An automated valuation model is a tool that produces real estate values. AVMs are designed to augment or replace traditional appraisal reports completed by professional appraisers. While some AVMs are used by popular websites, others are generated by internal systems used by valuation firms and financial institutions. While AVMs can be useful tools to get a sense of the value of your real estate, they're also controversial.
AVMs use market data to estimate the value of a piece of real estate. While AVM models vary in terms of both what factors they use and how they weigh them, you can usually expect an AVM to factor in a property's tax-assessed value and comparable sales in the area. AVMs use public data about the property to, for instance, calculate a value per square foot. Some AVMs also look at market trends to predict the direction of the market.
Assumptions and Gaps
Unlike a professional appraiser, an AVM can't see the property. Instead, it assumes that the property is roughly similar to other homes in the neighborhood. This can lead to an overstated value for a property in bad condition or an understated value for a home in superior condition with many upgrades. Furthermore, AVMs are largely dependent on public record databases, and if those databases have incorrect or outdated information, the model will return an inaccurate valuation. AVMs may not distinguish between various sale types, such as foreclosures and traditional sales. For example, it could compare a well-kept traditional sale to a severely damaged foreclosed property sale.
AVMs in Lending
Lenders use AVMs as a part of valuing properties for mortgages. In fact, some mortgage lenders rely on AVMs rather than regular appraisal inspection reports. Even if an AVM is not used to originate a mortgage, many lenders use AVMs to check up on their properties or to help them make decisions on handling distressed properties. Special AVM models exist to make distressed property valuations more accurate.
AVMs aren't just for lenders and real estate professionals. You can also use a consumer-oriented AVM to estimate the value of your house. While the publicly available AVM's don't always agree with each other, they can give you an estimate of your home's value. They can also be useful tools when you're looking at buying a property or analyzing the value of your second home or vacation property.
- Jupiterimages/Photos.com/Getty Images