Using an REO AVM in Conjunction with an Inspection Report
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Using an REO AVM in Conjunction with an Inspection Report

August 17, 2012

As stated in previous ValueNation columns, a reputable real estate-owned (REO) automated valuation model (AVM) is a great way for servicers and lenders to monitor valuation ranges for default properties in order to minimize loss severity and mitigate underselling. It is one of three widely recognized approaches for determining property value, with the other methods being an appraisal or broker price opinion (BPO). While all three are trusted methods, the REO AVM has proven to be objective and the least expensive.
This final column on REO AVMs will focus on coupling periodic property condition inspections with a quality REO AVM as a cost-effective and critical means for maximum return and reduced holding times. While a common assumption is that an REO/default property is typically in bad condition, in reality, its condition can run the gamut and may range from being in stellar condition, to moderate condition, to neglected condition.
A standard AVM considers the subject property to be in “good condition” as the model is not designed to verify the property’s current state. Obviously, the “good condition” applied in general terms is not going to apply to every property being valued by an AVM. Property condition can vary widely and the impact of this is definitely amplified when a high number of REOs are present.
The simplest and most effective way to verify property condition is with a ... you guessed it ... property inspection. A good inspection report will provide a detailed view of the subject property along with the prevailing conditions of neighborhood properties. Pairing it with a traditional AVM enables a higher level of informed decision-making. But when the subject property itself is an REO, the single-point value may still be insufficient. What if the property is in good condition but the neighborhood is run down? Or it is in poor condition but the neighborhood looks good? How does one reconcile these factors without ordering a full appraisal?
An REO AVM, specifically built for this scenario, is the best answer. A good REO AVM will provide several valuation points reflecting different stages of property condition in the neighborhood. REO AVMs not only provide the value points, but they derive these value points from neighborhood specific information. This is essential because the discount for “fair condition” in one community is likely to be a very different amount than in other communities based on factors, including price trends, neighborhood conformity, school districts, etc.
Some assume that an online mapping service can be used to determine property condition, but these typically show an outdated condition and a limited viewing area of the property. Utilizing a condition report on a regular basis following the review of an REO AVM will provide the clearest picture possible for providing an accurate reflection of the property condition to servicers and lenders.
David Rasmussen is senior vice president of operations at Veros Real Estate Solutions. For more information, call (714) 415-6300 or visit Veros.com.

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