A Recent Story About a Bank’s Automated Value Gone Wrong

If you have a home equity line of credit (HELOC) on your house, your bank will be periodically running an Automated Value Model (AVM) on your home’s value (think Zillow’s Zestimate) to determine if their loan to value (LTV) ratio is increasing. If the estimated value of your home decreases too much, they may reduce your credit limit or suspend your loan. This recently happened to me.

I keep a line of credit on every piece of property I own to act as my very own opportunity fund. About two months ago I received a letter from the bank stating a rental property’s line of credit was suspended due to a decreased value. What was even more odd was this credit line was about one year old, which threw up another red flag to me. I guessed exactly what happened here. They used an AVM to reevaluate it, however, they used a local appraiser when initially approving it. The AVM factored in sales comps from West of the subject property, in a development with heavily reduced sales prices, lower quality homes, rental property surge (due to so many bought up during the post 2008 financial fiasco) and finally higher crime. Conversely, my rental is in a gated subdivision with higher quality homes and much higher values.

I contacted the bank and spoke to a nice representative [robot, who couldn’t tell me anything] who said he can pass along what I send to their internal underwriters, who I could not speak directly to. I sent a polite explanation of what I believe happened, with regards to their internal AVM algorithms not being tuned locally. I invited them to see the attached CMA in that email. I provided them with four comparables (three of which were on the rental property’s street), all from inside the community. I outlined the adjustments I used to give a fair representation of the home’s value.

A few days later they emailed me and scheduled a local appraiser to come visit. The appraiser came, spent a bit over an hour there mapping the property and gathering data. A few weeks passed and I asked the bank about the appraisal.. The next day, I received an email request to schedule another appraiser because the first one was never submitted because the first guy fell ill. I understand people getting sick but the appraisal company should have had, I don’t know, some sort of a system set up to flag these things (as opposed to me calling and asking). Pardon the complaining. A new appraiser came back, I went back out to the property and we repeated the same song and dance. A week later, I got a call congratulating me on their decision to unsuspend my account. The value came in within, wait for it, a few percent off from where I pinpointed it at, leaving their LOC well under the 70% LTV (if it ever maxes out).

I also belong to a few MLSs and they each have their own AVM they use and they are all over the board in terms of accuracy. I simply do not trust AVMs for use in establishing value for any of my dealings. Perhaps they make for good conversations starters on the value?

The moral of my story is AVMs are not always correct and when it counts, do not count on them, trust a (local) appraiser or quality Realtor who knows that area. This goes for all real estate transactions, not just lines of credit. Investors who are buying or selling a home may need to know their true “indicated value” based on “true comparables”, with “local adjustments” that a competent appraiser or Realtor can provide.

Here for you in success.

Lenny Longo