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Introduction to Automated Valuation Model (AVM)
When you are looking to buy a home, the most significant factor that a homebuyer will have his entire focus on is the value of the home.
Most people know how the estimated property values are derived. However, when it comes to getting an actual value, only experts know how these are calculated.
In this post, we will learn what is an AVM (automated valuation model), and how it works.
What is an Automated Valuation Model (AVM)?
An automated valuation model is a tool that performs complex mathematical automated calculations to find out the value of a property.
AVMs are on a plethora of third-party websites. Places like Zillow.com, realtor.com, Trulia, and many others.
If you have ever gotten an instant value for your home or a home that you are looking at online, it was likely an automated valuation model that brought that to you.
In the states where the selling price of the home is not public information, these automated valuation models can be very hit or miss.
These tools can be fun for a leisure online search; however, if you want to know what your real home value is, without potentially risking a very costly miss, it is recommended that you speak to your local real estate agent for their expertise to know more about the values of the home.
How does an Automated Valuation Model Work?
You have seen automated valuation models all the time. Zillow calls it Zestimate, redfin calls it their home value estimator, and many such sites have some version of this model.
Back in the late 90’s institutional investors were looking for a fast way to get a hand on what a group of homes in a bundle of collateralized mortgages might be worth.
Since it was not feasible to appraise each home, they developed algorithms that looked at public records data for many homes at the same time and could come up with kind of a rough valuation.
Since then the portal sites have licensed and developed their own automated valuation models.
Pros of Using Automated Valuation Model (AVM):
The biggest advantage is that you cannot change the data produced through the AVM.
Unless you can somehow change public records for so multiple properties at the same time, you cannot fudge values lower or higher.
It removes the human factor from the evaluation process. They are roughly accurate most of the time to within ten percent overall so, they are helpful to keep an eye on how your property value is trending over time.
Cons of Using Automated Valuation Model (AVM):
Many times the prices mentioned by an automated valuation model may be misleading. Automated valuation models use tools like mathematical modeling, advanced analytics, machine learning algorithms, or any combination of these.
They analyze the vast amount of data by combining property records with many other variables such as home size, lot size, number of bedrooms, number of bathrooms, locations, so on and so forth.
However, data-driven valuation systems have their limitations because property pricing is both art and science.
For example, If there is a new development project being built in an old community, the AVM while calculating the price of an older home in that community may fail to take into account the impact of that upcoming community.
Similarly, when considering a location or a zipcode, an automated valuation model may not know that two distinct neighborhoods are side by side one with million-dollar homes other with average construction.
Likewise, while an automated valuation model may know that a house is remodeled, it cannot gauge what value those upgrades add to a home.
Lastly, automated valuation models also don’t take into account the subtle changes in the market trends. If it was just about analyzing data, AVMs would definitely do it better than humans.
However, part of home pricing is an art that requires the adjustment of many variables, and that is where the automated valuation models lack accuracy.
Conclusion
AVMs are a great way and tool for tracking how your property is appreciating over time and how the market is going in general.
However, for real evaluation, it is best to contact your trusted real estate agent who would be able to walk you through how an automated valuation model might be tripped up in your area and what to look out for.
When it comes to buying a new home, your lender would be going through the proper appraisals for their calculation purpose.
