This article explains the four most common valuation methods used for real estate and property transactions, including how and when they are used. It’s important to note that the methods below are not necessarily mutually exclusive. Homeowners, lenders, mortgage servicers, investors, and other professionals use one or more of these valuation methods, depending on circumstances and the type of transaction. Often, one valuation method is used to confirm or quality-check the results of another.
Comparative Market Analysis (CMA): A CMA is prepared by a licensed real estate professional and is most commonly used to help determine a home’s listing price. The CMA should not be the only factor in determining listing price; rather, it is a guide for the agent and owner to evaluate the active and sold competition, and to serve as a tool in the price-setting process. A CMA can also be used—depending on variations in state laws—value trend analysis, mediation and negotiation. It should not serve as the sole method of valuing collateral in a real estate transaction where a mortgage is being originated.
Automated Valuation Model (AVM): An AVM is a service or software that provides property valuations, often based on mathematical modeling. AVMs are most commonly developed or used by lenders, servicer appraisal staff, and investors. While AVMs are most often used by lenders or secondary markets to confirm valuations provided in appraisal reports, they should not be used as the sole method to value collateral in a real estate transaction where a mortgage is being originated as they are notoriously inaccurate especially in communities featuring homes that vary significantly in their level of finish, amenities, size, etc. They may, however, be used as the sole valuation option for other types of transactions, such as refinances.
Appraisal: An appraisal is prepared by a licensed or certified appraiser and is an opinion of a property’s value. Appraisals are most often used to value collateral in a real estate transaction and are required for most federally-regulated transactions above $250,000. Exceptions include transactions where no new money is involved. In practice, appraisals are used for the vast majority of purchase money transactions involving a loan. For the most part, lenders or servicers determine the use of appraisal or another acceptable methodology for transactions that are not purchase money.
Source: www.nar.realtor/appraisal/valuation-services-matrix
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