CAPE Exterior Condition Rating: Enhance Property Valuation Accuracy and Detect Outliers
Can you determine a property’s true exterior condition from the inside of your car? This is often the data collection method on which many investment decisions are made and property valuation models are constructed. The limited field of view offered by many “drive-by” methods like broker price opinions (BPOs) leads to a high probability that many critical aspects of a home’s exterior condition, like the condition of the roof or backyard, are being missed. In addition, arbitrary and haphazard notes taken from the street create unstructured and subjective data that are impossible to use for accurately informing decision-making and valuation. Last but not least, drive-by inspections take time and are relatively costly—especially in comparison to the speed and price of off-the-shelf datasets like public records or MLS. The latter sources, however, do not include insights into a property’s condition and either have accuracy issues or are sparsely populated. In the case of MLS data, you must also deal with subjective inputs from real estate agents and the fact that very few homes from the total stock are listed at any point in time.
In today’s market, single-family rental investors and loan traders are relying on this subjective, out-of-date, and slowly-generated information to make quick and crucial decisions. Property valuation providers are also using this poor-quality data as an input into valuations, which reduces their accuracy, while automated valuation models (AVMs) do not take current condition into account at all. The scale at which both of these functions need to be performed can magnify the shortcomings of these approaches.
CAPE’s Exterior Condition Rating (ECR), part of the CAPE AIRE platform, incorporates several exterior property attributes that quantify the condition of a property into a single rating for simple integration into existing workflows. Through the use of aerial imagery and machine learning, ECR combines individual attributes like roof condition, yard debris, lawn condition, driveway condition, and accessory roof condition to bypass the need for traditional in-person inspections.
Exterior Condition Rating and CAPE AIRE
The recently announced CAPE AIRE, an AI-powered intelligence platform for the real estate market, uses computer vision, aerial imagery, and novel data sources to extract highly accurate, critical information about property conditions and their surroundings, with a focus on characteristics that influence property value and marketability.
As one of AIRE’s features, ECR uses a property’s exterior attributes to enable more accurate estimates of property value and estimated repair costs and can also identify outlier properties to exclude from a purchase pool. ECR provides a rating on a five-point scale, ranging from excellent to severe. In addition to this rating score, ECR also produces details for any issues detected such as “cracked driveway” or “poor condition grass” that can impact a home’s curb appeal and its perceived value.
ECR Use Cases
Property valuation: ECR provides a more accurate property condition assessment, which in turn leads to improved property valuation, repair estimates, and risk inputs that can be generated quickly. Specifically, ECR has been shown to reduce AVM error. Armed with a more accurate property valuation, investors have access to more accurate ROI calculations.
Outlier detection: For both loan traders and single-family rental investors, ECR identifies properties in severe condition that should likely be excluded from a purchase pool or purchased at a discount.
ECR in Action
- Seasoned Loan Traders: ECR helps quantify property condition and risk within short and competitive bidding cycles
- Single-Family Rental Investors: ECR can identify homes for purchase-to-rent that yield high ROI and monitor ongoing quality of investments. ECR provides a refined estimate of current property value in addition to any renovation or repair costs.
- Valuation Providers: ECR can improve the quality and profitability of a valuation model in an increasingly hands-off environment.
ECR as a Proxy for Interior and Overall Property Condition
In addition to its impact on valuation, some of our partners have found a strong correlation between ECR and interior structural condition. In this context, ECR can be used as a proxy for a property’s overall condition.
ECR, Urban Institute, and AVM Error
In a report published by the Urban Institute titled Revisiting Automated Valuation Model Disparities in Majority-Black Neighborhoods: New Evidence Using Property Condition and Artificial Intelligence, CAPE’s ECR was used to help prove that “employing more sophisticated artificial intelligence techniques can help us more accurately assess the percentage magnitude of AVM error and its underlying contributors.”
If the goal is to more accurately assess the shortcomings of AVM models and their underlying contributors using large and complex data, the housing industry should consider exploring algorithms the artificial intelligence community has developed. – Urban Institute, 2022
Specifically, in exploring racial bias through AVM error, Urban Institute used ECR to discover that poor property conditions in the Atlanta and Memphis core-based statistical areas (CBSAs) “are associated with a greater percentage magnitude of AVM error,” and that “including property conditions in AVM calculations is important for AVM developers looking to improve accuracy.”
The report concludes that “understanding and eliminating the percentage magnitude of AVM error will ensure all communities experience equitable benefits from homeownership.”
Want to learn more about how ECR fits into the new CAPE AIRE platform? Read our AIRE announcement and visit our Real Estate page.