Automated Valuations for Bridging Loans
What are automated valuations & how do they work?
An automated valuation (AVs) is a type of automated property appraisal used in the UK to assess and accurately value it.
Automated valuations use recent sale prices for similar properties in the same area as well as software algorithms to provide a market value for a given property.
Automated valuations are typically used by banks and other specialist lenders to quickly and easily value properties - but they're not always suitable for every situation.
This guide will explain what an automated valuation is, how they work, their history, and the advantages and disadvantages of using automated valuations over traditional surveyors and valuation reports.
Contents
What is an Automated Valuation?
An Automated Valuation (AV), also known as a Desktop Valuation, is a type of automated property appraisal used to assess and accurately value a property which only requires a computer and an internet connection.
Automated valuations are used in the UK to quickly calculate a value estimate for a property. An automated valuation uses recent sale prices for similar homes in the same area as well as proprietary algorithms to provide a market value for a given property and can significantly speed up how long it takes to get a bridging loan - in best case scenarios it can save at least 2 weeks from the underwriting process.
Automated valuations are typically used by banks and lenders to quickly and easily value properties.
How do Automated Valuations work?
Automated valuations use predictive modelling to assess the value of a property. This type of property valuation uses data sets of information such as property location, square footage, and recent sales in the local area to generate a value estimate.
This data is then analysed by proprietary algorithms to produce an estimated value for the property. The value estimate is then compared to other properties that have sold in the local area to generate an accurate value estimate for the subject property.
The History of Automated Valuations
The concept of automated valuations had been discussed since the late 1980s but did not become widely used until the early 2000s.
Automated valuations first gained popularity in the early 2000s when lenders and property investors began looking for efficient ways to value properties. Automated Valuations became popular due to their efficiency, and for vanilla properties, have became a preferred method of property assessment by many lenders and property investors.
The impact of COVID-19 on Automated Valuations
Automated valuations gained in popularity during the 2019 and 2020 when COVID-19 practically halted all in person valuation reports due to successive lockdowns.
Limitations of Automated Valuations
Whilst automated valuations are quicker than surveyor valuation reports, they aren't suitable for every situation.
Bridging loan lenders are comfortable using automated valuations for residential property of traditional construction in much of the UK.
Residential properties are one of the easiest to asses in terms of their value because there are over 1 million properties of this type sold each year (1,067,260 properties were sold in 2022) This high volume of sales data increases the accuracy of the algorithms that power automated valuations.
Certain property types may not be suitable for automated valuations. Properties with non-standard construction, for example the housing stock of the late 1950's and 1960's may require an in person valuation due to the need for assessing the structural integrity of a building. 1960's properties with concrete as the load bearing material are a problem as poor quality in some made them vulnerable to spalling and cracking allowing the steel reinforced core to rust.
Additionally, automated valuations aren't suitable for commercial properties due to the limited sales data available, the uniqueness of each commercial building and its development potential or income generation potential.
Commercial properties are harder to accurately value. The value of commercial property will be based on many factors such as:
- Potential for income and capitalisation rate or ‘cap rate’
- Market prices of equivalent properties
- Value per square foot
- Rateable value
Similarly, land is also difficult to accurately value using automated valuations and a surveyor's valuation report instead would be required by a lender.
Automated Valuations Vs Traditional Surveyors and Valuation Reports
Automated valuations have become increasingly common in the UK, and are preferred over traditional surveyors and valuation reports by many lenders and investors due to their efficiency and cost effectiveness.
While automated valuations provide an estimated value of a property, traditional surveyors and valuation reports provide a more in-depth and detailed assessment of a property and are considered more accurate than an automated report.
Additionally, traditional surveys and valuation reports can be used for more complex real estate transactions such as bridging loans.
Final thoughts
Automated Valuations (AVs) are quickly becoming the preferred method of property assessment in the UK. They are more efficient and cost effective than traditional surveys and valuation reports and provide a relatively accurate estimated value for a given property.
However, they're not appropriate in all situations and traditional surveys and valuation reports provide a more in-depth and detailed assessment of a property and are therefore considered more accurate.
Ultimately, it is up to lenders and investors to decide which type of assessment is best-suited to their needs.
