You’ve probably used an Automated Valuation Model (AVM) without even realizing it. When you open up your favorite real estate site, type in a street address, and instantly see an estimate of what the property is worth, you can thank an AVM. This data tool, which has proliferated in recent decades, uses software, algorithms, and existing information to calculate an estimated value for a given piece of property.
AVMs may have made it easier to estimate the sale price of a house you have your eye on, but they have their limitations, too. Below, we’ll dive into how AVMs work, how they’re used — and when you might still need to rely on a human appraiser.
What Is an AVM?
Pinning down how much a home is worth is a process known as property valuation — and has historically been a job for human property appraisers. But as computers proliferated and software evolved, eventually, AVMs were created. They’ve been around for a while now: Zillow launched its Zestimate product, which functions on an AVM, in 2006. It’s now possible to get a basic understanding of what your home is worth in mere seconds.
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How AVMs Work
AVMs allow big companies like Zillow — as well as lenders, real estate agents, and shoppers — to get a quick estimate of a home’s value at a glance. These software products use a matrix of existing data (more on that below) to spit out a good guess as to what a home might be worth.
AVMs are also helpful because they’re updated in real time based on ever-changing market factors. For instance, if one property on a block sells for a higher price than expected, that sale price will begin factoring into the AVMs for the other homes on the block as soon as the information is public. In other words, the information is far more dynamic and constantly up-to-date than a human appraiser could offer with a single study.
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Key Components of AVMs
AVMs utilize a collection of different data sources and statistical algorithms to build their estimates. There are several different AVM companies that offer these programs to clients who use them, and they each have their own proprietary way of computing home values.
Some of the most common information that automated valuation models rely on includes:
• Public records that can include information like property sales and tax history
• Multiple Listing Service (MLS) data, which offers pricing information on other, similar properties (known in the industry as “comps”)
• Information about the property, such as its age, size, and tax assessment, which may be pulled from public record
Using machine learning combined with algorithms created by the professionals coding the software, AVMs can use these pieces of information to generate an up-to-date estimate for just about any property in America — though its level of accuracy may vary.
For example, with newly constructed properties, there may not be many perfect comps available in the area, which could lead to a less accurate AVM estimate. There are other situations where AVM accuracy might be lacking, too — we’ll dig into that below.
Applications of AVMs
Automated valuation models are useful in a whole host of situations — from mortgage lending, where lenders can use the information to make better informed underwriting decisions, to portfolio management, which can help investors understand the current value of their real estate assets.
And as anyone who’s ever quickly looked up the price of an eye-catching house can attest, AVMs are very useful for property shoppers, too. As long as the estimate is treated as just that — an estimate rather than an exact price — having access to AVM information can help browsers understand which homes they can afford to make an offer on or how much financial preparation they’ll need to do to be able to afford the house of their dreams. (They won’t, however, give you a complete picture of how much it will cost to own the home. For that you need a mortgage calculator with taxes.)
Advantages and Limitations of AVMs
Like everything else in life, AVMs have both advantages and limitations to keep in mind.
Advantages of AVMs include:
• Speed. Even the very fastest human property appraiser can’t update every property’s valuation every few hours like an AVM can.
• Cost-effectiveness. While appraisals must be paid for on a per-appraisal basis, factoring in the appraiser’s time working and expertise, companies may pay for AVM software once or as an affordable subscription service.
• Scalability. Since AVMs rely on algorithms, they can offer thousands of valuations based on less overall work than the bespoke human appraisal process.
On the other hand, their drawbacks include:
• Potential for inaccuracy. Any algorithm is only as good as the data fed into it, and mistakes in public records do happen. Records can also be outdated — not reflecting an HVAC upgrade, for example.
• Inability to assess intangibles. There are some factors (such as property condition) that can affect a home’s value that don’t easily translate to a database. In these instances, a human appraiser still has the edge.
AVM Accuracy and Reliability
As we’ve seen, although AVMs can offer a lot in terms of speed and cost-efficiency, they can sometimes lag behind human appraisers when it comes to accuracy. You might hear the phrase “AVM appraisal” but a valuation isn’t truly the same as an appraisal that you would get from a professional. Newly constructed or non-traditional properties can be more difficult to assess for value based on comps (since there aren’t many or any good ones), and intangibles like property condition don’t always show up in the data these algorithms draw from.
Fortunately, some AVMs also offer confidence scores, which can help those using the estimates to understand how likely it is that the value offered is accurate (or close to it). You could also check with a knowledgeable real estate professional to get their take on whether a given estimate hews closer or further from the truth.
Impact on the Real Estate Industry
AVMs have already changed the real estate industry by making home value estimates widely and readily available to the general public. Along with helping buyers shop in what can sometimes feel like a confounding market, AVMs also make it easier for those who do own their home to understand how much equity they’ve built — or how much they might stand to gain by selling.
While a human appraisal and home inspection continue to be common parts of most real estate transactions, over time, as they increase in accuracy, AVMs may reduce the need for such services, potentially saving money for those on the market. They could also help speed up the underwriting process for home mortgage loan lenders, as well as making it easier for real estate agents to offer their clients home showings in their price range.
The Future of AVMs
Although AI has been all the rage the last few years, we’re still just at the very beginning of this new line of technology — which has the potential to evolve at an exponential rate. While many AVMs are already incorporating machine learning and other high-tech methods, technological developments along with the continued progress of AI and big data could see these valuations becoming far more accurate and accessible over time.
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The Takeaway
Automated valuation models, or AVMs, have already changed the real estate industry — and have the power to continue to do so as technology improves and advances. However, human appraisals still have an irreplaceable role in today’s market, ensuring the best accuracy for tax assessments and sales.
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FAQ
How do AVMs compare to traditional appraisals in terms of accuracy?
Generally speaking, AVMs are not as accurate as a traditional appraisal. While AVMs are both speedy and cost-effective, their estimates are only as good as the data fed into the program — and, of course, sometimes that data can be inaccurate. AVMs also often can’t evaluate property conditions and other intangible elements that a human appraiser could easily spot.
Can AVMs completely replace human appraisers?
As is true in all parts of technology, as advancements continue, the jobs those technologies make easier may change. For now, human appraisers are still an important part of the real estate market, offering their expertise and individualized focus on a property rather than relying blindly on computer algorithms and data.
How do AVMs handle unique or recently renovated properties?
Nontraditional, newly renovated, or newly constructed properties can be challenging for AVMs, since they utilize publicly available information about comparable properties, or “comps,” to make their estimates (and these types of properties may not have very good comps available). AVMs also assume the same level of condition for all homes, which means they might overvalue a home in disrepair — or undervalue a newly renovated one.
Are AVM results accepted by all financial institutions?
Because AVMs can not (yet) match the accuracy and reliability of a human appraisal, many mortgage lenders still require human appraisals to be part of the purchase process. AVMs are new enough that legislation is still actively being made to regulate their use and ensure they comply with nondiscrimination laws and avoid conflicts of interest. Over time, more lenders may allow AVMs to replace human appraisals, but that’s not the market we have today.
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