With the rise of tech real estate services such as Zillow, Redfin, Realtor.com, etc., consumers can quickly research and get an idea of what their home is worth without involving a REALTOR®.
So, what is an AVM?
AVM stands for “Automated Valuation Model.” It’s a computer-driven mathematical formula that uses property characteristics, market information, and price trends to arrive at an estimated value or value range. Using an AVM minimizes the need to do a thorough analysis of properties currently on the market – the way it was done not so long ago.
Relying on an AVM consequently speeds up the home loan and appraisal process, and both lenders and appraisers use AVM software to arrive at home values.
Several AVMs are used in real estate and can include the hedonic, tax assessor, combined valuation, or price index model. All of these models have different pros and cons. The combined model will be the most comprehensive, and for the purpose of this article, we’ll use it.
A combined valuation is going to look at the following to generate a value:
- The price paid by the owner of the current property
- Deeded transactions (the number of times a property has been sold)
- Comps (prices of comparable properties)
- Any previous property valuations (tax assessments are an example)
Once it combines all of the available data, the software can give a fairly complete analysis of what the property is worth.
That seems fair, so what are the drawbacks or limitations of an Automated Valuation Model?
While technology has made marked advances, it’s by no means perfect, and there’s a lot an AVM can’t do. For example, an AVM can price a property high or low based on its location and number of owners. Still, the system won’t know the quality of materials used in the building’s construction or the builder’s reputation. It also won’t take into account any improvements that were not reported. For instance, adding a storage shed to the property.
If previous values are not available, the system may have difficulty generating an accurate price. Here in Idaho, since we’re a non-disclosure state, tax records may not contain the home’s actual sales price. So, when the system generates a valuation, it’s really going to be a guess that isn’t very accurate, especially when data isn’t publicly available.
If the property has never sold before, it’s possible the AVM may have difficulty coming up with comps against which to evaluate the property in a particular area. Additionally, if the home is unique, there’s a likelihood the system won’t provide an accurate value. If it’s not able to come up with a fair price, then a professional will need to visit the property to assess the real value.
Home prices generated by systems like Zillow are usually inaccurate for our area. While they may give a rough ballpark as to what to expect, they’re generally lower than reality, given the market conditions. With homes selling practically as soon as they hit the market, values continue to rise. This illustrates the importance of working with a REALTOR® to have a professional market analysis done so that you have a realistic expectation of what to get for your home should you decide to sell.
Industries that Use AVMs
AVMs are used in a variety of industries, most with roots in real estate. Let’s take a look at some of the professions that rely on AVMs.
Real Estate Agents
We touched on this above, but real estate agents need to have a way to find and evaluate properties for their clients quickly. Experienced agents generally have their fingers on the market’s pulse and can put together valuations on a property pretty easily. However, having a system that can quickly show them comps and other approximate valuations can help them work more efficiently and deliver an excellent experience for their clients. In today’s hot real estate market, speed is everything, and being able to locate and evaluate properties quickly is going to be beneficial.
Investors
People who deal with investments and investment properties as part of their profession also rely heavily on AVMs. They can evaluate whether a property is a good value or a good buy based on the ROI of comps in a particular area. Also, Investment Advisors can use an AVM to generate a list of properties that might appeal to their client without involving a REALTOR®.
Lenders
Lenders rely on AVMs to assist with their risk management. Mortgage brokers, banks, etc., need a quick way to verify if their clients seeking a mortgage have the resources to qualify for a loan. AVMs can also help lenders see if the property is going to be worth the risk. Also, depending on your lender, if you’re buying a new home or refinancing, it’s possible to get an appraisal waiver thanks to the work of AVMs.
Appraisers
In the Idaho real estate market, home appraisers are incredibly busy. Many use AVMs to help them assign values to properties without needing to do a thorough inspection of the home in question. Of course, as mentioned above, AVMs are not perfect, and sometimes appraisers need to do more work to accurately assess a property’s value.
The Last Word
As technology continues to evolve, systems and processes are giving people more opportunities for efficiency. AVMs were born out of the advances in technology and have been beneficial to professionals and consumers. While the technology continues to improve, there are still issues that need to be improved. Furthermore, AVMs will never replace the personal experience of appraisers and REALTORS®.
As mentioned above, AVMs are great tools to use to establish a baseline. Still, when the time comes to sell your home, you’ll need to rely on a professional as the accuracy will be far superior to that of an AVM, especially if the value is attained using a free service.
There you have it—more than you probably ever wanted to know about automated valuation models.