An Automated Valuation Model (AVM) is an algorithm that uses statistical methods to value properties.
1.0: What are International Valuation Standards: International standards for international markets
International Valuation Standards (IVS) serve as the key guide for valuation professionals globally to underpin consistency, transparency and confidence in valuations.
IVS are central to the IVSC's mission to raise standards of international valuation practice as a core part of the financial system for the benefit of capital markets and the public interest.
IVS 104- Section 30.3
"The Market Value of an asset will reflect its highest and best use. The highest and best use is the use of an asset that maximizes its potential and that is possible, legally Permissible and financially feasible. The highest and best use may be for continuation. of an asset's existing use or for some alternative use. This is determined by the use that a market participant would have in mind for the asset when formulating the price that it would be willing to bid".
2.0:IVS 105 - Section 10.4: Valuation Approaches and Methods
Market Approach, Income Approach and Cost Approach
Valuers are not required to use more than one method for the valuation of an asset,
Particularly when the valuer has a high degree of confidence in the accuracy and reliability of a single method. More than one valuation approach or method may be used to arrive at an indication of value, particularly when there are insufficient factual or observable inputs for a single method to produce a reliable conclusion. Where more than one approach and method is used, or even multiple methods within a single approach, the conclusion of value based on those multiple approaches and/or methods should be reasonable and the process of analyzing and reconciling the differing values into a single conclusion should be described by the valuer in the report" (IVS).
Almost all Residential AVMs use the 'Market Approach' exclusively.
2.1: Valuation Model (S.90)
IVS effective from 31st January 2022 defines valuation model as:
(S.) 90.1. A valuation model refers collectively to the quantitative methods, systems, techniques and qualitative judgments used to estimate and document value.
(S.) 90.2. When using or creating a valuation model, the valuer must:
(a) Keep appropriate records to support the selection or creation of the model, (b) Understand and ensure the output of the valuation model, the significant assumptions and limiting conditions are consistent with the basis and scope of the valuation, and (c) Consider the key risks associated with the assumptions made in the valuation model.
(S.) 90.3. Regardless of the nature of the valuation model, to be IVS compliant, the valuer must ensure that the valuation complies with all other requirements contained within IVS.
2.2:(IVS 105-Section 20.5)
When comparable market information does not relate to the exact or substantially the same asset, the valuer must perform a comparable analysis of quantitative and qualitative similarities and differences between the comparable assets and subject assets should be performed. It will often be necessary to make adjustments based on this comparative analysis. Those adjustments must be reasonable and valuers must document the reasons for the adjustments and how they were quantified. (IVS 105-S.20.5).
2.3: (IVS Paper on Residential AVMs dated 30 November, 2022-Page: 16)
Can a Residential AVM incorporate different valuation approaches and methods with any level of reliability?
Almost all Residential AVMs use the 'Market Approach' exclusively. In selecting the valuation approach (es) and methods for an asset there are several factors that should be considered, one of which is "the availability of reliable information needed to apply the methods. In many markets around the world such as parts of Africa, South America and India would be unable to use a Residential AVM as the data available within these markets both in terms of quality and quantity is either unavailable or insufficient to produce accurate results. This is further highlighted in IVS 105-Section.
2.3.1:Valuation
The act or process of determining an opinion or conclusion of value of an asset on a stated basis of value at a specified date in compliance with IVS. (Glossary, Section- 20.24, IVS effective from 31 January, 2022).
2.3.2:Value
The opinion resulting from a valuation process that is compliant with IVS. It is an estimate of either the most probable monetary consideration for an interest in an asset or the economic benefits of holding an interest in an asset on a stated basis of value. (Glossary, Section- 20.29, IVS effective from 31 January, 2022).
2.3: (IVSC AVM paper dated 30 November, 2022)
The definitions ut-supra refer to 'an opinion' or conclusion of value that is compliant with IVS. The current state of development of Residential AVM does not unequivocally support the position that a Residential AVM can ever produce an 'opinion,' or 'conclusion' of value without the input of a valuer's professional judgement. (IVSC paper 2022).
3.0: The European Standards for Statistical Valuation Methods for Residential Properties (ESSVM)
Effective as of 1 March 2022.
Valuation Methods are Surveyor's Valuations, Semi- Automated Valuations, and Statistical Valuation Methods.
There are four main types of Statistical Valuation Methods:House Price Index, Single Parameter Valuation, Hedonic Models (also called 'Hedonic AVMs'), and Comparable - based Automated Valuation Models (also called Comparable Based AVM or simply 'AVMs').
Statistical valuation models are Hedonic Models and Comparable-based AVMs.
Advanced Statistical Models are Automated Valuations 'Comparable Based AVMs'.
In the Valuation of real estate as collateral for a lending institution, Market Value is defined as:'market value' means for the purpose of immovable property, the estimated amount for which the property should exchange on the date of valuation between a willing buyer and a willing seller in an arm's-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion"4.
For VAT purposes Market Value is defined as:
'Open market value' shall mean the full amount that, in order to obtain the goods or services in question at that time,a customer at the same marketing stage at which the supply of goods or services takes place, would have to pay, under conditions of fair competition, to a supplier at arm's length within the territory of the Member State in which the supply is subject to tax'.
If statistical Valuation Methods are employed to estimate other Bases of Value, for instance market rent or investment value,it must be clearly stated what Basis of Value a Statistical Valuation Method is set up to produce. If the definition of Market
Value deviates from that of the EU legislation above, this must be clearly stated also.
3.1:Property-Specific Valuations
It comprise Valuations that are performed for specific properties taking into account their individual characteristics, including their precise location, i.e., address or geo coordinates. Specificity of property location and Property Characteristics is achieved if a statistical model takes into consideration the individual characteristics of each subject Property, instead of an aggregate over a larger set of properties.
Statistical Valuation Methods which are able to provide Property-Specific Valuations are deemed to be Advanced Statistical Models.
Bench Mark Value is "The property value against which the Accuracy" of a Statistical Valuation Method is measured. And This may require removal of certain pieces of information by the provider of a Statistical ValuationMethod before running the test or removal of certain cases by the AVM user after the test. Blind testing is critical to meaningful Accuracy assessment.w
Bulk Test
The provider of the Statistical Valuation Method still ensures that these be Blind Tests by not using the Benchmark Value for the purpose of computing the result, but the user has to take this on trust and has no way of validating the integrity of the test. This is the main disadvantage of the Bulk Tests, their main advantage being the ability to source very large samples and conduct very specific analyses on cases with only certain given characteristics.
Blind Test
This may require removal of certain pieces of information by the provider of a Statistical Valuation Method before running the test or removal of certain cases by the AVM user after the test. Blind testing is critical to meaningful Accuracy assessment.
4.0:Conclusion
(IVS paper) ……….A fully automated Residential AVM with no valuer interaction is not IVS compliant for the following reasons:
"There is no valuer involvement in either the creation of the model or the output; it does not include the valuer's judgement of the model noting that a valuation is defined in IVS as the act or process of determining an opinion or conclusion of the value of an asset on a stated basis of value at a specific date in compliance with IVS and a residential AVM is unable to provide opinion on value".(IVS)
(*) International Practitioners attitudes towards AVMs in 2008: 71% of the valuers agreed that AVMswere inadequate for loan valuation as a result of no physical inspection, 87% of the valuers agreed that physical valuations were more accurate than AVMs, as a result of local knowledge, and 90% of valuers agreed that the ability to evaluate comparable was a major advantage over AVMs. (*) Institute of Professional Auctioneers and Valuers, Dublin, Ireland. (IPAV) Annual Valuation Conference 2017 – Automated Valuation Models: a brave new world.
Valuation Regulators of the Governments are expected to instruct lending Institutions, Institutional Investors and Rating agencies for primary Valuation opinion from registered valuers.
As reported universally an AVM is an estimate and should not be confused with a valuation from a registered property valuer. It provides an estimate of current value, plus a Forecast Standard Deviation (FSD) which is a measure of the accuracy of the estimate. The lower the FSD, the more confident the AVM is of the estimate. The price range as being the AVM ± 1 FSD, For example, an AVM of ₹ 60,00,000/- with an FSD of 10% would mean, the concerned property value would be between ₹ 54,00,000 to ₹ 60,00,000/-.
International Governments Valuation Regulatory Authorities are expected to protect the judicial rulings that "a human valuer is an expert and his opinion is an expert opinion".
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