Automated Valuation Models, how do they work?

An automated valuation model (AVM) is a term for a service that combines, artificial intelligence, and mathematical or statistical modeling with databases of existing properties and transactions to calculate real estate values.

Many appraisers, and even Wall Street institutions, use these AVMs to value residential properties. Consumer-ready AVMs also exist on property listing sites like Zillow and Trulia.

“Automated valuation models (AVMs) are software-based pricing models used in the real estate market to value properties. AVM providers include commercial platforms like CoreLogic, Freddie Mac, and Equifax, as well as free consumer sites like Zillow and Trulia.”

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 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.

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

AVM providers offer their services to a variety of clients, including real estate agents and brokers, mortgage lenders, and major financial institutions. Leading AVM providers include CoreLogic, the Federal Home Loan Mortgage Corp. (Freddie Mac), VeroVALUE, and Equifax. The public can use them through free consumer real estate sites.

The bottom line

“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and consistent than a human appraiser, but they are also only as accurate as the data behind them, meaning they may be outdated or incorrect.”

Major AVM providers tout their accuracy, comprehensive coverage, and time savings. AVMs deal in averages. So they are particularly effective where the property stock is very generic. In regions with a larger range of types and styles, they may be less accurate and useful.

While their use is growing, AVMs have not supplanted human valuation estimates, not least because most mortgage lenders require a customized appraisal of a property to be carried out in person by a certified appraiser. Because of concerns over their accuracy, some industry participants suggest viewing results from multiple AVMs as a way to get a more complete picture and to increase confidence in their reports.