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The risks and rewards of AVMs

07 / 12 / 2015

By John Bagshaw, Corporate Services Director, Connells Survey & Valuation

Valuers are the vanguards of the recovery

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By John Bagshaw, Corporate Services Director, Connells Survey & Valuation

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By Donna Smith, Investment Director, Connells Group

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05 / 03 / 2014

Sustainable valuations can prevent another 2008

Sustainable valuations can prevent another 2008

By John Bagshaw, Corporate Services Director, Connells Survey & Valuation

The latest report from RICS has not yet received an enormous fanfare from the national press. But arguably, it should have. The big issues addressed by this long-awaited report have set the agenda of the last seven years and their long-term implications will continue to do so.

A number of unfortunate lending decisions made in the years preceding 2008 tripped up our whole financial system and put the UK economy on the brink of collapse.

Dr Oonagh MacDonald, an ex-MP, one-time lecturer of philosophy, and author of an entire book looking at the downfall of Fannie Mae and Freddie Mac, understands this big picture. Hence her report for RICS keeps in mind the true importance of a healthy valuations industry for the entire mortgage market, the future of our financial system and the entire British economy.

In more down to earth terms, valuers need a practical strategy to make sure they still have a viable career in five or ten years’ time. Similarly, lenders need to know they can still get the service they need. As a consequence, Macdonald rightly argues for change.

The widely discussed “valuations shortage” is probably the best publicised symptom of all the pressures facing the valuation industry. After a rapid recovery in lending levels, many firms are inundated with work and struggling to keep up. But a variety of factors are at play in this squeeze.

First, timescales are at variance when looking at lenders immediate valuation requirements compared to the supply requirements to increase valuer numbers on the ground.  Even with the latest rules designed to speed up the process, it can still take up to five years to qualify as a full member of RICS, as MacDonald’s report highlights. By contrast, five years is a lifetime for lenders. The financial world of 2014 is very different to that of 2009, which was again incomparable to 2004.

Responding to volatile demand with long-term and significant investments can be a very difficult call to make. Connells Survey & Valuation is recruiting at all levels and we’ve increased our capacity by 30% in twelve months. But this takes significant investment which is why we’ve earmarked £6 million to hire another 100 graduate and trainee surveyors this year and to then train them to the very best standard. We will have almost doubled our headcount since 2012, and this is a trend we are seeing across the board.  But, as the report points out, good people take time to develop and they need the right incentives to join the industry.

Secondly, the progressive reduction in valuation fees over the last 10 to 15 years, coupled with the current shortage of valuers has resulted in ‘lower fee’ cases now being de-prioritised.

As a result and quite rightly, MacDonald argues firmly against a continuation of the “procurement approach” to valuation fulfilment tendering. Lenders need to look beyond such an oversimplification, and move away from the existing commoditised approach. Growing demand will have to mean some movement on fees in the short-term, otherwise there will be little margin remaining for valuation companies to re-invest in growth.

For lenders, understanding the value of their property security is arguably the most important aspect of the mortgage process. Doing it well should be at the top of the agenda.

The report also looks a little deeper than immediate symptoms. MacDonald has many other recommendations for how the valuations industry can keep up with a rejuvenated mortgage market, beyond simply doing more of the same with more people.

Responsible use of AVMs is one of these suggestions.  This is a good idea – not because AVMs are better than physical valuations, but because they can free up extra time for the higher risk cases where experience, physical inspection and local knowledge is needed more.

Experienced staff will always be central to the process of deciding when an AVM is appropriate, and in the hands of skilled valuation professionals such technology can reduce the margin of error.  But this leads on to another key area of the report.

The objective of our industry must be to provide impartial and accurate valuations as often and as quickly as we possibly can. However, the negligence claims culture experienced over the last 10 years needs to change. Many painful lessons have been learnt since 2007, but whilst valuers and lenders alike have significantly enhanced risk and fraud processes and procedures, valuers need to be assured about the levels of future liability to which they are exposed.

MacDonald’s example of one company receiving 12,000 “confetti claims” in a single afternoon is not a risk valuers can sustain. . Such claims, and the damage on the availability and cost of professional indemnity insurance are other key areas tackled by the report – with clear advice that lenders “help maintain the competitiveness of the valuation sector” by avoiding such practices of bombarding valuations firms.

Understanding these threats is the first stage in overcoming them. In 2014, in light of a fresh momentum in the property market, the valuation industry is as important as ever and it is also now armed with a practical manifesto for improvement.

So with this fresh impetus, the future looks bright for those joining the ranks in the coming years.


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