The Future of Real Estate: Will AI Replace Human Underwriting?

Introduction: The Role of Underwriting in Real Estate

Underwriting has become crucial in the real estate industry, ensuring that commercial and residential transactions are financially viable and the property is cash-flowing. The usual underwriting process in real estate involves assessing risk in taking a loan to buy a property, a process heavily reliant on human judgment – to assess property values, buyer’s financial history, and future trends.

However, recent developments in Artificial intelligence (AI) are changing the narrative, with major players in the real estate industry asking whether AI will eventually displace human underwriting.

In this article, we will explore the future of real estate underwriting, with insight into how AI is already transforming both residential and commercial property markets, and whether it can actually replace human underwriting.

What is Underwriting in Real Estate?

From a real estate standpoint, underwriting is the process of analyzing and evaluating the various risks associated with lending money for the purchase of properties. Be it a residential mortgage or commercial property loan, the purpose of underwriting is to assess the financial potential of a loan and underlying risks, including factors such as the borrower’s credit score, the value of the property, and projected income (for income-generating properties). Now, let’s talk about the types of real estate property, to understand their underwriting process.

Types of Real Estate Investments and How They Are Valued

There are various types of real estate investments, but this article will focus on two major types, viz; Commercial Real Estate and Residential Real Estate.

Commercial Real Estate

Commercial real estate is the property that is used for business undertaking rather than residential purposes. They are purchased, leased, or developed to generate income. Some common types of commercial real estate are;

1. Office Building: These are used for business operations and they may include coworking space, skyscrapers, and business parks.
2. Multifamily: Multifamily properties are complexes with multiple housing units structured to accommodate multiple tenants. Investors choose them because they can yield numerous streams of rental income from a single asset.
3. Mobile Homes: They are manufactured and moved to a site which often is a mobile home park. They are favorable to investors who own the land where the mobile home is placed due to cash flow from renting the property out and an increase in the value of the land over time.
4. Hospitality: This type of commercial real estate property includes a hotel and relaxation site built for travelers or tourists. CEO Mark Hamister an expert in the hospitality sector of real estate at Hamister Group, shared a great insight into why real estate investors need to understand the sub-sectors in hospitality real estate so that they are not wasting their finances on properties that will not yield long term or face challenges due to low patronage.
5. Mixed-Use Development: This combines under one complex, residential, commercial, and sometimes industrial spaces.

As Peak Frameworks explains, while commercial real estate can provide rental income and property appreciation over time, investors must consider risks such as economic downturns, tenant turnover, and changes in consumer preferences.

Residential Real Estate

Residential real estate is developed for individual or family rentals and dwellings. According to Metawealth, residential real estate stands as one of the most profitable ventures in the real estate industry. An investor will be making the grandest financial decision in a lifetime if they choose to invest in residential real estate. Types of residential real estate may include;

1. Single-Family Homes: These are single living spaces that are detached from other residences. As stated by HHHunt, Single-Family Homes do not share walls with other homes, as would be seen with the likes of condominiums and townhomes.
2. Townhomes: These are properties with multiple floors sharing one or two walls with other adjacent properties but with separate entrances. They come in various designs and styles as pointed out by Integrity Homes, which include but are not limited to Queen Anne townhomes, Greek Revival Style, the Federal Style, and Italianate townhomes.
3. Condominium:  This is a unit within a complex where tenants share common areas and amenities, while maintenance is handled by some association. Propex emphasized their affordability due to the sharing of costs by neighbours.

Residential vs. Commercial Real Estate Valuation: A Deeper Dive

How commercial and residential real estate are valued is different, which in turn influences how underwriting is approached.

Commercial Properties:  They are valued based on the income they generate, which typically is through cash flow. The underwriting process for commercial real estate commands more complex financial models to assess the property’s potential revenue, operating expenses, and Net Operating Income.

Residential Properties: Residential properties are valued based on comparable sales (Comps) in the area. This method involves assessing similar homes sold recently in the same area to get an estimation of what a property is worth in the market. In conducting the underwriting for residential real estate, the focus would be on the buyer’s ability to repay the mortgage. This will involve checking the customer’s creditworthiness, income, and debt-to-income ratio.

Fix and Flip Strategy

Investors whose strategy is to use the fix and flip method, understand the importance of relying heavily on detailed underwriting if they are to get good profit. They need this to calculate the cost of repairs to a property, how much the property will cost in terms of purchase, and the anticipated selling price of the property after they have expended costs on renovations. With the advent of AI, investors can get a predictive analysis of the final sale value of a property based on market trends and similar properties.

The Rise of AI in Real Estate

In so far as the real estate market grows increasingly complex, AI technologies are revolutionizing and streamlining the underwriting processes. These technologies can handle vast amounts of data, quickly and accurately analyzing market trends, property values, and risk factors that may take human underwriters far longer to assess. 

Speaking on how AI is streamlining the real estate investment process, KeyCrew Journal, in one of their review article, stated that DealWorthIt consolidates all human efforts in the discovery of a property into a single platform, and goes further to provide a platform that assists investors to evaluate a property potential return over a long period.

Now let’s talk about the transformation AI is bringing to the real estate industry.

How AI is Transforming Various Aspects of  the Real Estate Industry

The emergence of AI has changed how properties are valued, bought, sold, and financed. AI Technology is giving the flex to real estate professionals, to gain insights from historical data and market trends, which was previously non-existent. For instance, AI is capable of predicting changes to how a property is valued in a neighbourhood, with economic and climate data playing a major role.

Innovations

1. Data Analysis: AI can process large data sets, and analyze thousands of data points which would naturally take humans forever to evaluate. Take for example, in commercial real estate, data-driven insights may include tenant occupancy rates and historical rent rolls.
2. Machine Learning: With no disrespect to humans, AI can use machine learning to constantly adjust its predictions based on new data, refining property value models over time.
3. Predictive Modeling: AI has what it takes to forecast future market trends based on historical data, which allows better decision-making. For instance, AI Predictive models can evaluate how a property’s value would change in a couple of years, based on factors like shifts in the economy or developmental strides in the locality.

The Benefit of Using a Real Estate Underwriting Software

In one of our articles, we considered the 5 benefits of using a real estate underwriting software. A brief highlights of those benefits are stated below:

1. Efficiency
2. Automated Analysis with Instant Results.
3. Time-Saving advantage
4. Unlocking Market Intelligence
5. Team collaboration

Can AI Replace Human Underwriting in Real Estate?

The question as to whether AI is capable of replacing human underwriting is a tough one to answer without first comparing AI underwriting viz-a-viz human underwriting. Here is a comparison between both.

Aspect	AI Underwriting	Human Underwriting
Decision-Making Process	Relies on data, algorithms, and patterns in historical data.	Relies on experience, intuition, and judgment.
Speed	Faster, as AI can process vast amounts of data instantly.	Slower due to manual review and analysis.
Consistency	Highly consistent, and follows the same rules and algorithms.	Can be influenced by biases, fatigue, or varying interpretations.
Cost	Lower in the long term after initial setup and training	Higher, due to salaries, benefits, and training costs.
Risk Assessment	Can spot patterns in data that humans might overlook, but may miss nuanced or unquantifiable aspects.	May miss subtle patterns, but can consider complex or nuanced factors.
Accuracy	Highly accurate for tasks it’s trained on, but limited by data quality and scope.	Depending on the individual’s experience, can vary.
Scalability	Scalable; can handle thousands of evaluations simultaneously.	Limited by time and human resources, often needs expansion of staff for growth.
Data Processing	Can analyze massive datasets in a fraction of time.	Limited by time, often needs additional resources to process large data.
Error Handling	May make errors in unfamiliar or ambiguous situations without human oversight.	Can adjust decisions based on context or new information.

Based on the above comparison, it seems both human and AI underwriting have their shortcomings. While there is significant promise with AI, there are challenges in full integration of same in the real estate industry. AI systems require quality and accurate data to function effectively, and any incomplete or outdated data is bound to provide inaccurate underwriting decisions. Now here is our decision!

The Future of Commercial Real Estate: Hybrid Models and Human-AI Collaboration

Rather than fully replacing human underwriting, we at DealWorthIt believe that the future of real estate underwriting lies in a hybrid model, where human experts and AI systems can function hand in hand. AI can handle the heavy lifting process of vast amounts of data, identify trends, and make predictions – while human underwriting provides the nuanced judgment that is currently not available with AI.

Conclusion

While AI is undoubtedly transforming the real estate underwriting landscape, it’s unlikely to fully replace human underwriting in the near future. Instead, a hybrid model of human-AI collaboration appears to be the most realistic and effective approach. AI can handle the heavy data lifting, allowing human underwriting to focus on more complex decision-making and risk assessments.

As the technology evolves, however, we can expect AI to play an increasingly central role in real estate underwriting, making the process faster, more accurate, and cost-effective. Human underwriting, however, will continue to provide critical oversight and judgment, ensuring that the industry remains adaptable to the many variables and uncertainties that come with real estate investment.