Technological advances like automated valuation technology based on machine learning can simplify and expedite the process of buying or selling commercial real estate, but AVMs may also result in appraisals that do not reflect actual market values. As automated property valuation methods become more widespread, buyers and sellers should ensure that property appraisals accurately document a property’s real value.
Technology – A Double-Edged Sword
New technology promises to save money by reducing the time required to complete commercial real estate transactions. Scanned rent rolls eliminate time-consuming financial verification. Artificial intelligence capable of extracting information from the varying forms used by lenders significantly reduces the time required to underwrite a commercial property loan. These technological efficiencies can result in lower origination and underwriting fees, but they can also be a double-edged sword.
Increasingly, banks, lenders, and loan underwriters are turning to Automated Market Valuations (AVMs) to appraise commercial properties. The intent is to standardize the commercial appraisal process, but the AVM valuation results are not always consistent with local markets and can vary significantly from one another.
AVM Advantages and Disadvantages
The key advantage of AVMs is that they are fast and can easily be incorporated into the underwriting process. Underwriters no longer have to wait for manually prepared appraisal reports.
AVMs also have their disadvantages in commercial real estate transactions. Advocates claim that 70 percent of AVMs have an acceptable margin of error of plus or minus 10 percent, or $10,000 for every $100,000 in value. For many, that margin of error is not acceptable.
Even more concerning, 30 percent of AVM valuations fall outside the so-called acceptable margin of error. A deviation from actual market values of that magnitude would likely result in buyers and sellers walking away from the transaction.
Accepting an AVM appraisal without understanding the local market may cause buyers to overpay for a property, increasing the time to recover their investment. Sellers may leave profits on the table by selling too low.
Inaccurate AVMs can have other impacts, including:
- Adverse credit decisions
- Incorrect tax assessments
- Reduced cost of relocation when a government seizes property under eminent domain
Understand the Limitations of AVMs
While technology advances can expedite the sale of commercial properties, buyers and sellers should understand the limitations of the AVM process. To protect themselves, they must ensure that the AVM results are in line with actual market values.
