AI and Real Estate: 3 Takeaways on Property Value
Artificial Intelligence (AI) is a very hot topic in almost every industry and component of life. Its rapidly-expanding capabilities recently caused tech leaders to sound the alarm on the need for additional regulation. Nonetheless, lawmakers have not formalized significant limitations on the use of the tool to date.
The Real Estate industry is ripe for AI use, given its focus on data. Land value, rent, and improvements all surround trends across geographic markets. Further, AI can help streamline transactional details with fewer costs. Nonetheless, the ease of AI does not eliminate the legal framework surrounding the valuation of land. In fact, the fair market value of property remains based on state law (across jurisdictions). I recommend that potential sellers and purchasers keep the following in mind.
In Virginia, “fair market value” is defined as the amount that a willing buyer would pay for a piece of Real Estate – and a willing seller “who desires, but is not obliged to sell it”. This determination is verified – using a Real Estate appraisal. While Real Estate appraisals are not necessary to establish the sales price for property, they remain an integral component of transactions.
Real Estate appraisals in Virginia (and several other jurisdictions) can only be completed by licensed professionals. The Virginia Administrative Code regulates the appraisal profession in Virginia. Appraisers must be licensed by the Commonwealth and adhere to the Uniform Standards of Professional Appraisal Practice (USPAP). A failure to comply with USPAP can result in discipline by the Commonwealth and profession. In contrast, sales and analysis pulled from AI do not contain vetting or oversight by a regulatory body.
USPAP requires that appraisers use specific valuation mechanisms to determine their opinion of value. Appraisers must apply the sales comparison, cost, and income approaches to value (as applicable). Each valuation approach carries specific methodologies and requirements that must be ultimately reconciled in a final opinion of value. AI opinions or predictors of value do not apply the same level of analysis.
I recommend that market participants remain skeptical about using AI to predict the value of their property or potential investments. While the tool serves as a helpful way to quickly scan information, its lack of oversight and standards underscores the importance of existing industry indicators such as appraisals.
Theodora Stringham focuses her practice on bringing solutions-oriented representation and zealous advocacy to complex issues impacting individuals, organizations, and businesses. Ms. Stringham seeks to understand clients’ concerns and provide thorough and strategic options aimed at achieving their goals. She has been recognized for her work in the Real Estate, Labor and Employment, and Commercial Litigation practice areas, providing counseling and litigation support for a wide variety of concerns.