The company I work for, Rismark International, has developed very sophisticated, and arguably world-class, technology that allows it to automatically revalue every home in Australia almost every day. We produce these 'automated property valuation models' (AVMs), which have taken a team of four full-time PhDs a number of years to build, in combination with our exclusive strategic partner, RP Data (ASX: RPX), which is Australia's largest real estate data company.
At its heart, Rismark's AVM leverages off our patented hedonic house price index technology, which you can read more about here. Recent independent testing has shown that Rismark's AVM is as accurate as the best alternative providers in the world when applied to local properties. The combination of unique and extremely expensive data requirements with immense technical difficulty means that there are actually only a handful of companies around the globe that are capable of delivering these products.
The emergence of accuate AVMs has potentially profound ramifications for both regulators and banks' approach to risk management, as I intimated here when flagging another idea.
Today the industry bible, Banking Day, had an interesting series of articles on the subject, which I have enclosed with their permission below.
Desktop valuations mitigate risks rather than costs
29 June 2010 7:03am
Article By: John Phillips
Business initiatives often start out with the promise of incurring costs in order to cut costs down the track. Some have the habit of merely adding costs. One energetic corner of risk management in the banking industry – the valuation of property used as security over loans – may be drifting into the second category.
Over recent years a boutique industry has emerged providing automated or desktop valuations to banks. These services are proving their mettle as an additional risk management tool, and a check against more conventional (and human) valuation methods. They are not, yet, however, displacing the work of valuers.
RP Data, one of the key suppliers to this niche (and also busy rolling up competitors) estimates the valuation services market to be worth $500 million a year, fees primarily paid by banks and their customers.
Grant Warner, national director at the Australian Property Institute, said that full property valuation volumes have not been impacted by the adoption by more banks of automated valuation models (AVMs).
“The Institute views them (AVM’s) as computer generated assessments," Warner said. “They are not viewed as valuations, because not enough of the valuation process is actually undertaken to warrant a valuation.”
Warner adds while it is very difficult to quantify how many full valuations are undertaken each year, the Institute's member base has remained static in the historical medium term, highlighting that valuers are not leaving the industry.
“There will always be a requirement for full valuations. Obviously members’ clients will establish their risk profiles as to where they see AVMs, or desktops, kerbside or full valuations, and will utilise these given a particular circumstance.”
This view is supported by Gavin Hulcombe, chairman at Herron Todd White, Australia’s biggest employer of valuers.
“We certainly haven’t seen (in recent times) a reduction in full valuation volumes. We have seen a slight reduction in some of the kerbside valuations, by and large we understand AVMs are being used, but this has not had a major impact on our valuation numbers generally. In the future we certainly see a place for both, (full valuation and AVMs).”
Hulcombe adds Herron Todd White still employs about the same number of valuers as it did two years ago, with the total around 350.
Both Warner and Hulcombe support hubs such as VaLex, which provide a platform between the banks and the valuers.
“Those platforms have certainly provided a lot more uniformity within the industry, and the ability to connect business to business has definitely improved efficiencies,” said Hulcombe.
AVMs may reduce mortgage insurance claims
29 June 2010 7:03am
Automated valuation models are being employed by banks to mitigate risks from other approaches to property valuation in Australia, such as identity fraud and overstated valuations by intermediaries.
AVM use has skyrocketed in the local market over the last three years, according to vendors of these services, with lenders and major mortgage insurers seeking time efficiency and cost saving methods when valuing and underwriting properties, or reviewing securitisation portfolios. Providers, though, may only just be beginning to make money. Provider internal fixed costs remain high, compounded by the sales process that may stretch up to a two-year period for a major banking or insurance client.
One niche supplier in this market is Hometrack Australia, which entered the Australian AVM market with a commercially viable product in early 2008.
There is money to be made though providing AVMs in Australia, according to Brendan Darcy, chief executive officer at Hometrack.
“It is profitable. Fixed costs are high. You need very talented people to build and distribute the rocket ship.
“The AVM is one of the most sophisticated products in all of financial services. To take the raw data from multiple sources and deliver a highly reliable and calibrated AVM requires huge investment.”
The AVM testing to implementation timeline will vary depending on the size and valuation requirements of the end user, with Darcy adding Hometrack clients are very accepting of AVMs and vary dramatically in size.
“From the point where an AVM initiative has sponsorship within the ADI, there is typically two to six months of testing, and implementation of two to six months after that," Darcy said.
“We deal with all sizes of ADIs, from major banks, second tier banks, non-banks, and the mutuals. Of the dozens of ADIs we deal with, I can’t think of one that resists AVMs in principle.”
Identifying the loan to valuation threshold for an AVM, or other non-full valuation methods such as desktop or kerbside, will be a function of the user and varies depending on internal risk scenarios.
Darcy adds the LVR threshold can’t be viewed in isolation.
“Usage is a function of the LVR and the Confidence Level (a measure of AVM accuracy)," Darcy said. “Generally speaking ADIs are comfortable lending up to 85 per cent for very high confidence levels and lower LVRs for moderate confidence levels.”
With the primary purpose of an AVM remaining a risk mitigation tool to identify valuation discrepancies and frauds, this places much of the responsibility for an incorrect AVM valuation back on the lender.
“If a lender implements an AVM prudently the vast majority of its valuation risk will lie with the remaining physical valuations, not the AVM. Having said that, AVMs will continue to improve. Hometrack views AVM development as in the early stages, and in ten years AVMs will be unrecognizable compared to today.”
Hometrack has recently extended its electronic valuation capabilities to desktops, which Darcy considers will continue to form an important part of the Australian property valuation industry moving forward.
“Geospatial integration of data and imagery is a major part of the future valuation industry. Lenders don’t want just a report, they want a process with independent verification at the heart of it. We’ve built something that is just the first step in that journey.”
VMS and ValEx create single hub
29 June 2010 7:03am
While lenders are taking a closer interest in the use of automated valuation of properties, the suppliers of these services are reorganising in order to produce more sustainable business models. In short, some are combining their businesses, with the Brisbane-based RPData at the head of the present effort to wring efficiencies from this sector.
In May RP Data announced the realisation of a long-term ambition to purchase the ValEx Group and the VMS Division of Sandstone Technology, to control the Australian desktop property valuation sector.
RP Data will pay $26 million for ValEx and $20 million for VMS. This values the two businesses at five times the expected 2010 EBITDA of the business, RP Data said. The purchase will take RP Data to a 70 per cent share of a valuation services market.
“There are two distinct hubs in the industry, ValEx and the Sandstone VMS, and this [proposed merger] will create a single unified hub,” said Bob Hall, chief executive officer at Sandstone.
“Because we couldn’t add much more value for our customers, we thought that consolidation within the industry could deliver more value.”
ValEx and VMS automate the workflow between financial institutions and valuation providers for AVMs, electronic desktop and full inspection valuations.
“With VMS, we didn’t see much more in ongoing innovations we could bring to that space, or the valuations hub," Hall said. “We have a couple of the major banks and most of the regional banks using VMS, and there was a little bit of blue sky left, but we were reaching the point where we couldn’t see adding further value to it.
“Where there is still some innovation is within the strategy lenders to get the appropriate level of valuation. For example, they might use the hub to get two different types of automated valuation from two different providers, and if the valuations coincide with each other then they may not look further.”
Hall adds the VMS sale proceeds will be used to invest in new technologies, primarily in the lending and internet banking areas, and not on developing any AVM-style software.
“AVM is a fairly crowded market in Australia, with quite a few providers chasing a limited number of financial institutions.”
Hall does not currently see the need to develop a LIXI standard between an AVM to a valuation service provider.
“I think the desire is actually more to have a LIXI standard between the lender and the VMS hub, which is already in place in fact.”
Hall identifies mortgage settlements as the biggest area of inefficiency at the moment.
AVM volumes picking up29 June 2010 7:02am
“From the second half of 2008 when volumes were quite depressed, compared to today, we would be conducting double the volume of transactions, and we would have no difficulty doubling it again,” said Andrew Robertson, chief executive officer at ValEx.
Current ValEx volumes are around 400,000 per annum, around 1600 to 1700 per day, with Robertson adding that 75 to 80 per cent are full valuations, with the remainder desktops, with these percentage allocations little changed for the past two years.
“At this point in time we are not providing, but do have the capability to provide, AVMs, but up to date we have found lenders that will use an AVM will get that themselves.
“The model for VaLex has always been a platform, so we are not the service provider, so whether it’s a full valuation from a valuer or a desktop, or an AVM, we manage the process for the client and source the assessment type from either a panel valuer or an existing service provider.”
RP Data announced a takeover of ValEx last month, along with the VMS division of Sandstone Technologies, with the acquisition currently under ACCC review. Robertson confirmed that ValEx would not be restricted to just using the RP Data electronic valuation types should full ACCC approval be received.
“VaLex will continue to offer all AVM, desktop products, and not just RP Data’s. The concept is that it’s an open platform and customer focused, so if any bank (lender) wants to use an AVM from any other provider than RP Data, then they will be absolutely free to do that. And then we will be looking to put the right connectivity between those suppliers and the VaLex platform in place.”
With the ValEx system being web based, Robertson said the system is scalable to handle more clients.
“As the volumes grow all we really need to do is increase the number of servers and database capacity, which is relatively easily done.”
Due to the scalability, Robertson said ValEx is actively looking to bring new clients on board. Adding volume actually improves the ValEx system.
“The ValEx system actually works better the more volume it has, particularly in the area of compliance tools with the ability to run data to check the accuracy of valuations. The more data you have, the greater your capability in these areas.”
Commonwealth Bank is by far the biggest ValEx client, with CBA's subsidiary BankWest also now using the service.
The timeline for adding a new client to the ValEx system varies, generally depending on volume.
“We have actually put a new client on as quickly as one month, but it depends on trials. Some lenders may want to run a pilot in one state, or trial different systems and make an assessment."
