What is an Automated Valuation Model (AVM)?

Insights

What is an Automated Valuation Model (AVM)?

September 30, 2022
,
Certified Credit

In the world of real estate, property valuation is an essential process. It’s used during tax assessments, mortgage originations, and more.

Historically, traditional 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 faster, more affordable estimates than traditional appraisals, making them an attractive alternative for homebuyers and mortgage lenders alike.

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.

AVMs Defined

AVMs are software programs that use statistical modeling to estimate the market value of 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 take a 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.
    • Discounted cash flow approach – Lastly, appraisers may use the discounted cash flow approach for commercial properties. This method predicts up to a decade of income and expenses and discounts future cash flows back to the present day using a discount rate.

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 Hybrid Appraisals?

AVMs and traditional appraisals aren’t the only property valuation tools you can choose from. Hybrid appraisals, also known as bifurcated appraisals, are another method that’s gaining popularity.

As their name suggests, hybrid appraisals combine aspects of AVMs and traditional appraisals. Here’s how they work:

    • An in-person property inspection is conducted by a third-party real estate professional, such as a realtor, appraiser trainee, or property inspector.
    • The third-party inspector shares their report findings with the appraiser.
    • The appraiser uses the inspection findings, as well as public records, MLS data, and comparable sales to complete their estimation.

As you can see, hybrid appraisals resemble traditional appraisals—they just split the work between two people, allowing the appraiser to focus all of their attention on the valuation process. Like AVMs, hybrid appraisals are often faster and more efficient than their traditional counterparts.

What Are the Benefits of AVMs?

AVMs have been replacing traditional appraisals in several situations due to their many benefits.

The advantages of AVMs are as follows:

    • 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. In contrast, traditional home appraisals can take up to a few weeks to complete.
    • Convenience – Arranging a traditional appraisal can be complicated and time-consuming. Firstly, the current property owner and the home appraiser must synchronize their schedules. After that, the owner must prepare the property for an in-person walk-through. AVMs don’t require anyone to schedule an in-person appointment or impose on a homeowner’s privacy, enhancing convenience for everyone involved.
    • Affordability – Traditional appraisals can cost a few 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. Since AVMs digitize this process, they’re much more cost-effective.
    • Accuracy – Lastly, AVM estimates are often more accurate than traditional appraisals. That’s because they take the potential for human error and bias out of the equation. According to Forbes, traditional appraisals have error rates of up to 16%, while AVMs’ are below 4%.[iii]

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.

    • 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 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. Hybrid appraisals can provide many of the same benefits as AVMs without these drawbacks, since they can take the condition of the property into consideration.

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 inefficient traditional appraisals, leading to less stress, lower costs, and quicker closings.

Our AVM offerings include:

  • 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.
  • Home Price Analyzer (HPA) – Next, you can try out the HPA. This AVM’s hybrid model plugs detailed real estate database information into several independent statistical algorithms. As a result, it has a strong reputation for providing fast, reliable residential home estimates.
  • 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.

Certified Credit: More Than Just a Score

In addition to our AVMs, we also offer many other innovative solutions for mortgage lenders, including:

Are you ready to boost your mortgage lending business with the latest data-driven technology? Schedule a credit consultation with our team today.

 

Sources:

[i] Investopedia. What You Should Know About Real Estate Valuation.

https://www.investopedia.com/articles/realestate/12/real-estate-valuation.asp

[ii] Bankrate. How much does a home appraisal cost? It depends on several factors.

https://www.bankrate.com/mortgages/how-much-does-an-appraisal-cost/

[iii] Forbes. Everything You Need To Know About Automated Valuation Models (AVMs) In Real Estate.

https://www.forbes.com/sites/forbesrealestatecouncil/2020/03/02/everything-you-need-to-know-about-automated-valuation-models-avms-in-real-estate/?sh=69b953c23013

[iv] HousingWire. What AVMs can and can’t do in the appraisal process.

https://www.housingwire.com/articles/what-avms-can-and-cant-do-in-the-appraisal-process/

[v] Freddie Mac. Home Value Explorer.

https://sf.freddiemac.com/content/_assets/resources/pdf/fact-sheets/home_value_explorer_794.pdf