Automated Home Valuation Modeling

If you’re thinking about selling your home, one of the first things you’ll want to find out is how much your home is worth. For potential home buyers, it’s much the same. You want to know how much the homes you like in your area cost.

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Enter your home address and know its home value and its neighborhood price values.

One of the best things to help you answer these questions is an automated valuation modeling tool. AVMs are a type of computer program that quickly analyzes real estate data to produce an estimated value for a given piece of property.

AVMs have been around for a while and continue to improve in accuracy. However, the ballpark estimate an AVM produces still isn’t a substitute for a professional appraisal. At the same time, AVMs are an important educational and market research tool for home buyers, home sellers and others who want to find out the value of a piece of property.  

History of AVMs

The origin of AVM software programs goes all the way back to the 1980s and the advent of the personal computer. As computer use expanded in the business world, real estate professionals looked for opportunities to put the new technology to work in their field.

The Early Days of AVMs

George Matysiak, a professor of economics at Krakow University, says the first commercial use of an AVM was in North America in 1981, as financial firms and institutional investors turned to AVMs for market analysis help estimating property values. The software tools applied basic statistical methods to a set of data records on properties. These first-generation AVMs produced a quick report on the market value of a piece of property, taking into account its location, relevant market conditions, and even characteristics of the piece of real estate, based on the information available in the data set.

The first-adopters of AVM technology liked that the valuation reports of AVMs were fast, affordable and systematic. Though computing power 40 years ago wasn’t as fast as it is today, AVMs could still crunch reams of property data far faster than a team of property researchers or appraisal experts. This meant that getting a ballpark estimate on a property’s value could be done cheaply, because it could be done faster and with less human labor. First-adopters also appreciated that AVM reports were systematic. This was thought to reduce some inaccuracies in valuations that could come from human judgement.

However, early AVMs weren’t perfect. They were limited by computing power as well as thin data. The limits of computing power meant that the math used to compute the valuation reports was also limited. Multiple regression analysis (MRA) was one of the key methods for determining values, however, MRA had drawbacks, such as the inability to fully account for the interaction of some pricing variables. Access to large enough data sets was also a problem, since, without human judgement, the accuracy of the report depends on a large enough set of data.

AVM Technology Advances

So while computing power improved and data records grew, AVMs remained a tool mostly for large financial firms, institutional investors, researchers and governments for the next couple decades. That all began to change around 2004, says Steve Bergsman, writer at Mortgage Banking Magazine, when second-generation AVMs, with improved technology, took up widespread use in the mortgage market. This happened first in the secondary market, where mortgage investments are sold on to investors. But by 2006, the primary mortgage market and the residential real estate market were also opening up to the idea of AVMs.

By 2007, people were taking notice of a new real estate tech firm called Zillow, which offered property estimates online to home buyers and sellers. The Wall Street Journal noted that Zillow’s early estimates were often very good, within a few percentage points of the actual price paid. However, when data was lacking or contained its own errors, the estimate could be off.

Today’s AVMs

Fast-forward to today, and there are numerous AVMs, available for free online at your fingertips. The two big challenges that plagued the early modeling tools, lack of computing power and limited data, have largely been addressed. Modern computational methods involving artificial intelligence and machine learning mean that more factors can be accounted for in AVM reports. Additionally, most property records are now online, meaning that today’s AVMs have access to massive amounts of data, further aiding accuracy. George Matysiak, of Krakow University, reports that today’s AVM estimates are now within 3% accuracy of actual selling prices half the time and within 10% accuracy 75% of the time.

How AVMs Work

Today’s AVMs still combine the two basic elements of statistical models and a database of real estate market data to arrive at a property value estimate. But this is only what’s happening on the surface level.

AVMs Are Different from an Appraisal

Greenfield Advisors notes the accuracy of today’s AVMs not only depends on the algorithm and data set used, but also on the skill of the human who programs the computer tool. Similar to a traditional sales comparison analysis, data on a subject property is compared with a set of sales transactions selected by the AVM. But that’s where the similarities end.

With a traditional appraisal, an appraiser will select a small number of very similar comparable sales, in terms of number of rooms, square footage, amenities, location, market conditions, etc., and determine a professional valuation for a subject property. However, an AVM can compare a much larger set of data, crunching data on the relationship between these property characteristics in a large number of sales transactions and those homes’ final sales prices in order to estimate a value for the subject property.

Statistical Modeling Helps Determine Value

Commercial AVM tools today use a number of complex modeling and mass appraisal techniques, including regression analysis, neural networks, and expert systems modeling. Hedonic regression models, which are useful for comparing complex goods like real estate, are also common.

What all that means for the home buyer or seller is that an AVM might discover that curb appeal matters less to buyers than the number of bathrooms, or that school district and not a two-car garage sells this kind of house at a particular price. Those results can be used to better estimate the value of the subject home.

AVM Strengths and Weaknesses

Like all tools, AVMs have their strengths and weaknesses. An AVM is a great tool for market research when properly utilized, with “properly utilized” being the key words here.

AVM Strengths

One of the greatest strengths of AVMs is that they are always getting better. Technological improvements are made to computer systems every day, as are improvements of existing real estate data accuracy. Plus new data is being recorded and uploaded to databases used by AVMs all the time. As these tools rely on technology and data, the constant improvements of both mean AVM value estimates are increasing in accuracy.

Another strength of AVMs is the ability to gather a large volume of valuations. AVMs are particularly well suited to situations where you would like to have valuation estimates for a large number of properties, even over a span of months or years. This is particularly useful in commercial applications, when investors, financial firms, governments or others want to look at the value trends. However, everyday home shoppers and homeowners can also benefit. Many online AVMs allow you to see the estimated value of a particular home as it has risen or fallen over time, even comparing it to average neighborhood home values or metro values over time.

AVMs also benefit from speed. Steve Bergsman notes in Mortgage Banking Magazine that AVMs produce valuation estimates almost in real time. Though there may be a lag in how quickly new data is loaded into the database, the estimated value you receive today will reflect the latest available information. In contrast, the estimated value reported by an AVM six months ago would be different, depending on the data available and the current market conditions.

Finally, a great strength of AVMs is their cost. While institutions and governments may pay to access commercial AVM software products, which still cost much less than professional appraisals, home buyers and sellers often have access to good-quality AVM tools for free online. This is a huge strength of AVMs, considering the cost of a single professional appraisal is upwards of $300, and can take weeks to be fulfilled. It’s a further reason AVMs are helpful for researching and comparing a number of properties or taking a wider look at the real estate market.

AVM Weaknesses

At the same time, AVMs aren’t perfect, so it’s important to understand the tool’s limitations and weaknesses to avoid confusion and surprises.

One weakness is that AVMs are automated. While it’s true that automation may help eliminate some human error inherent in other types of property valuations, the current state of the technology means that automation introduces its own margin of error. Without the human element of a traditional appraisal, an AVM estimate may overlook factors like home condition, views, improvements, and so on.

In part, this weakness is due to a limitation in the software. To arrive at a valuation estimate, AVMs must make certain assumptions about the homes they are assessing. One assumption that can be problematic is that the subject property and other comparables are all in saleable condition. This can result in a neglected property being overvalued, or in an updated and well-cared-for property being undervalued.

Another weakness is that the AVMs of today have difficulty accounting for unique features of a subject property. A great view can add thousands to the value of home, and the same is true for a home with unique luxury upgrades or a history of famous ownership or local renown. While AVMs are learning to factor in more data points and arrive at better value estimates, the software of today can’t account for such variables.

Data can be another area of weakness for today’s AVMs. While data today is good overall, and continually improving, real estate data isn’t perfect. This can lead to under- or overestimates for some properties where data was lacking. Additionally, it’s important to note that uniform data isn’t collected across the country. This means that some areas with better data will have more accurate AVM estimates, and other real estate markets where data is lacking will have a larger margin of error in AVM valuations.

That brings us to the biggest weakness of AVMs: accuracy. All of the above weaknesses can contribute to a particular valuation estimate being inaccurate. However, it’s important to note that there are many different methods for ascertaining the value of a property. AVMs just happen to be the easiest, fastest and most cost-efficient — and for a ballpark estimate, AVMs are a good compromise. Rest assured, that when real estate agents, lenders or institutional investors need a more accurate real estate valuation, they will make use of additional tools and methods.

When to Use AVMs

With that said, you’ve probably realized there’s a right time and a not-so-right time to use an AVM. This is no slight against AVMs; it’s just important to pick the right tool for the right job.

One of the best times to put AVM technology to work is at the beginning of your real estate values search. Quick, free and on-demand estimates can guide you in the right direction. You may find your home has gone up in value, or that homes in a particular area are right in your price range. With such information, you can decide to move forward by contacting a real estate agent or mortgage refinance lender.

Another good use for AVM tools is looking at trends, whether for historical markets or neighborhoods. An AVM tool can tell you whether property values are rising or falling over time, as well as how fast they’re changing, for a single property, or for a whole neighborhood or region. Investors and market researchers are the primary users of AVMs for this purpose, but home buyers and sellers can also look at trends. It may tell you whether your home value is in sync with a particular trend, or bucking it.

Finally, AVMs are a good tool for discovering when real estate markets are changing. The real estate market goes through cycles, sometimes growing, sometimes contracting, sometimes quickly, sometimes slowly. By crunching the data on many factors and many properties, AVM reports can help you spot these changes in the cycle.

When Not to Use AVMs

It’s also important to understand when an AVM isn’t the right tool for the job. In these cases, other methods and tools will be better suited to provide you with a precision valuation.

For example, it’s necessary to use methods other than an AVM when determining the true value of a home, whether you are considering selling, buying or refinancing. There are situations, such as determining what price you will list your home for or what price you will offer on a home you want to buy, where precision counts and ballpark estimates just won’t do. To buy or sell a home, you’ll want to go beyond an AVM report and work with a real estate agent, who may use several methods to determine value, such as comparative market analysis.

Mortgage transactions are another place where AVMs play a limited role. Accuracy matters when it comes to deciding whether to approve a purchase loan, allow a homeowner to refinance, or approve a cash-out refinance of a homeowner’s equity. It’s for this reason that banks may make some limited use of AVMs, but back those estimates up with public records research, multiple list system data, predictive economic modeling and traditional appraisals.

Why Appraisals Still Matter

It’s true that despite the incredible progress of AVMs, traditional appraisals still matter. In part, this is due to the skill and precision of expert appraisers. If you purchase, sell, refinance or invest in real estate today, odds are a professional appraiser will be the one to determine the true value of the property.

Appraisers can and do sometimes make use of specialized AVMs, called interactive AVMs, that allow the appraiser to adjust some data points to make an AVM report more accurate. However, traditional appraisals include many subjective elements. Appraisers usually visit the subject property, take photos to document its condition and measure square footage. Computer AVM programs get better every day, but when it comes to these subjective elements, a professional appraisal is best.

See What Your Home Is Worth

For a fast, free, on-demand estimate of your home’s value, automated valuation modeling is a perfect choice. Velocity Lending’s own AVM tool, powered by Zillow’s Zestimate AVM, is a great way to start your home value research. See an informational estimate of what your home is worth, then contact a lender or real estate professional about the next steps for selling, buying or refinancing.

Get my home value

Enter your home address and know its home value and its neighborhood price values.