AVM vs Full Appraisal: Which to Choose?

Deciding between an Automated Valuation Model (AVM) and a Full Appraisal report is a crucial choice for mortgage lenders. Both methods have their pros and cons, and the decision often depends on a range of factors, such as the type of loan, regulatory requirements, and the lender's risk tolerance. Below are key considerations that should guide this decision because applications and situations vary:


Accuracy and Reliability

1. Complexity of Property: For unique or complex properties, a full appraisal, which takes into account a much broader range of variables and relies on an appraiser's expertise, will typically result in a more accurate valuation.
2. Local Market Conditions: Full appraisals are generally more accurate in fluctuating or less predictable markets, where the appraiser's local knowledge can be invaluable. This has been particularly evident in recent times.
3. Confidence Level: If an AVM can offer a high confidence level and low margin of error in a stable, well-understood market, it may be sufficient.

Cost and Time

1. Expense: AVMs are generally less expensive than full appraisals, which require labor-intensive on-site inspections followed by research and manual completion of a report.
2. Speed: AVMs can produce valuations much more quickly, often within minutes, compared to a full appraisal, which can take days or even weeks.

Regulatory Requirements

1. Compliance: Depending on the jurisdiction and type of loan, there may be specific regulatory requirements for property appraisals that cannot be satisfied by AVMs.
2. Documentation: Full appraisals generally offer a more detailed report, which can be beneficial for audit trails and demonstrating due diligence.

Risk Management

1. Loan-to-Value (LTV) Ratio: For loans with a higher LTV ratio, the stakes are higher for the lender, making the more thorough full appraisal a safer bet.
2. Portfolio Strategy: Lenders should consider how the valuation method fits into their overall risk management and portfolio strategy.

Customer Experience

1. Transparency: A full appraisal can be more transparent for the customer and can build trust, as it usually includes a site visit and a more comprehensive evaluation.
2. Convenience: An AVM is much faster and less intrusive for the borrower, requiring no site visit or scheduling.

Scalability and Efficiency

1. Volume: For lenders dealing with a high volume of loans, AVMs can provide quick valuations at scale.
2. Operational Efficiency: Using AVMs can streamline the loan approval process, making it more efficient.

Type of Loan

1. Loan Purpose: For less risky transactions, such as refinancing a low LTV loan, an AVM might be sufficient. For a new, high LTV loan, a full appraisal would be safer.
2. Loan Amount: Smaller loans might not warrant the expense of a full appraisal, whereas larger loans often do.

Market Acceptance

1. Investor Preference: If the loan is intended to be sold in the secondary market, lenders must consider what valuation methods are acceptable to potential investors.
2. Public Perception**: In some markets, full appraisals are considered the gold standard, and using an AVM could potentially impact the lender’s reputation.

The best choice depends on a combination of these factors, and often lenders will use a mix of both AVMs and full appraisals depending on the specific circumstances surrounding each loan.