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ADVISORY OPINION 18 (AO-18)

This communication by the Appraisal Standards Board (ASB) does not establish new standards or interpret existing standards. Advisory Opinions are issued to illustrate the applicability of appraisal standards in specific situations and to offer advice from the ASB for the resolution of appraisal issues and problems.

SUBJECT: Use of an Automated Valuation Model (AVM)

APPLICATION: Real Property, Personal Property, Intangible Property

THE ISSUE:
What steps should an appraiser take when using an AVM as a tool in the development of appraisal, appraisal review, or appraisal consulting opinions and conclusions concerning an individual property?

In addition, what steps should an appraiser take when he or she is using an AVM only to process information and communicate the AVM’s output but is not performing an appraisal, appraisal review, or appraisal consulting assignment?

BACKGROUND:
This Advisory Opinion addresses how an appraiser may use an AVM.

An AVM is a computer software program that analyzes data using an automated process. For example, AVMs may use regression, adaptive estimation, neural network, expert reasoning, and artificial intelligence programs.

The output of an AVM is not, by itself, an appraisal. An AVM’s output may become a basis for appraisal, appraisal review, or appraisal consulting opinions and conclusions if the appraiser believes the output to be credible for use in a specific assignment.

An appraiser can use an AVM as a tool in the development of appraisal, appraisal review, or appraisal consulting opinions and conclusions. However, the appropriate use of an AVM is, like any tool, dependent upon the skill of the user and the tool’s suitability to the task at hand.

This Advisory Opinion applies when an appraiser uses an AVM in connection with an individual property. This Advisory Opinion does not apply to mass appraising. An appraiser needs to know, before using an AVM, whether it is to be used:

1. to perform an appraisal, appraisal review, or appraisal consulting service, or
2. solely to provide the client with AVM output.

When an appraiser uses an AVM to develop his or her own opinions or conclusions in an appraisal, appraisal review, or appraisal consulting assignment, all of the USPAP rules governing that assignment apply and all of this Advisory Opinion is relevant.

An appraiser is not performing an appraisal, appraisal review, or appraisal consulting assignment when he or she simply runs an AVM by using information provided by the client and:

1. does not alter the input or affect the output of the AVM, and
2. does not communicate his or her own appraisal, appraisal review, or appraisal consulting opinions or conclusions regarding the AVM’s output.

If the appraiser uses an AVM only to provide the client with the AVM output, the references to the Conduct section of the ETHICS RULE and the “Communicating the AVM Output” section in this Advisory Opinion are relevant.

ADVICE FROM THE ASB ON THE ISSUE:
Relevant USPAP & References
Competency
Under What Conditions May AVMs Be Used?
Database
Understanding and Control of the AVM
Communicating the AVM Output
Analyzing an AVM’s Effectiveness
Review of the Output of an AVM
Review of an Appraisal Report Containing Output of an AVM
Use of an AVM in an Appraisal Review Assignment
Illustrations

Relevant USPAP & Advisory References (AO-18)

Conduct section of the ETHICS RULE: “An appraiser must perform assignments ethically and competently, in accordance with USPAP and any supplemental standards applicable to the assignment. An appraiser must not engage in criminal conduct. An appraiser must perform assignments with impartiality, objectivity, and independence, and without accommodation of personal interests.” Further, “An appraiser must not communicate assignment results in a misleading or fraudulent manner. An appraiser must not use or communicate a misleading or fraudulent report or knowingly permit an employee or other person to communicate a misleading or fraudulent report.”
COMPETENCY RULE: “Prior to accepting an assignment or entering into an agreement to perform any assignment, an appraiser must properly identify the problem to be addressed and have the knowledge and experience to complete the assignment competently.”
SCOPE OF WORK RULE: “The scope of work must include the research and analyses that are necessary to develop credible assignment results… Appraisers have broad flexibility and significant responsibility in determining the appropriate scope of work for an appraisal, appraisal review, and appraisal consulting assignment.” “The appraiser must be prepared to demonstrate that the scope of work is sufficient to produce credible assignment results… An appraiser must not allow the intended use of an assignment or a client’s objectives to cause the assignment results to be biased.”
Standards Rule 1-1(a): An appraiser must “be aware of, understand, and correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal.”
Standards Rule 1-1(b): An appraiser must “not commit a substantial error of omission or commission that significantly affects an appraisal.”
Standards Rule 1-1(c): An appraiser must “not render appraisal services in a careless or negligent manner, such as by making a series of errors that, although individually might not significantly affect the results of an appraisal, in the aggregate affect the credibility of those results.”
Standards Rule 1-6(b): An appraiser must “reconcile the applicability or suitability of the approaches used to arrive at the value conclusion(s).”
STANDARD 2: “In reporting the results of a real property appraisal, an appraiser must communicate each analysis, opinion, and conclusion in a manner that is not misleading.”
STANDARD 3: “In performing an appraisal review assignment, an appraiser acting as a reviewer must develop and report a credible opinion as to the quality of another appraiser’s work and must clearly disclose the scope of work performed.”
Statement on Appraisal Standards No. 9 (SMT-9): “Although an appraiser must identify and consider the intended use of the appraiser’s opinions and conclusions, an appraiser must not allow the objectives of the client or other intended users of the report to affect the appraiser’s independence and objectivity. An appraiser must not allow the objectives of a client or other intended users to cause the analysis or report to be biased.”

Competency (AO-18)
When an appraiser is asked to use an AVM in an assignment, the appraiser must ensure that he or she can comply with the requirements of the COMPETENCY RULE both prior to accepting the assignment and in the course of performing it.

In an appraisal assignment, an appraiser must have a basic understanding of how the AVM works in order to reasonably determine that:

1. use of the AVM is appropriate for the assignment;
2. the output of the AVM is credible for use in the assignment; and
3. the AVM does not exclude relevant market measures or factual information necessary for a credible calculation.

A client may suggest or request the use of an AVM in an appraisal, appraisal review, or appraisal consulting assignment, but ultimately the appraiser is responsible for the decision to use or not use the AVM and its output. The appraiser must be able to reasonably conclude that the AVM’s output is credible before deciding to use the AVM or rely on its output. For example, in an appraisal assignment, the credibility of the AVM output may be established by comparison to the subject market. If the appraiser concludes that using the AVM output in an assignment would be misleading, the appraiser should either use other tools to perform the analysis or decline the assignment.

Under What Conditions May AVMs Be Used? (AO-18)
There are five critical questions to which the appraiser should answer “yes” before deciding to use an AVM in an appraisal, appraisal review, or appraisal consulting assignment:

1. Does the appraiser have a basic understanding of how the AVM works?
2. Can the appraiser use the AVM properly?
3. Are the AVM and the data it uses appropriate given the intended use of assignment results?
4. Is the AVM output credible?
5. Is the AVM output sufficiently reliable for use in the assignment?

The answers to these questions may be affected by the degree to which the appraiser can interact with the AVM. The decision to use an AVM may also be affected by support information supplied by the AVM’s developer, the appraiser’s previous experience in using the AVM, or other available information.

Database (AO-18)
Credibility of the AVM output depends on the quality of its database and how well the AVM is designed to analyze that database. When using an AVM in an appraisal, appraisal review, or appraisal consulting assignment, the appraiser must have reason to believe the AVM appropriately uses data that are relevant.

Understanding and Control of the AVM (AO-18)
When using an AVM in an appraisal, appraisal review, or appraisal consulting assignment, an appraiser should have a basic understanding of how the AVM analyzes data to determine whether the AVM measures and reflects market activity for the subject property. The appraiser does not need to know, or be able to explain, the AVM’s algorithm or intricacies of its statistical or mathematical formulae. However, the appraiser should be able to describe the AVM’s overall process and verify that the AVM is consistent in producing results that accurately reflect prevailing market behavior for the subject property.

AVMs differ in the number and type of data characteristics as well as in the volume of data analyzed. The appraiser should know which characteristics (e.g., size, location, quality) are analyzed and how the analysis is tested for accuracy and reasonableness. The appraiser should ascertain that the characteristics analyzed are those to which the market responds.

Some AVMs allow the appraiser to select the data analyzed on the basis of, for example, distance from subject, size, or age of the improvements. An appraiser’s ability to change the AVM’s selection parameters may affect the appraiser’s decision to use or rely on the AVM output.

The appraiser should be aware that the AVM may not perform consistently given the same input criteria. The appraiser should be confident of the AVM’s credibility when applied to a specific property. The appraiser decides whether to rely on the AVM output, regardless of the AVM’s overall test performance. In some cases, the appraiser may accept the AVM’s output, while in other cases that same AVM’s output would not be acceptable.

Communicating the AVM Output (AO-18)
An appraiser must ensure that his or her communication of an AVM’s output is not misleading.

An AVM’s output is not, by itself, an appraisal, and communication of an AVM’s output is not, in itself, an appraisal report. When an AVM is used in an appraisal, appraisal review, or appraisal consulting assignment, information furnished about an AVM in the appraiser’s report must satisfy the reporting requirements applicable to the type of report provided (e.g., in the case of a real property appraisal, a Self-Contained, Summary, or Restricted Use Appraisal Report). The appraiser should cite the name and version of the AVM software and provide a brief description of its methods, assumptions, and level of allowed user intervention. The report should, to the extent possible, identify the database (e.g., Multiple Listing Services) and the data analyzed.

An appraiser bound by USPAP may be asked to run an AVM and communicate its output without performing an appraisal, appraisal review, or appraisal consulting assignment. For example, an appraiser may be asked to simply enter property characteristics provided by the client but not alter the input or affect the AVM’s output. In this specific instance, the appraiser is not acting in the capacity of an appraiser but rather is functioning only as an AVM operator. In such a situation, an appraiser must carefully avoid any action that could be considered misleading or fraudulent. The appraiser should take steps to ensure that communication of the AVM’s output is not misconstrued as an appraisal, appraisal review, or appraisal consulting report. For example, the appraiser should:

1. not communicate his or her opinions or conclusions as an appraiser regarding the credibility or reliability of the AVM’s output;
2. not provide an appraiser’s certification or statement of limiting conditions in connection with the AVM’s output; and
3. ensure that his or her role as only an AVM operator is clearly indicated if his or her signature or other identification marks appear on document(s) used to communicate the AVM’s output.

Analyzing an AVM’s Effectiveness (AO-18)
An appraiser bound by law, regulation, or an agreement to comply with USPAP may be asked to analyze and comment on the effectiveness of an AVM for a stated intended use. Such a request involves an aspect of value and thereby this would be an appraisal practice service, but one for which USPAP has no specific performance standards. In order to accept such an assignment, an appraiser bound to comply with USPAP must ensure compliance with the Conduct, Management and Confidentiality sections of the ETHICS RULE, the COMPETENCY RULE, the JURISDICTIONAL EXCEPTION RULE, and the SUPPLEMENTAL STANDARDS RULE. To meet the COMPETENCY RULE, at a minimum, the appraiser should also have a basic understanding of how the AVM works.

Review of the Output of an AVM (AO-18)
An appraiser bound by law, regulation, or an agreement to comply with USPAP may be asked if the output of an AVM is credible for a specific property, given the intended use of the AVM’s output. Such a request involves an aspect of value and thereby making this determination is an appraisal practice service, but one for which USPAP has no specific performance standards. The appraiser must ensure compliance with the Conduct, Management and Confidentiality sections of the ETHICS RULE, the COMPETENCY RULE, the JURISDICTIONAL EXCEPTION RULE , and the SUPPLEMENTAL STANDARDS RULE.

Review of an Appraisal Report Containing Output of an AVM (AO-18)
An appraiser may be asked to review an appraisal report that includes an opinion of value based on the output of an AVM. This is an appraisal review assignment under USPAP which must follow the requirements of STANDARD 3. This kind of appraisal review assignment may be accepted if the appraiser performing the review understands how the AVM works and can form an opinion as to the adequacy and relevancy of the data and the appropriateness of the analysis, based on the information provided in the report under review.

Use of an AVM in an Appraisal Review Assignment (AO-18)
An AVM may be used in the process of reviewing a real property appraisal report. The appraisal reviewer may use the AVM to test the reasonableness of the value conclusion in the report under review if the appraisal reviewer has a basic understanding of how the AVM works, can use the AVM properly, determines that use of the AVM is appropriate for the appraisal review assignment, and believes the AVM output is credible and sufficient for the appraisal review assignment.

Illustrations (AO-18)
1(a). Staff Appraiser D, who has access to market databases, is asked to use an AVM to process information. When Appraiser D runs the AVM, she has done no other appraisal research. Appraiser D does not apply any of her appraisal knowledge or judgment in operating the AVM. Appraiser D has entered only property characteristics provided by the client and does not know how the AVM analyzes the data. Is the AVM output an appraisal?

No. The AVM output by itself is not an appraisal. Appraiser D did not apply her appraisal knowledge, judgment, or expertise, nor did she represent that the output was her own opinion of value.

Appraiser D must be very careful in communicating the AVM output to ensure that there is no misunderstanding as to her role in operating the AVM or communicating its output. For example, Appraiser D should:

not communicate her opinions or conclusions as an appraiser regarding the credibility or reliability of the AVM’s output;
not provide an appraiser’s certification or statement of limiting conditions in connection with the AVM’s output; and
ensure that her role as only an AVM operator is clearly indicated if her signature or other identification mark appears on documents used to communicate the AVM’s output.

1(b). Staff Appraiser D receives AVM output from a coworker who is not an appraiser. Appraiser D is requested to determine if the AVM output is credible, given the intended use. What can Appraiser D do?

Appraiser D should not express an opinion regarding value. However, the request involves an aspect of value and, therefore, Appraiser D can indicate if the AVM output is credible. USPAP includes no specific performance standards for this kind of service. However, because performing the service requires an appraiser to consider an aspect of property value, it is part of appraisal practice. Appraiser D must, therefore, ensure compliance with the Conduct, Management and Confidentiality sections of the ETHICS RULE, the COMPETENCY RULE, the JURISDICTIONAL EXCEPTION RULE , and the SUPPLEMENTAL STANDARDS RULE.

1(c). After staff Appraiser D has received the AVM output, can she incorporate the information into the appraisal process?

Yes. However, Appraiser D must be able to understand how the AVM works and determine that the information analyzed is credible and reliable.

2. Appraiser V provides residential appraisals to Client A, whose intended use is to document security for equity lines of credit. Appraiser V has determined that Orange Box AVM is sufficiently reliable to use as a tool in these appraisals. Orange Box AVM was recently used by Appraiser V on a house in a suburban single-family residential subdivision.

Client B requests Appraiser V to use Orange Box AVM, alone, for a relocation appraisal assignment on an identical house in the same subdivision. Can Appraiser V use Orange Box AVM alone in this relocation appraisal assignment?

AVM itself and the AVM output for Client A’s needs may not be appropriate for Client B’s need

Client A’s intended use of the appraisal is to document security for an equity line of credit. Typically, Client A’s lending decision is based primarily on the homeowner’s capacity to pay the debt and only secondarily on the value of the house. The reliability expectation of the value opinion needed by Client A is relatively low.

The intended use of the relocation appraisal for Client B is to develop an opinion of a sale price of the house under very specific conditions. Typically, the reliability expectation of the opinion needed by Client B is relatively high because his or her intended use involves a near-term transfer of the house, with immediate financial implications. Appraiser V must determine if Orange Box AVM’s output is sufficiently reliable to meet Client B’s stated expectations.

3(a). Appraiser A developed a regression analysis model that suggests a relationship between the size of a residence and the price per square foot of similar residences in a specific market. This relationship has been confirmed by market behavior, and the database used is believed to be reliable. Can the appraiser use the regression analysis model in other appraisal assignments of similar properties in the same market?

Yes, because the appraiser knows how the regression analysis model works, has independently tested the conclusions it provides, and believes the database is reliable. However, the appraiser must consider whether the AVM output is credible and reliable for each assignment on a case by case basis.

3(b). Appraiser A’s friend, Appraiser B, works in a different market area. Appraiser B is impressed with Appraiser A’s model and wants to use the model in Appraiser B’s market area. Can Appraiser B use Appraiser A’s model?

Yes, if Appraiser B understands how Appraiser A’s model works and verifies by independent testing that the model produces reliable results in Appraiser B’s market area and that the database used by Appraiser B reflects behavior in Appraiser B’s market area. However, the appraiser must consider whether the AVM output is credible and reliable for each assignment on a case-by-case basis.

4(a). A client of Appraiser A requests that Appraiser A use Blue Box AVM. The client says, “Since we are only doing residential appraisals, you can skip the cost and income approach. To lower the cost of the appraisal just use the Blue Box AVM results as the basis for your value conclusion.” The client also says, “Blue Box AVM makes thirteen adjustments, and that is all that the appraiser needs to be concerned with.” The Blue Box AVM developer feels that appraisers cannot understand this new technology and that appraisers do not need to know how the thirteen adjustments are made. What should Appraiser A do?

Appraiser A should:

learn how the Blue Box AVM works;
determine if he can use the AVM properly; and,
given the intended use, determine if the output of Blue Box AVM is credible and sufficiently reliable for use in the assignment.

If Appraiser A cannot understand how the Blue Box AVM works or concludes that the results are not credible, given the intended use, Appraiser A should discuss the issue with the client. This discussion may result in a modified scope of work or in the appraiser declining the assignment.

4(b). Another client requests that Appraiser A consider Green Box AVM. The client indicates that Appraiser A can modify six of the thirteen items analyzed in Green Box AVM, such as the distance within which the comparables are selected and the size range (square footage) of the comparables. The developer of Green Box AVM will also describe how the AVM works and provide the results of test data, which indicate that the model is reliable. What should Appraiser A do?

Appraiser A needs to follow the same steps described in 4(a).

5. Appraiser C’s client has licensed the Red Box AVM. The client requests that Appraiser C use the Red Box AVM as a tool in an appraisal consulting assignment. The client knows that Appraiser C has a reliable internal residential database. The client also knows that Appraiser C has tested Red Box AVM and has found it to be reliable. Further, the software developer of Red Box AVM has given Appraiser C information about how Red Box AVM works and test data showing its results. Can Appraiser C apply the Red Box AVM in the appraisal consulting assignment?

Yes, if the Red Box AVM is used for that part of the process for which it has been determined to be credible and reliable. However, the appraiser must consider whether the AVM output is credible and reliable for each assignment.

This Advisory Opinion is based on presumed conditions without investigation or verification of actual circumstances. There is no assurance that this Advisory Opinion represents the only possible solution to the problems discussed or that it applies equally to seemingly similar situations.
Approved July 9, 1997
Revised September 16, 1998
© Copyright 2006 – The Appraisal Foundation

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