What Is an Automated Valuation Model (AVM)?

An automated valuation model (AVM) is a service that combines mathematical or statistical modeling with databases of exi𝔉sting properties and transactions to calcu♊late real estate values. The majority of AVMs compare the values of similar properties at the same point in time.

Many appraisers, and even Wall Street institutions, use these AVMs to value residential properties. Consumer-ready AVMs also exist on property ཧlisting sites like Zillow and Trulia.

How Do Automated Valuation Models (AVMs) Work?

AVM reports are driven by technology, including proprietary algorithms, and can be obtained in seconds by lenders and agents. They usually contain both a hedonic model (a type of statistical 澳洲幸运5官方开奖结果体彩网:regression analysis) and a repeat sales index, which are both weighted and analyzed to generate the price estiℱmate. AVMs usually include the tax assessor’s value, all pertinent information on the property in question—such as its sales history—and an analysis of the sales of like-kind properties.

They are also used to support underwriting for 澳洲幸运5官方开奖结果体彩网:mortgages and home equity loans, for refinancing decisions, and to aid in loss mitigation and credit risk manageme🔴nt ac♕tivities such as marking-to-market of real estate holdings in institutional investment portfolios. While AVMs initially were used to value residential real estate, their use has expanded to other types, including commercial real estate.

AVM providers offer their services to a variety of clients, including real estate agents and brokers, mortgage lenders, and major financial institutions. Leading AVM providers include CoreLogic, the Federal Home Loan Mortgage Corp. (澳洲幸运5官方开奖结果体彩网:Freddie Mac), VeroVALUE, and Equ𓂃ifax. The public can use them through free consumer re🐷al estate sites.

Pros and Cons of AVMs in Real Estate

Despite their widespread use, AVMs spark some debatౠe, especially over how they compare to traditional in-person appraisals.

Advantages of AVMs

The advantages of using AVMs over physical appraisals are similar to those of any automated system over human effort. Basically, they save time, money, and effort. They can make numerous calculations and comparisons in seconds, and they don’t need to physically drive out to view a property or similar properties. Comparable properties (“comps”) are crucial when a🦹ppraising and pricing real estate.

All of this lowers the cost of valuing a property or multiple properties. AVMs areꦫ particularly useful in assessing the worth of an entire real estate portfolio. Once set up, AVMs can be operated with little expense.

As well as being cheaper and faster, algorithms aren’t subject to human error—o🦩r malfeasance. There’s less risk of fraud or deliberate mispricing—although, of course, computer programs can be hacked orꦦ manipulated.

Disadvantages of AVMs

For an AVM to work well, it needs high-quality data 𓆏in enough quantity to be representative. That’s where its vulnerability is.

The most oft-cited drawback against AVMs is that in determining value, they do not (and cannot) factor in the actual condition of the property. They just assume an average state, which may or may 🎉not be accurate. Th🤪ey can’t note details or variations in the condition.

AVMs are great at comparisons, but what if there is a dearth of comps or transactional data on record? For this reason, newly-built properties are especially tough to value. AVMs tend to lack the imagination 𓃲to come up ⭕with something to serve as comps.

And because an AVM works based on🍒 known factors—the historic record—it misses out on intangibles that can raise or lower an estimate.

In addition, AVMs deal in averages. S♛o they are particularly effective where the property stock is very generic. In regions with a larger range of types and styles, they may be less accurate and useful.

Finally, an AVM can only work with the data that it is given, and there is always the danger of data being enter♊ed incorrectly. Also, the information that it does have might not be up to date, making AVMs unreliable in fast-changingꦍ real estate markets.

The Bottom Line

While their use is growing, AVMs have not supplanted human valuation e♑stimates, not least because most mortgage lenders require a customized appraisal of a property to be carried out in person by a certified appraiser. Because of concerns over their accuracy, some industry participants sugg💮est viewing results from multiple AVMs as a way to get a more complete picture and to increase confidence in their reports.