Automated Valuation Models

Everything is going high tech these days, even real estate appraisals. You’ve probably used real estate tech before without even realizing it.

For instance, ever check home price listings online on a big industry website like Zillow? Then you’ve used what’s called an AVM.

What Is It?

An automated valuation model (AVM) can work like a warp drive in the property appraisal process. It takes time for an appraiser to do analog research for comp homes that fit specific requirements, not to mention the time it takes to compile a nice final appraisal report that usually includes fancy charts, graphs, statistics, and maps. With an AVM, all that work can be completed in a few seconds, putting an estimated property valuation at the fingertips of lenders, agents, appraisers, and you almost instantly.

How do AVMs work? These are computer models, so like many such programs, a series of algorithms crunch multiple sources of data to answer the query. For AVMs, that means finding online records of comparable home sales and comparing property details, tax assessment data, and pricing trends.

To get even more geeky about it for a minute, AVMs usually contain both a hedonic model (which weighs characteristics of the home along with data on its neighborhood) with a repeat-sales price index (which looks for trends in the property sale price data of comparable homes).

In other words, a boatload of factors are weighted to give the best valuation estimate possible. The idea being, the more modelling, the more accurate the estimate will be.

The Pros of AVMs

AVMs do have a lot going for them. They are lightning fast and greatly reduce costs for lenders, agents, or appraisers looking for a reliable property estimate. Another thing to feel good about: their valuation models will always be consistent and objective. So you don’t have to worry about whether the computer model has a migraine or is reliving being chased by your chihuahua while it’s coming up with your estimate.

AVMs have been around since the 90s, but the models in use today are much more sophisticated than older versions. Current data records are easily accessible online, algorithms are more refined, and the models have shown a strong track record for reliability. Many experts thought the AVMs wouldn’t be able to handle the declining housing market after the recession, but generally, the AVMs response was: “We got this.”

The Cons of AVMs

Like anything though, AVMs do have some limitations. The most obvious being that its best feature is also its biggest handicap — with AVMs, there’s no inspection of the property.

While that saves a great deal of time and money, it also means the property valuation is less thorough. There’s no appraiser to verify the square footage, factor in a broken furnace, or make sure a seller isn’t counting a dining room with an air mattress as a fourth bedroom.

Beyond the first-hand inspection, appraisers can more easily catch mistakes in a tax assessment, spot unique trends in a local housing market, and make rational choices from conflicting data. Appraisers can walk brokers through their thought process and the reasoning behind their assessment.

A Valuation Estimate Versus an Appraisal Opinion

While AVMs haven’t yet replaced the appraisal process altogether, they’ve greatly expanded access to reliable price estimate data for lenders, brokers, and appraisers, not to mention buyers and sellers as well. So enjoy the access to this new technology. But just keep in mind that when it comes to AVMs you’re getting an estimate, which may differ from a more thorough home appraisal.