What are AVMs in real estate?

When you’re selling your house, you’ll very likely have to go through a home appraisal. This process is an official examination of your home that determines how much it’s worth, and is often required when you take out a mortgage. Automatic valuations are becoming more popular for real estate brokers, lenders, and people who want to know the value of their home without going through the official appraisal process.

These computer-based models factor in the tax assessor’s value, all pertinent and available information about the property, and an analysis of comparable property sales to estimate the home's value. Using an AVM can be more accurate than a human appraisal, but the estimates they provide are only as good as the data that it's supplied.

What is an Automated Valuation Model (AVM)?

An AVM is a software-based tool that combines statistical modeling with a database of existing properties and transactions to calculate residential and commercial real estate values. It’s similar to a real estate agent’s comparative market analysis (CMA) which compares the values of similar properties at the same time. However, unlike a CMA, AVMs use data that you provide, as well as existing data to automate and streamline the process — and the results are only as good as the data available.

AVMs are often used to support mortgage underwriting and home equity loans, assist in refinancing decisions, and to aid in loss mitigation. Although created to value residential real estate, they are more commonly used in commercial real estate.

Many appraisers use AVMs to value residential properties, and consumer-ready AVMs exist on sites like Zillow, and its competitors like Trulia. Some of the biggest AVM providers include CoreLogic, the Federal Home Loan Mortgage Corp. (Freddie Mac), VeroVALUE, and Equifax.

How do AVMs work?

AVMs are powered by statistical models, algorithms, and data. Most AVMs include a statistical regression analysis, known as a hedonic model, and a repeat sales index

Some of the most important data points in an AVM report uses to determine the price of a home include: 

• the tax assessor’s value
• the property’s sales history
• the sales history of similar properties
• the property’s basic features

An AVM will not, however, consider the condition of a property when determining its value. That’s where a human appraiser comes in.→

→ Learn about the difference between appraised and market value

Why are AVMs used in real estate?

Real estate agents, brokers, and mortgage lenders all use AVMs as a jumping-off point in property valuation and setting a listing price. It’s an efficient first step to analyzing what a property is worth. Factors like the condition of appliances in the home and how long the home stays on the market can impact the sale price, but AVMs offer a good starting point.

Consumers can also use AVMs to get a solid estimate of what their home is worth before deciding to put it on the market. iBuyers, for instance, use AVMs to generate property value estimates before making an offer to buy your home.

Is an AVM more accurate than an appraisal?

AVMs process and utilize far more data than the human mind can handle in a matter of seconds. As such, when there is a lot of data available about your property and properties in the area, an AVM can provide an extremely accurate valuation.

Traditional appraisers may have biases about a particular area, may ding property values more for certain defects in a home, and are subject to “gut feelings” that machines are not.

However, an AVM is only as good as the data available, which isn’t always a lot — especially in more rural areas. While this gets better over time, there’s good reason to worry that an AVM estimate isn’t accurate in areas with limited public data. Similarly newly built homes are notoriously difficult for AVMs to value. Lacking imagination, AVMs can’t manufacture comps out of the data.

Likewise, if a comparable property in the area was sold to a family member for a big discount or went significantly above asking price in a hot market, it can impact the data set. AVMs are very reactive to outliers.

Finally, AVMs are subject to some human error, as well. They only work with the data they’re provided, which means a data entry error can have a big impact on the model. Add a 0 to $500,000, and you’ve got a massive outlier.

Related: How accurate are Zillow Zestimates?

Advantages of AVMs

When looking at the advantages and disadvantages of AVMs, you have to compare them to the traditional home appraisal process. Before AVMs, in-person human appraisals were how we determined home value. While both methods still play an important role in the real estate industry, we need to clarify that we’re comparing AVMs to the traditional appraisal method in this section.

Faster results

You can get an AVM report in a matter of minutes, without having to schedule a meeting with anybody. It could be days or even weeks to complete an in-person property appraisal, depending on how busy appraisers are or if a lender requires you to use someone specific. A faster valuation — if a lender and/or buyer waives an in-person appraisal — can expedite the closing process.

Less expensive

Home appraisals take time and effort from a human appraiser. As such, they also cost money. The typical home appraisal costs between $300 and $400 and is usually paid by a buyer. However, if you’re a homeowner who wants to have your home appraised before going out to market, you’ll have to foot that bill. An AVM saves both the time of getting an appraiser out, and it’s a lot more affordable.

If you have multiple properties, it’s significantly cheaper to use an AVM to assess the entire value of a real estate portfolio.

Attractive to buyers

The most well-known consumer AVM is Zillow’s “Zestimate” tool, which displays a property’s “true” value. Millions of potential buyers use this tool when house hunting because it’s an intuitive and easy way to feel a little more informed about a property.

As such, AVMs are a proven way to attract more leads. When somebody sees that your home is listed for a bit less than the AVM-projected price, it draws interest. In a competitive housing market, it’s not always easy to capture leads who might want to buy your home, but AVMs offer a compelling tool.

Disadvantages of AVMs

AVMs rarely forgo the need for a home appraisal. In the vast majority of home sales that involve a buyer taking on a mortgage, a lender will insist on an in-person home appraisal. That’s because of several limitations of AVMs.

Limited in scope

AVMs are not meant to replace more in-depth property valuations like inspections, Comparative Market Analysis (CMA) tools, or in-person appraisals. 

AVMs only use quantitative data to make estimates, so they can’t take into account the condition of a home. They always assume an “average” state of the home, which could impact both homes in great condition and poor condition. They can’t note or analyze home details. This is the biggest criticism of AVMs.

Again, they’re a starting point for the sale process, usually not a replacement for a home appraisal.

They’re not human

There’s a fundamentally human element to real estate. Home is where the heart is, after all, right? An AVM can’t factor in abstract elements to a property valuation like how the neighborhood has changed over time, how cute that breakfast nook is, or the incredible quality of that recent kitchen renovation. Those are left to human evaluators to note in a property valuation.

Automated Valuation Models (AVMs) are yet another example of how real estate is getting more innovative and efficient. However, while AVMs offer brokers, lenders, and consumers alike a useful way to value properties quickly, they’re not a replacement for a traditional appraisal.

FAQs

Here's more to know about automated valuation models in real estate.

Q: What is an AVM?

An AVM is an Automated Valuation Model, a computer-generated estimate of a property's value based on mathematical algorithms and data analysis, without the need for a physical inspection.

Q: Can AVMs predict future property values?

AVMs are focused on estimating current property values based on historical data and market conditions. They are not typically designed to predict future property values accurately.

Q: What does real AVM range mean?

Real AVM range refers to the range of values generated by an Automated Valuation Model for a specific property. It indicates the possible value range within which the property's market value is estimated to fall.

Q: What is an example of an AVM?

Zillow's Zestimate is a well-known example of an AVM. It provides estimated property values for millions of homes based on their proprietary algorithm, but keep in mind that is not always completly accurate.