Chris Fairfax, managing director, Positive Lending
In a digital world, the automated valuation model is the future of valuing property collateral at various stages of the mortgage
Existing users are increasing applications for data output that
could include origination, point of sale, surveyor audit, rental value auditing, fraud detection, portfolio management and risk assessment. New users are signing up too; in the past six months TSB and Foundation Home Loans have added Hometrack as provider of AVM services.
In terms of lending, rather than post-completion risk assessment many utilise AVM data to assess security valuation for a remortgage or further advance lending, where a traditional surveyor inspection has been carried out for purchase.
Within short-term property lending, both Precise and Shawbrook have adopted the AVM for remortgage and purchase, the former increasing maximum property value permitted from £500,000 to £1m in 2017.
Generally, AVMs are used for low LTV, low or middle market value and where plentiful comparable data can provide a strong confidence level, the data being comparable purchase price, marketing price and surveyor opinion. As with any statistical model, reliability of data will become stronger as quantity increases and correlation between subject and comparable data is better understood.
AVMs offer considerable advantages to traditional reporting but may carry additional risk. The two key advantages being speed and cost, AVMs are immediate and cost between £20 and £100. Cost savings are always useful but the greatest benefit is increased speed of decision at point of sale, which will hasten conversion and offset the longer application process caused as a result of more robust client data gathering post Mortgage Credit Directive.
The greatest challenge with automation is obvious: nobody actually visits the security. This poses a number of credit risk and regulatory issues that could lead to a substantially lower property value than that provided by the AVM, opinion suggests, and increased exposure to mortgage fraud. Important application information is much harder to validate, which could leave lenders exposed to greater risk, from simple things such as occupancy and condition to more complex matters such as presence of invasive plant species or structural defects.
Jane Benjamin, head of relationship management, Sesame and PMS
When we talk about financial advisers ‘having the conversation’, we are usually referring to the need for protection cover to be discussed and considered, so that customers are insured against the risks associated with taking on debt.
The need to discuss different types of valuation survey may not immediately resonate in the same way but, on closer inspection, the parallels are there.
This isn’t to say that AVMs haven’t been successful and do not have a role. They have helped to speed up the mortgage process, particularly remortgages. However, they have limitations.
While AVMs can be adequate for standard properties in urban areas where data is plentiful, they become less accurate where data is scarce, such as in rural locations and for unusual types of property. Furthermore, as there is no physical inspection, issues such as condition and appeal may not be fully reflected in the valuation. AVMs can also struggle in volatile market conditions.
Along with these risks, there is another key point for the purchaser to consider: do they really know what they are buying? After all, the automated valuation is primarily for the lender’s benefit and purposes rather than theirs.
The only way to reduce this risk is by the adviser informing their client about the full range of survey options. This is particularly important in respect of older properties, where only a physical survey will uncover potential problems that lie hidden beneath.
This is why advisers need to go beyond any reliance solely on AVMs and discuss all the options available. It should simply be part of the broader conversation, which considers the full range of customer needs and risks.
Think of it as property purchase insurance against a potential building defect that may emerge further down the line, in the same way advisers think about protecting the customer against the financial impact of serious ill health.
Ultimately, it is for the customer to decide whether to opt for an automated or physical valuation, but they can make this decision only if they have been fully informed. It’s our moral responsibility to do so.