Friday, September 19, 2014

How to Evaluate an AVM Vendor

Since AVM has now been around for a while, the vendor market is predictably quite crowded too. Those vendors not only cater to the mortgage industry (origination to portfolio management to collections and foreclosures) but they also supply their values to a host of other financial servicers, as well as to a growing list of public agencies including the department of assessments, assessment reviews, state equalization boards, and small court systems.

Given the growing need for the AVM values and a crowded landscape of their providers, it is critical to understand how to evaluate them before entering into a lengthy contract. While AVM values could be wide-ranging, for the purpose of this book, focus will be on the mass-modeled values. Additionally, the vendors who openly resell a mix of 3rd party values (without the hide-and-seek of the private labeling) to compliment their other product lines are also outside the scope of this book. Here are the points of safeguards one must consider:

1. In-house Value vs. Private labeled Value

 Other than the exclusive resellers, the vending crowd can be broadly grouped into two categories. The In-house value vendors have their own in-house or contract researchers developing and updating the AVM values, while the Private-labeled folks tend to outsource the development to other research houses and consultants with a no-compete, often on a revenue-sharing basis.

During the prior (2003 through 2007) real estate/mortgage boom, many low-cost research houses sprang up in India and other Southeast Asian countries to take advantage of the local high-end yet relatively inexpensive quantitative skills. Naturally, the In-house folks, from the very beginning of the sales conversation, would be more forthcoming and transparent than their counterparts. 

For example, the In-house folks would be more than willing to work with custom samples (i.e., to populate samples provided by the potential buyers) considering their inherent (Valuation and IT) strength to outpace the competition, while the Private-labeled folks would invariably point almost everyone to some frozen (web-based) values. Therefore, depending on the potential size of the contract, one should ask to populate a custom sample (better yet, a series of samples as sales dialogues mature) where recent appraisals/work-ups are available so the overall deviations (COV, COD, etc.) may easily be computed to establish the effectiveness of the vendor’s values. Once the top choices are zeroed in, paying a visit to their facilities is advisable. This two-step selection process will help avoid a lot of agony down the road.

2. Quality of Values

To differentiate the qualified from the unqualified, it is always a good idea to ask if they are S&P or OCC (or other well-known bodies) compliant. The vendors that are compliant know very well that their long-term existence in the industry is predicated upon the quality of value – industry standard compliance is the gold standard. The unqualified population, on the other hand, will offer a million excuses as to why that is totally unneeded. Here are some warning signs: ‘it is too time-consuming’; ‘we revalue all properties nightly’; ‘our logistics don’t allow that – we work with multiple data vendors’; ‘we don’t believe in those old compliance standards – we have advanced in-house QC measures in place,’ etc.

Of course, the public agencies are often bound by the International Association of Assessing Officers’ (IAAO) guidelines and standards (Coefficient of Dispersion, Price Related Differential, etc.), so the proof (from those who also cater to the public agencies) that they meet and exceed those requirements should be requested. Warning signs: ‘what is IAAO?’; ‘we are OCC-compliant so we don’t need to meet any other requirements and standards,’ etc. Public agencies should specifically look for values that are always IAAO-compliant.

Of course, this safeguard does not apply to the fast emerging group of vendors that specializes in custom modeling and value generation using client’s own internal data, meaning (private) portfolio data or (public) assessment roll data.

3. Nature and Frequency of Value Updates

The frequency requirements vary. In order to work with the mortgage originations, vendors need to frequently rerun their models (with more recent sales) to stay close to the current market conditions, whereas portfolio managers tend to be more P/L-oriented (quarterly to annual), and public agencies need conform to the taxable status dates (annual).

While some regional/national data warehouses also produce their own AVMs, most AVM vendors either buy from or form a Joint Venture with the data warehouses to receive the data, with monthly updates, considering the underlying AVM data – population and sales – are quite expensive.

In a volatile market such as this, even the best engineered models require frequent updating and fine-tuning (preferably monthly - at least quarterly), so it is good to understand the nature and frequency of their value updates. Many AVM houses tend to rerun their models annually, but time-adjust in between, which may not be good enough. Those models must be updated at least quarterly.

The best way to find out how frequently and effectively (whether they are rerunning the models or just time-adjusting the old model values) they are updating their values is to ask them to repopulate the same custom sample(s) in the following month(s) as sales conversations continue. One can thus easily determine how up-to-date their values are. If they return the same set of values (I doubt their salespeople would even allow that!), they should be avoided.

If one can identify a time adjustment pattern (say, adjustments by specific geographies like city or county) in vendors’ values, they should be considered with a grain a salt as well. If their new values are different yet as surgical in line with the recent dynamics of the market (the way a multiple regression equation with 50+ independent variables is supposed to work!), one can infer that they truly reran the model with more recent sales, and therefore their AVM values would be more effective and thus would make a significant difference for the user organization.

4. Encourage Competition

 Instead of using one vendor, it’s good to try two vendors (separate them along the portfolio/geographic lines) so they would always know that there is competition even within the client organization and that they have to continually prove their worth to keep the account.

It is equally important for the public agencies; for example, if the department of assessment uses one vendor (to produce the roll or to validate the roll), the assessment review department must use an alternate vendor to avoid having to justify the ‘double dipping’ to the legislators.
Internal competition will invariably force the vendors to intensify their R&D, knowing very well that losing a key client could be the kiss of death meaning others often follow suit. In other words, when the word spreads about vendor X losing a key client, other existing clients become more cautious, often aggressively without proper investigation.

5. Buy According to Your Needs

AVM values can be quite expensive, so it is essential to perform a needs analysis internally before putting out a RFP or contacting a group of vendors. For a portfolio manager needing to revalue portfolios quarterly or annually should always sign contracts keeping that frequency in mind, thereby paving the way for some substantial savings. Alternatively, while negotiating for the AVM values for in-house portfolios, it is wise to try to encourage the vendor to run the complementary static pools or vintage and migration analyses for free or at a significantly discounted rate.

The declining demand for mortgage products since the last housing meltdown has lowered the demand for AVM values, which in turn has hurt the industry, particularly those in the the outsourcing industry (Knowledge Process Outsourcing or KPO’s). Therefore, the AVM vendors – in pricing their products – ought to be more flexible today. Won’t hurt to ask!

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


Sid Som MBA, MIM
Homequant, Inc. 

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