In the world of real estate, property valuation is an essential process. It’s used during tax assessments, mortgage originations, and more.
Historically, traditional, in-person appraisals have been used to generate property valuation estimates. However, a new data-driven approach has been gaining traction in recent years: Automated valuation models (AVMs). AVMs provide quick estimates that allow lenders to ensure the accuracy of a traditional appraisal, evaluate a transaction’s loan to value (LTV) before a traditional appraisal, or can even replace a traditional appraisal for some refinances, home equity lines of credit (HELOCs), portfolios of collateral, and more.
Below, we’ll explain what AVMs are and how they work. We’ll also highlight the benefits and drawbacks of using AVMs over traditional property appraisals.
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AVMs are software programs that use statistical modeling to estimate the market value of the residential and commercial real estate. AVMs base their valuations on the following types of information:
- Real estate databases
- Public property records
- Sales histories
- Tax assessments
- Property characteristics (square footage, number of bedrooms and bathrooms, etc.)
- Property locations
- Real estate market price fluctuations
If you want to estimate a property’s value, there are several AVM providers you can choose from. Zillow’s “Zestimate” is a popular consumer-facing AVM that many homebuyers are familiar with. While all AVMs work similarly, their specific algorithms and data inputs may diverge, leading to varying valuations and differing degrees of accuracy.
While consumers can use AVMs to see how different properties may fit within their budgets, real estate agents, brokers, and mortgage lenders often use AVM services as a starting point to evaluate properties and obtain accurate estimates.
What is an AVM Report?
You can find out more about a specific AVM estimate by reviewing its associated report. An AVM report typically includes the property’s address, county, current owner, and intended land use. It may feature the comparable sales used to inform its estimate too.
AVM reports may also include:
- Estimated property value ranges – An AVM’s estimated value range lets you know the highest and lowest potential values that a property will most likely have. When AVM estimates have narrow ranges, it means that they use more detailed data, leading to better accuracy. In contrast, broad AVM ranges suggest scantier data and lower accuracy.
- Confidence scores – The probable accuracy of an AVM is estimated by its confidence score. This score lets you know how certain an AVM is about the accuracy of its estimate based on its available data and algorithmic limitations. The higher the confidence score, the better.
- Forecast standard deviations – The forecast standard deviation lets you know the statistical probability that an AVM estimate lies within a certain range of the actual market value. It’s determined by the consistency of data used during the calculation. Lower forecast standard deviations suggest higher chances of accuracy.
By reviewing these key metrics about an AVM’s estimate, you can assess its validity and proceed accordingly.
AVMs vs. Traditional Appraisals
Now that you understand how AVMs work, let’s look at how they differ from traditional property appraisals.
During an in-person appraisal, a qualified appraiser will inspect a property; take stock of its size, condition, special features, and floor plan; review the real estate transactions of recent comparables in the area; and factor in any relevant market trends.
Qualified appraisers can use one or more of the following methods to arrive at their final estimates:[i]
- Sales comparison approach – One of the most popular appraisal methods for residential properties is the sales comparison approach. This method estimates a property’s value by looking at the recent selling prices of similar properties in the area. This method stands out for its ability to factor in selling points of the surrounding location, such as good schools, convenient shopping centers, and overall appearance.
- Cost approach – With the cost approach, an appraiser adds up the cost of each component of a property. After that, they add this total cost to the market value of the land and account for any relevant depreciation.
While a property’s cost can certainly impact its market value, it’s not the only factor. Thus, this method is usually reserved for properties that have been recently enhanced by the addition of a new building.
- Income capitalization approach – Appraisers often use the income approach for investment properties. This method predicts a property’s value using its estimated net annual income and rate of return. To determine these figures, the appraiser must factor in potential vacancies, rent collection issues, and operating expenses.
As you can see, each of these methods requires the appraiser to conduct complicated calculations and exercise unbiased judgment when determining various figures.
Since appraisers are human beings, eliminating all biases may be impossible. For instance, an appraiser may unconsciously select comp properties that slightly inflate or deflate a property’s value based on the purpose of the appraisal (ie. mortgage underwriting vs. tax valuation).
What Are the Benefits of AVMs?
While an AVM cannot replace a traditional appraisal in many scenarios, they still offer several benefits. Some of these advantages include:
- Speed – AVMs can spit out estimations in a matter of minutes. Thanks to their rapid results, they enable real estate agents, mortgage brokers, lenders, and homebuyers to review properties’ values on the spot. This allows a lender to quickly verify the value of the property — validating that there is no potential bias or error.
- Affordability – Traditional appraisals can cost a hundred dollars.[ii] That’s because the home appraiser must make a trip to the property, inspect it in detail, and perform complicated assessments to arrive at an estimated value. The entire process could take several weeks. When originating a HELOC or similar loans, the cost of a traditional appraisal can significantly impact the cost of origination. Since AVMs digitize this process, they’re much more cost-effective when applicable to the loan.
- Accuracy – Although an AVM does not address the unique features of a property, it does offer an increasingly accurate property estimate in residential areas. Advancing technology, such as artificial intelligence (AI) and machine learning, has significantly improved AVM’s accuracy with a majority of AVMs that provide values within +/- 5% of a home’s actual value. [vi]
- Peace of Mind – AVMs offer a cost-effective solution to verify a mortgage LTV, and ensure the stated value of the property that comes from the broker, consumer, or appraiser was not influenced by unintentional bias.
What Are the Drawbacks of AVMs?
While AVMs have many upsides, they also have the following limitations:
- They can’t take into consideration the condition of a property – To a homebuyer, high-end appliances, and fresh hardwood floors can make a big difference in the perceived value of a home. Unfortunately, AVMs don’t factor in these types of details.
- They’re only as accurate as their inputs – AVMs rely on a wide range of information about a property to estimate its value. If this data is inaccurate or outdated, it may hinder the accuracy of the estimate.
Unfortunately, real estate public records aren’t always updated immediately. It can take several months for new information to reach them. As a result, AVM estimates may not be able to factor in the latest comparable sales in an area.
Additionally, AVMs’ accuracy may decrease when the available data is sparse. For this reason, AVM estimates may not be as suitable for rural homes or other properties where comparable sales data is limited.
- Many Mortgage transactions still require appraisals – While AVMs can provide a worthwhile starting point for determining the market value of a property, traditional appraisals are still required for most formal real estate transactions. As a result, AVMs may not eliminate the need for traditional appraisals entirely. They can simply reduce the number of appraisals needed during the homebuying and mortgage origination process.
Note: Fannie Mae recently announced that it will allow mortgage lenders to use a desktop appraisal option within their Desktop Underwriter starting March 19, 2022.[iv] Desktop appraisals aren’t the same thing as AVMs, but they are similar. Desktop appraisals can be conducted without an in-person inspection, relying on property records instead. Like AVMs, the accuracy of desktop appraisals depends on the quality of the available public record data.
As you can see, AVMs have some drawbacks. Even so, they can enhance the mortgage underwriting process significantly.
How are Lenders Using AVMs Today?
Although AVMs may not be able to replace a traditional appraisal when manufacturing a mortgage for a new purchase, they are still being used today to optimize and improve the origination process.
Eliminating a Traditional Appraisal from a HELOC, Second Mortgage, & More
Unlike the appraisal required for a new purchase, the guidelines for a qualified refinance, HELOCs, and portfolios of collateral appraisal are less stringent. Generally, these loans have a lower risk and therefore federal agencies and investors will often allow them to bypass a traditional appraisal.
As a result, many lenders either select a hybrid appraisal (a digital estimate and a visual inspection of the outside of the home) or an AVM solution, rather than having an appraiser evaluate the entire property.
While a hybrid appraisal may be slightly more accurate, it will not offer a quick value estimate and will be less cost-efficient. AVMs help reduces origination costs and greatly improve the speed and time in which the appraisal can be completed.
Ensuring LTV Before a Traditional Appraisal
Even though a mortgage for a new home purchase requires a traditional appraisal, the evaluation of the property can take weeks to schedule, conduct, and report. And, unfortunately, sometimes that appraisal comes in below the proposed purchase price.
When this happens, the LTV of the loan is impacted, and the borrower needs to make a decision. The borrower can either renegotiate the purchase price or the borrower can put more equity toward the home with a larger downpayment – neither of which is a favorable position for a borrower.
At the same time, this decrease in LTV can change the terms and conditions of the loan and increase the lender’s risk, as lower LTV loans have a greater possibility of delinquency and default.
To avoid this scenario, many lenders will pull an AVM at the beginning of the origination process, long before the traditional appraisal to ensure the LTV and purchase price are aligned with the estimated value of the home. This not only offers the lender peace of mind, but it makes sure the borrower does not end up “underwater” or in an tough situation and that closings are not delayed by renegotiations or additional underwriting.
Upgrade Your Mortgage Lending Business With High-Quality AVMs
If you’re ready to streamline your property valuation process, Certified Credit can help.
Our AVMs pull from extensive databases of property records, so you can enjoy fast, accurate estimates. They can mitigate your reliance on traditional appraisals, leading to less stress, lower costs, and quicker closings.
Our AVM offerings include:
- Freddie Mac’s Home Value Explorer (HVE) – Lastly, we provide access to HVE from Freddie Mac.[v] This AVM uses a proprietary algorithm and the most comprehensive data available to produce exceptionally accurate estimates in seconds.
- PASS – Our PASS ATM automatically selects the best calculation model for your chosen property based on its unique specifications. It also provides detailed reports so you can assess the accuracy of your final estimates.
- PMC — By combining property-level data and market trending information with an in-person physical exterior inspection completed by an experienced professional with local market knowledge, PMC provides a comprehensive report of the property. This report includes multiple photographs, neighborhood conditions, home price index, and local sales activity to accurately evaluate the property value.
- GEO AVM — Brings together industry-leading AVMs to deliver results in seconds. By evaluating geography, price tier, property type, subject property factors, and other variables, this AVM solution selects the most appropriate valuation model, ensuring accurate results that meet federal guidelines.
- iVAL — Using a rules-based system and a blended model, iVal analyzes the latest market sales of comparable properties. By leveraging council data, local sales data, property attribute data, and Valocity-generated data, this automated solution produces a predicted market value for residential properties.
Certified Credit: More Than Just a Score
In addition to our AVMs, we also offer many other innovative solutions for mortgage lenders, including:
- Affordable credit reports
- Credit score improvement tools
- Automated lead generation tools
- Automated prequalification
- Automated verification of income and employment
- Automated undisclosed debt monitoring
- Other property and valuation tools
- Fraud and risk support
- Underwriting compliance support
- Settlement services
Are you ready to boost your mortgage lending business with the latest data-driven technology? Schedule a credit consultation with our team today.
[i] Investopedia. What You Should Know About Real Estate Valuation.
[ii] Bankrate. How much does a home appraisal cost? It depends on several factors.
[iii] Forbes. Everything You Need To Know About Automated Valuation Models (AVMs) In Real Estate.
[iv] HousingWire. What AVMs can and can’t do in the appraisal process.
[v] Freddie Mac. Home Value Explorer.
[vi] Housing Wire. 3 misconceptions about using AVMs in home equity lending.