You’ve probably used an automated valuation model (AVM) without even realizing it. When you open up your favorite real estate site, type in a street address, and instantly see an estimate of what a property is worth, you can thank an AVM. This data tool, which has proliferated in recent decades, uses software, algorithms, and existing information to calculate an estimated value for a given piece of property.
AVMs may have made it easier to estimate the sale price of a house you have your eye on, but they also have limitations. This article dives into how AVMs work, how they’re used, and when you might still need to rely on a human appraiser.
Table of Contents
- Key Points
- • Property valuation has started to shift from human appraisers to AVMs.
- • AVMs use public records, multiple listing service (MLS) data, and property details to estimate home values quickly.
- • Estimates update in real time as new sales and market data becomes available.
- • AVMs are faster, more scalable, and more cost-effective than home inspections, but they may not provide details on a property’s condition.
- • While useful for buyers, lenders, and investors, AVMs provide estimates, not formal appraisals.
What Is an AVM?
Pinning down how much a home is worth is a process known as property valuation — and has historically been a job for human property appraisers. As computers proliferated and software evolved, developers created AVMs. They’ve been around for a while now: Zillow launched its Zestimate product, which functions on an AVM, in 2006. It’s now possible to get a basic understanding of what your home is worth in mere seconds.
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How AVMs Work
AVMs allow big companies such as Zillow — as well as lenders, real estate agents, and shoppers — to get a quick estimate of a home’s value at a glance. These software products use a matrix of existing data (more on that below) to provide a good estimate of what a home might be worth.
AVMs are also helpful because they’re updated in real time based on constantly changing market factors. For instance, if one property on a block sells for a higher price than expected, that sale price will begin factoring into the AVM for other homes on the block as soon as the information becomes public. In other words, the information is far more dynamic and up to date than a human appraiser could offer with a single study.
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Key Components of AVMs
AVMs use a collection of different data sources and statistical algorithms to build their estimates. Several different AVM companies offer these programs to clients, and each has a proprietary way of computing home values.
Some of the most common information that AVMs rely on includes:
• Public records, which may include information like property sales and tax history
• MLS data, which offers pricing information on similar properties (known in the industry as “comps”)
• Information about the property, such as its age, size, and tax assessment, which may be pulled from public records
Using machine learning and algorithms created by professionals, AVMs can use these pieces of information to generate an up-to-date estimate for just about any property in the U.S., though their level of accuracy may vary.
For example, there may not be many perfect comps available in an area with newly constructed properties, which could lead to a less accurate AVM estimate. There are other situations in which AVMs may be inaccurate, as described below.
Applications of AVMs
AVMs are useful in a whole host of situations, from mortgage lending, where lenders can use the information to make better-informed underwriting decisions, to portfolio management, which can help investors understand the current value of their real estate assets.
And as anyone who’s ever quickly looked up the price of an eye-catching house can attest, AVMs are also very useful for property shoppers. As long as the estimate is treated as just that — an estimate rather than an exact price — having access to AVM information can help browsers understand which homes they can afford to make an offer on or how much financial preparation they’ll need to get the house of their dreams. They won’t, however, give you a complete picture of how much it will cost to own the home. For that, you’ll need a mortgage calculator with taxes.
Advantages and Limitations of AVMs
AVMs have both advantages and limitations.
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Pros:
• Speed: Even the fastest human property appraiser can’t update every property’s valuation every few hours like an AVM can.
• Cost-effectiveness: While appraisals must be paid for on a per-appraisal basis, factoring in the appraiser’s hours worked and expertise, companies may pay for AVM software once or as an affordable subscription service.
• Scalability: Since AVMs rely on algorithms, they can offer thousands of valuations based on less overall work than the bespoke human appraisal process.
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Cons:
• Potential for inaccuracy: Any algorithm is only as good as the data fed into it, and mistakes in public records do occur. Records can also be outdated, so they may not reflect a heating, ventilation, and air conditioning upgrade, for example.
• Inability to assess intangibles: There are some factors (such as property condition) affecting a home’s value that don’t easily translate to a database. In these instances, a human appraiser still has the edge.
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AVM Accuracy and Reliability
As we’ve seen, although AVMs can offer a lot in terms of speed and cost efficiency, they can sometimes lag behind human appraisers when it comes to accuracy. You might hear the phrase “AVM appraisal,” but a valuation isn’t really the same as an appraisal you’d get from a professional. Newly constructed or nontraditional properties can be more difficult to assess for value based on comps (since there may be few, if any, strong ones), and intangibles such as property condition don’t always show up in the data these algorithms draw from.
Fortunately, some AVMs also offer confidence scores, which can help you understand how likely it is that the value offered is accurate. You could also check with a knowledgeable real estate professional to get their take on how accurate a given estimate is.
Impact on the Real Estate Industry
AVMs have changed the real estate industry by making home value estimates widely and readily available to the general public. Along with helping buyers shop in what can sometimes feel like a complex market, AVMs also make it easier for those who own a home to understand how much equity they’ve built, or how much they might stand to gain by selling it.
While a human appraisal and home inspection continue to be common parts of most real estate transactions, over time, AVMs may reduce the need for such services as they become more accurate, potentially saving money for those on the market. They could also help speed up the underwriting process for home mortgage loan lenders, as well as make it easier for real estate agents to offer their clients home showings in their price range.
The Future of AVMs
Although AI has been all the rage the last few years, we’re still just at the very beginning of this new line of technology, which has the potential to evolve at an exponential rate. While many AVMs are already incorporating machine learning and other high-tech methods, technological developments and the continued progress of AI and big data could result in these valuations becoming far more accurate and accessible over time.
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The Takeaway
AVMs have had a significant impact on the real estate industry and will continue to do so as technology improves and advances. However, human appraisals still have an irreplaceable role in today’s market in terms of accuracy for tax assessments and sales.
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FAQ
How do AVMs compare to traditional appraisals in terms of accuracy?
Generally speaking, AVMs are not as accurate as a traditional appraisal. Although they can provide quick and cost-effective estimates, these estimates are only as good as the data that feeds into the program, which can sometimes be inaccurate. AVMs also often can’t evaluate property conditions and other intangible elements that a human appraiser could easily spot.
Can AVMs completely replace human appraisers?
As technology advancements continue, the jobs that technologies make easier may change. For now, human appraisers are still an important part of the real estate market, offering their expertise and individualized focus on a property rather than relying solely on computer algorithms and data.
How do AVMs handle unique or recently renovated properties?
Nontraditional, newly renovated, or newly constructed properties can be challenging for AVMs since they use publicly available information about comparable properties to provide estimates, and these types of properties may not have very good comps available. AVMs also assume the same level of condition for all homes, which means they might overvalue a home in disrepair or undervalue a newly renovated one.
Are AVM results accepted by all financial institutions?
Because AVMs cannot (yet) match the accuracy and reliability of a human appraisal, many mortgage lenders still require human appraisals to be part of the purchase process. Because this technology is still relatively new, legislation is actively being created to regulate its use and ensure it complies with nondiscrimination laws and avoids conflicts of interest. Over time, more lenders may allow AVMs to replace human appraisals.
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