Wednesday, August 20, 2014

Understanding the Buzz about MLS-based AVM

Building AVMs using the Multiple Listing Services (MLS) data – closed sales as well as seasoned listings – is often thought to be a smarter route in light of its cleaner and more up-to-date data. 

However, those who advocate that fail to understand that the MLS provides nothing more than a sales database, and as a result any AVM developed as such could not be effectively applied to a population outside of the MLS listings. Here are some of the reasons why the MLS-based AVM’s could fall short as a full-cycle AVM or a CAMA model while applying to a non-MLS population:

1. MLS Sales Data do not Communicate with Vendor Population Data: An automated valuation model by itself is not very useful unless it is applied on to a large population. In the public sector, a form of AVM, known as the mass appraisal modeling, is frequently used by the assessing jurisdictions to generate assessment rolls. Since those jurisdictions collect, maintain, and warehouse their own property data, there is an inherent disconnect between their data variables and formats and those of the MLS’.

In the private sector, financial institutions – local to regional to national – use AVM values in the front-end (origination), in the mid-end (portfolio management), and in the back-end (collections and foreclosures). Considering the cost effectiveness, AVM houses tend to acquire their data, population as well as sales, directly from the source, meaning the assessing jurisdictions and reformat them in-house using their own unique formats. 
The MLS sales, once recoded, are also available from those jurisdictions. Those financial institutions do not buy sales data, instead they buy AVM values from the AVM houses in line with their aforesaid requirements. Again, given the huge disconnect between their data and MLS', the AVM houses develop their models using their in-house sales data and then apply them on to the respective populations to generate values. They are judged not only on the effectiveness of their values, but also on the hit rates so they need to continually update their inventory. To be competitive, they also need to comply with the rigid industry guidelines and requirements, e.g., S&P and OCC.

2. MLS Sales Alone will not Generate a Representative Sales Sample: While it would be almost impossible for the AVM houses to depend exclusively on the MLS sales to build models and then apply them on to their populations, many assessing jurisdictions use recent MLS sales in their model-building process to bolster the recency of their modeling sales sample. 
However, the recent (the lag between the sales closing and recording) MLS sales alone would be totally inadequate considering the sales sample must also be a representative sample of the population.

3. The MLS Sales Universe is a Subset of the Overall Sales Market: Not all owners list their properties for sale with the MLS. Many are sold directly, through organizations like For Sale By Owners (FSBO), and by other non-member brokerage houses. The high-end properties are often marketed via specialty brokers who tend to be non-members. Consequently, in addition to the aforesaid sampling error, models built off of the MLS sales only will introduce serious bias at the point of application.

4. The MLS Data are Proprietary: Except for the basic sales information (sale price, sale date, validation), the use of their property data (other than for sales promotion by their network members) requires express written consent from them. Knowledgeable practitioners and consultants in related fields like mass appraisal and AVM are aware of those copyright restrictions and tend to avoid such infringements, although the MLS data are cleaner and more up-to-date including the interior data as they are professionally collected by the members with an eye for the competing details and special upgrades. 
Of course, even if those interior data variables are inadvertently used in a model, that model could not be effectively applied on to the non-MLS population from the national data vendors as their databases rarely incorporate such detailed interior data (please read ‘Do You Need Interior Data to Build a Better Residential AVM’ in my first book entitled ‘How To Build a Better Automated Valuation Model’ for more details).

5. Generic MLS-based AVM is Not in the Best Interest of the MLS: While AVM is an econometric solution, the MLS listings are originated by the realtors using a very subjective process called comparative market analysis (CMA). If an AVM is developed with the recent MLS sales and then applied on to their current listings, the deviations between the currently listed prices and the AVM values would be difficult to explain to the clients, creating serious confusions in the marketplace. 
For example, if property X is listed for $480,000 while the new MLS AVM value comes at $420,000, it would put the listing broker on the defensive and would offer a comparative advantage to the buyer’s agent. Conversely, if the numbers are transposed, the seller would feel terribly shortchanged due to the listing agent’s inefficient CMA which could easily result in the cancellation of the listing. In view of these potential conflicts, most listing brokers would be opposed to the MLS-wise AVM’s. Any deviation, positive or negative, would not be conducive to their client relationship. 

In late 2009 National Association of Realtors, announced a new national AVM initiative called Realtor Valuation Model (RVMTM) to build their version of AVM which they consider would eventually become the “gold standard.” In building their AVMs, they would be sourcing the data from multiple external sources as well as MLS’ own internal and proprietary data.
Of course, an MLS-based AVM could be of immense help if it is developed by the MLS using their recent sales and listings data, frequently updated, and continually applied to their incoming listings to validate all CMA’s. Thus, in addition to producing the econometrically-equalized starting values for all listings, the seller would be provided an opportunity to evaluate both CMA and AVM values simultaneously before committing to the contract. 
This independent validation would provide an added comfort to the seller, while reducing the valuation risk for the listing broker. Needless to say, this addition would be the risk-managed highest and best use of their proprietary data, creating an unprecedented union between the wholesale (AVM) and retail (CMA) values within the same environment. 


Sid Som MBA, MIM
Homequant Inc. 

Note - This book is available on Kindle (Amazon - query 'Sid Som').

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