The rise of Automated Valuation Models

12 December 2018

In the chartered surveyor space as in many other industries, technological innovations have huge potential to shake up traditional norms, and this can be clearly seen in the emergence of Automated Valuation Models (AVMs) in property valuations.

Over recent years there has been a gradual acceptance of and shift towards embracing software-based solutions, to the point where today increasingly sophisticated AVMs are now mainstream in the residential property space. At the same time, however, there remains a clear need for a trained human eye and professional judgement.

How far should human and machine-based surveying be independent or can they co-exist? What are the benefits and pitfalls of this symbiosis? These are pertinent questions for property valuers right now. This briefing attempts to tackle them and shine a light onto how this might impact risk within the chartered surveyor sector.

Harnessing the benefits…

There are many benefits to the use of AVMs, principally in residential property valuations. Proponents point out that a data-driven model is not subjective and therefore should create reliable results, giving certainty and comfort to lenders and buyers. It is also being widely adopted by banks as a means of cutting costs and increasing efficiencies on large volumes of transactions.

Whether AVM should be used in isolation is questionable. As Simon Rees, Managing Partner of Gerald Eve LLP explains, “A purely derived statistical or data-mined valuation risks being widely off the mark. Consequently, there remains a requirement for professional judgement to augment model-based valuations.”

That said, many in the industry welcome its usefulness as a sense-check to professional judgement and to benchmark portfolios. Moreover, insight from the increased use of Big Data could help property professionals [and lenders] to identify cycles and trends over time to help them make better decisions.

…while paying attention to the pitfalls

While there’s an argument to say that since AVM is not new, models should have been stress-tested and re-calibrated over time to create optimised solutions, there are still concerns in many quarters over accuracy and transparency.

Many different models exist and it can be hard to compare them. As Sara Duncan, Head of Risk Management, Valuation and Advisory Services at Colliers International puts it, AVMs are essentially “black boxes” from the user’s perspective, so it can be challenging to understand what data is being used, how the algorithms work and how reliable it is in terms of number and quality of comparables. It may be unclear what the margin of error is, and because models are not standardised, it can be hard to compare and contrast between providers.

Gerald Eve’s Simon Rees makes the point that whereas US-based AVM providers are relatively open about making their accuracy results publicly available, European AVMs are more reluctant to provide information or open up their methodologies to public scrutiny. With no external regulation currently in place, many in the industry have concerns over impartiality and quality control.

Whether algorithms can ever be a match for professional knowledge is also a contentious issue, no matter how well designed or how comprehensive the data inputted. Individual experts will have a degree of insight about a local market that is unavailable to AVMs – another reason why many say the two should be used in tandem.

Heightened risk in bridging loans

One area where increased use of AVMs could pose greater risks is in bridging loans – which has seen as proliferation of specialist providers in recent years as banks largely exited this higher-risk space. In a sector which competes heavily on price and speed, AVMs are attractive because they can give such specialist lenders fast, low-cost access to property valuations.

However, Collier International’s Sara Duncan warns that using AVMs, which are largely designed for mass market and homogenous property types, on bridging loans which are often far more complex, requires caution. Another issue for surveyors is that, as the market becomes used to cheaper valuation fees thanks to AVMs, there could be a “race to the bottom” which puts pressure on valuers’ margins and turnaround times - and increases their risk.

Covering liabilities

As the use of AVM by surveyors sees continued growth, issues over where liability lies are likely to come into ever sharper focus, says Stuart Mangion, Partner at JLT Specialty.
The key point to be aware of is that, often, liability will ultimately rest with surveyors in the same way it would had AVM not been used – even if surveyors are instructed to use AVM by banks [or consumers]. For example, it is unlikely that a court would deem a chartered surveyor’s duty of care to diminish if automation is deployed to reduce costs, even if cost savings are passed on through lower fees.

Situations will undoubtedly arise where liability for an incorrect valuation rests (even if only in part) with the software provider. However, even if a recovery from the software provider is possible behind the scenes, it’s the surveyor that will always be the initial target for any claim. Therefore, it’s essential to ensure that potential lines of recovery from the provider remain open in the event of their negligence.

Thankfully, Professional Indemnity cover available to cover these risks is broad, with very few exclusions. And while insurers do not underwrite to a level where they vary premium rating to apply based on different methods of valuing, there will undoubtedly be greater scrutiny as knowledge of potential claims issues increases.

To minimise exposure to potential claims, Stuart Mangion advises that attention should be paid to the terms of engagement with clients and says that the basis of valuation method used needs to be made clear.

A threat or opportunity for chartered surveyors’ career prospects?

Though many in the chartered surveying sector may feel wary of the threat AVMs could pose to their career prospects, some think professional development opportunities could actually improve. 

Colliers International’s Sara Duncan sees a clear role for property professionals to shape the development of AVMs alongside tech experts, and believes that new entrants to the industry will have a vital role to play in making such systems better in the future.

Moreover, for the younger generation of chartered surveyors at the start of their careers, if AVMs can automate much of the routine work, this should free them up to take on more challenging, interesting work than has previously been possible for new trainees.

Summary

Though not currently suitable for most commercial properties, in the residential property sector AVMs are here to stay, posing enormous potential benefits, but at the same time altering the risk landscape for chartered surveyors.

As house price growth starts to decelerate and with further interest rate rises a distinct possibility – a combination which has historically been the key cause of negligence claims against surveyors – AVMs should be used with care.

While technology will undoubtedly become increasingly advanced, making AVMs more accurate and reliable, it should not be seen as a replacement for professional expertise – rather as a tool to enhance and support it. After all, chartered surveyors still have to sign their names to valuations, so they need to be comfortable with the results AVMs provide, and be open about the methodology used with their clients, as they will be first in line for any negligence claims.

For further information about the risks and insurance protections outlined in this report, please contact Stuart Mangion, Partner, JLT Specialty on +44 (0)20 7558 3544 or email stuart_mangion@jltgroup.com.