis to the traditional 1004 URAR appraisal, often with even better data.
The timing for investors couldn’t be more fortuitous, as appraisal modernizations initiatives are being created and enacted across the industry to combat the same issues outlined above. From mitigating appraisal bias to solving for a worsening appraiser shortage, appraisal modernization is touching every stakeholder in the housing industry. The impact of these changes flows downstream to benefit every lending sub-market.
The way this works in the case of a normal appraisal or a pre-rehab property is that a property data collector visits a property with their smartphone and specialized software from the appraisal provider. Depending on the technology available to them from the appraisal provider, property data collectors can use software applications and their phone’s cameras to capture 3D imagery from the exterior and interior of the property.
Some physical 3D captures can generate up to 900 HDR-quality images per capture, along with a virtual tour that is like an interactive walkthrough of the entire home.
On top of that, the data collector also captures vital information about the property’s condition, quality, and amenities on a form. Everything from the type of utilities present to the condition of the cabinets, to deficiencies or remodel specs are captured in detail, room-to-room, for the appraiser to use.
Crucially, the technology used in these captures uses the LIDAR technology and photogrammetry built into today’s smartphones to accurately image the interior spaces of the home, and software can build out an extremely accurate floorplan complete with labels and square footage that follow ANSI standards.
The combination of the imagery, 3D tours, condition/quality data, and the floor plan give the appraiser and the lender a “data packet” that immerses them in the property.
The Benefits of Property Data Collection
So, what is the result of this process applied to a two-value appraisal report (pre- and post-rehab) for an REI property?
The first benefit is the speed of inspection and appraisal delivery. The daily carrying costs of investor loans are significantly higher than conventional mortgage loans, and the faster the appraisal process can be finished, the more money that is saved by all parties.
Today’s leading providers can get inspections and data collections of homes done within 48 hours or less after receipt of order, with the majority being next day inspection if the property contact is available. The inspection takes approximately one hour to complete and captures everything at the site, both exterior and interior.
A local appraiser can take the data packet and view the pre-rehab condition of the home, provide an “As Is” value and factor in the budget to provide an “As Repaired” value. This process can be consistently completed in two to three days by prepared, local appraisers who await the data packet. This brings a consistent appraisal experience with a turnround time that is typically in the three-to-five-day range, due to the appraiser not having to physically visit the property every time.
The second benefit is the insulation of the entire process against industry’s busy periods. That three-to-five-day appraisal process would be able to be held in periods of heavy activity when the traditional appraisal process gets taxed. Because the property data collector is always available for a quick inspection timeframe, appraisers can receive the inspection and provide an opinion of value much more quickly. It scales the industry capacity in an unprecedented way. Anyone who was doing business during the pandemic remembers these appraiser capacity issues and the disaster they caused throughout the lending industry. This technological process is the solution to that problem.
With the entire appraiser industry seeing a 25% reduction in capacity since mid-2022 due to retirements and other factors, scalability will be needed to ensure appraisals in every lending segment, including REI, can still be done in time.
The third benefit is risk mitigation for the lender. Certainty of the property’s condition is provided to the lender upfront. Lenders have access to what the appraiser sees, the entirety of the 3D imagery and floor plans, and all the photos. This enables private lenders to make early draw funding decisions to their best customers, based on an unbiased assessment of the property’s true condition.
Lenders can easily reconcile budget items that borrowers submit by simply looking at the items in question on the property data packet and agreeing or determining that they need to be replaced or repaired. And when the rehabilitation is complete, everyone can see how the repaired property stacks up against the original appraisal and repair budget. The same resources that did the property inspection imaging could also be used to verify the completion of construction phases, or work with the appraiser to provide full imagery of the completed property in the event they are not available for a final walk through.
The advancement of digital appraisal technology provides amazing benefits to investment property owners and investors, arming them with the certainty of property condition that stakeholders are counting on for the future of the lending industry. The benefit to appraisers and lenders is clear with the massive data enhancement, imagery, and consistency of results the digital property imaging and data collection provide. Investment property buyers and investors should prepare for the anticipated next wave of high-volume production by incorporating these digital valuation assets into their lending businesses now.
I encourage every investor and lender reading this to learn more about these modern appraisal processes, and incorporate them into your workflow this year, and ensure you have vendors that can deliver the components of the modern appraisal from end-to-end.
