What Is an Automated Valuation Model (AVM)?

Automated Valuation Model (AVM) is a term for a service that uses mathematical or statistical modeling combined with databases of existing properties and transactions to calculate real estate values. The majority of automated valuation models (AVMs) compare the values of similar properties at the same point in time. Many appraisers, and even Wall Street institutions, use this type of model to value residential properties.

Consumer-ready AVMs are also available including Zillow's "Zestimate" and similar web-based real estate valuation tools.

Key Takeaways

  • Automated valuation models (AVMs) are software-based pricing models used in the real estate market to value properties.
  • AVMs are more efficient and consistent than a human appraiser, but they are also only as accurate as the data behind them, meaning they may be outdated or incorrect.
  • AVM providers include commercial platforms like CoreLogic, Freddie Mac, and Equifax; as well as free consumer sites like Zillow and Trulia.

Understanding Automated Valuation Models

Automated Valuation Model (AVM) providers offer their services to clients including real estate agents, and brokers, mortgage lenders, and major financial institutions. Leading AVM providers include CoreLogic, The Federal Home Loan Mortgage Corporation (Freddie Mac), VeroValue, and Equifax. Major providers tout their accuracy, comprehensive coverage, and time savings.

AVM reports are driven by technology, including proprietary algorithms, and can be obtained in seconds by lenders and agents. They usually contain both a hedonic model (a type of statistical regression analysis) and a repeat sales index, which are both weighted and analyzed in order to generate the price estimate. AVMs usually include the tax assessor's value, all pertinent information on the property in question, such as its sales history, and an analysis of the sales of like-kind properties. For the model to work well, they need high-quality data in enough quantity to be representative. While these models are quick and cheap, they do not factor in the condition of the property to determine its value.

They are also used to support underwriting for mortgages and home equity loans, refinancing decisions as well as aiding in loss mitigation and credit risk management activities such as marking-to-market of real estate holdings in institutional investment portfolios. While initially AVMs were used to value residential real estate, their use has expanded to other types including commercial real estate.

AVMs And Physical Appraisals

Despite their widespread use nowadays, questions remain as to how accurate these automated models are compared to physical appraisals. A 2017 conference paper titled, "Automated Valuation Models (AVMs): a brave new world?" by George Andrew Matysiak of Krakow University of Economics, references other studies on this topic in addressing the strengths as well as the shortcomings of these models as a valuation tool. Because of accuracy concerns, some industry participants suggest viewing results from multiple AVMs as a way to increase confidence in results.

While their use is growing, they have not supplanted human appraisers, not least because most mortgage transactions require appraisals of the property in question to be carried out by certified appraisers.