It’s time to rethink tax assessments for real estate valuations
When my wife and I received our tax assessment increase last year, we weren’t thrilled at the idea of paying more property taxes. But, there was a silver lining to receiving the notice in the mail. As a lending industry innovator, the letter sparked my thinking about tax assessments and how it may be time to reimagine the way we determine property value.
In Iowa, the state where the LenderClose team and I are developing new lending technology for community lenders, tax assessment values (TAVs) are revisited every other year. Our next assessment is expected in 2021. That’s a long time between assessments. Because TAVs are only updated once every 24 months, credit unions in our state are in danger of falling short on two very important goals: mitigating risk and satisfying borrowers.
As we’ve experienced during the past decade, real estate markets shift – sometimes rapidly. Values in a specific zip code or neighborhood sometimes rise and drop based on hyper-local activities. For example, two short sales on the same street are highly likely to drop valuations across the entire neighborhood, as the events are factored into the comparable sales analysis.
Or, consider a neighborhood that adds an apartment complex, business, retail shops or a park. Increased amenities are likely to inflate the value of the properties around them.
In today’s fast-paced real estate and development environments, these kinds of activities are happening much more rapidly than in the past. Lenders need access to the most accurate and up-to-date information as they evaluate mortgage and home equity applications. Using assessor data that may not reflect current conditions not only presents unnecessary risks, it carries opportunity costs, as well.
Opportunity Costs of TAVs
In recent years, U.S homeowners have been enjoying a sellers’ market. Property values have rebounded since the housing market crash of 2008, and some markets are even seeing increases over pre-recession levels.
Many borrowers, when applying for a home equity loan or a refinance, are looking to fully tap into the equity resources their home provides. Relying on potentially outdated tax assessor data could be short-changing both them and the lender because:
- Borrowers may be unable to maximize the lendable equity in their home.
- Lenders may be leaving equity on the table, which generates interest income for their financial institution.
- Lenders risk losing borrowers if they look for other options that better reflect increased home values.
Alternatives to TAVs
The good news for lenders is there are now middle-ground options between TAVs and the highly manual and sometimes expensive process of ordering 1004 appraisals. One such option, automated valuation models (AVMs), has proven to be a reliable, efficient, cost-effective and instantaneous alternative to TAVs. AVMs use mathematical models combined with property and transaction data to calculate real estate values based on the most currently available information.
In 2010, the NCUA, FDIC and OCC released the Interagency Appraisal and Evaluation Guidelines allowing the use of AVMs for transaction amounts of $250,000 or less. A site visit to the property is still required to satisfy the guidelines, so an AVM should be complemented with a Property Condition or a Property Inspection Report (PCR/PIR). Just this past year, the FDIC and the OCC amended the guidelines by increasing the appraisal threshold for residential real estate loans to $400,000. NCUA achieved a similar evolution of guidelines in the commercial lending arena, taking its threshold from $250,000 to $1,000,000.
For lenders that can’t or don’t want to integrate AVMs into their lending processes, there are other evaluation products that involve a site visit, a report on the property and a professional’s valuation based on available data.
Why Credit Union Lenders Should Give AVMs a Second Look
AVMs are yet another corner of financial services being reshaped by technology. They are not erasing the need for appraisals. Rather, AVMs are providing a powerful complement and new dimension to the traditional approach.
Today’s real estate labor market is characterized by a shrinking number of licensed appraisers, which is driving costs well beyond reason in some places. Right now, in the state of Oregon, the average cost of a 1004 appraisal is between $700 and $1,300. The cost can be equally prohibitive in rural markets across the U.S. Contrast that to an AVM or evaluation product that can provide the service for $25 – $250 and also much more quickly, and the value to credit unions and their member borrowers becomes pretty clear.
Lenders that want to remain competitive and provide the best borrower experience should reconsider the phrase “We’ve always done it that way.” Real-time data and the technology to process it are creating high-value analytics possibilities for even the smallest lending teams. Those that are open to new possibilities will have the best chance of creating the outstanding borrower experiences, increased efficiency and speed our highly competitive lending landscape demands.