What Is an Automated Valuation Model (AVM)?
An automated valuation model (AVM) is a term for a service that combines mathematical or statistical modeling with databases of existing properties and transactions to calculate 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 listing sites like Zillow and Trulia.
Key Takeaways
- Automated valuation models (AVMs) are software-based pricing models used in the real estate market to value properties.
- AVMs are more efficient and consistent than a human appraiser, but they are also only as accurate as the data behind them, meaning they may be outdated or incorrect.
- AVM providers include commercial platforms like CoreLogic, Freddie Mac, and Equifax, as well as free consumer 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 regression analysis) and a repeat sales index, which are both weighted and analyzed to generate the price estimate. 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 mortgages and home equity loans, for refinancing decisions, and to aid in loss mitigation and credit risk management activities 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. (Freddie Mac), VeroVALUE, and Equifax. The public can use them through free consumer real estate sites.
Zillow’s popular web-based real estate valuation tool, Zestimate, is one well-known type of AVM.
Pros and Cons of Automated Valuation Models (AVMs) in Real Estate
Despite their widespread use nowadays, AVMs spark some debate, 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 (“comps” being a key factor when appraising and pricing a particular piece of real estate).
All of this lowers the cost of valuing a property or multiple properties. AVMs are 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—or malfeasance. As objective automatons, they remove bias and subjectivity from the equation. Therefore, there’s less risk of fraud or deliberate mispricing—although, of course, computer programs can be hacked or manipulated.
A 2017 conference paper, “Automated Valuation Models (AVMs): a brave new world?” by George Andrew Matysiak of the Krakow University of Economics, referenced other studies in addressing the strengths and the shortcomings of these models. “There is little hard impartial evidence on the accuracy of commercially available AVMs in the public domain,” the paper noted. “Despite high average accuracy levels, statistically based valuations may be widely off the mark and need to be augmented by professional judgment.”
Disadvantages of AVMs
For an AVM to work well, it needs high-quality data in enough quantity to be representative. That’s where its vulnerability lies.
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. They can’t note details or variations in the condition.
AVMs are great at comparisons, but what if there is a dearth of comparable real estate (comps) or transactional data on record? For this reason, newly built properties are especially tough to value, and AVMs, being rather literal, tend to lack the imagination to 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.
Finally, an AVM can only work with the data that it is given, and there is always the danger of data being entered incorrectly. Also, the information that it does have might not be up to date—making AVMs unreliable in fast-changing real estate markets.
The Bottom Line
Major AVM providers tout their accuracy, comprehensive coverage, and time savings. AVMs deal in averages. So 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.
While their use is growing, AVMs have not supplanted human valuation estimates, 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 suggest viewing results from multiple AVMs as a way to get a more complete picture and to increase confidence in their reports.
