Determining house prices is an inexact science. When you’re ready to sell your home, it takes time and experience to determine its fair market value, with agents often doing lots of real estate comparisons to compare the home to similar ones nearby. And there’s also the appraisal process, by which lenders make sure the house is worth enough to secure the mortgage loan offered. It’s no wonder sellers often turn to online pricing models known as Automated Valuation Models, or AVMs, for a quick estimate of their home’s value.
What is an Automated Valuation Model (AVM)?
An automated valuation model is a computer program that uses an algorithm to determine the value of a property. If you want a ballpark figure of your home’s value, you can easily get an idea by typing in the address on these sites.
But there are many different AVMs, each designed and offered by a different real estate or finance company – and you’ll likely get a different number with each. One of the most popular examples is Zillow’s Zestimate, a dollar figure displayed on every property listed on its website. Realtor.com, banks like Chase, and major brokerages like RE/MAX also offer their own versions.
AVMs consider various factors about the home and its location to arrive at an approximate value of a property, without a professional appraisal. However, while their approximate values can be useful for buyers, sellers, agents, and even lenders, it’s important to keep in mind that they’re just that: approximate. In other words, just because a house’s Zestimate is $500,000, there’s no guarantee that the house will actually sell for that much.
How do AVMs work?
AVMs calculate existing data on a home, as well as the area and similar homes in the same area, and use complex mathematical formulas to determine the home’s value.
For example, an AVM may consider factors such as:
- square area of the house
- Global property size
- Number of bedrooms/bathrooms
- When the house was built
- Recent Comparable Home Sales
- Tax notice
- Previous sales amounts
- Neighborhood crime statistics
- School district assessments
- Market trends and seasonality
The precise formula and data points used vary: each AVM algorithm will calculate the value of a house slightly differently. One might value an extra bedroom slightly higher than another, for example, causing one AVM to value a house at $250,000 while a second values the same house at $265,000.
AVM vs Home Appraisals
Both AVMs and home appraisals aim to accomplish the same thing: give an idea of a property’s value. However, there are key differences between the two.
For starters, AVMs are usually free. Plus, they’re easy – just enter your address. And because they rely solely on existing data, anyone can use an AVM to appraise a home thousands of miles away.
However, AVMs cannot account for more subjective things, such as whether the house is in good condition or the general vibe of the area. This is where professional assessments come in. Appraisals require a professional to physically visit a property and appraise it in person. They’re not free – in fact, appraisal fees can run into several hundred dollars or more. Professional appraisers will consider many things that an AVM would consider, such as the size of the home and the number of bedrooms, but they may also consider subjective factors that could influence the value of the home.
Advantages and disadvantages of MAV
Along with other digital-based real estate technology trends, AVMs have grown in popularity. Their main advantages include:
- Convenience: You can perform an AVM in minutes or less, whereas assessments require appointments, scheduling, and in-person visits.
- Cost: Some sites may charge a small fee to access their AVM, but the majority are free. Professional appraisers, on the other hand, cost hundreds of dollars.
Of course, there are downsides when complex decisions are made by a computer rather than an experienced human being. Two big disadvantages of AVMs:
- Subjectivity: An AVM evaluates data points objectively, rather than physically seeing and understanding a home as a person would. He may, for example, overvalue a house in poor condition if he cannot account for its condition.
- Precision: The accuracy of the AVM can be variable. The more data available, the more accurate their estimates will be, which means they are more accurate in large, busy markets with lots of real estate sales and purchases.
At the end of the line
Automated appraisal models are an easy way to get an idea of a home’s value. They are much faster and cheaper than hiring an appraiser, which makes them extremely popular. However, keep in mind that AVMs only provide an estimate of a home’s value and are not guaranteed – the final sale price may be higher or lower.