In real estate, you might hear of AVM. Learn what that means and if you need it.
If you’re buying or selling real estate, “AVM” (automated valuation model) might be a term you’ve encountered—probably next to a dollar figure. AVMs in real estate can provide rapid-fire estimates of a property’s value, potentially saving you a lot of time and money. But to use them safely and well, you need to understand how they work.
What is an AVM in real estate?
In real estate, “AVM” stands for automated valuation model. It’s a computer program that takes data about a property, crunches the numbers and determines how much the property is worth.
“AVMs are great for quick, automated estimates of a property’s value,” said Colin Meagley, a real estate agent at KW Commercial in Binghamton, New York. “They’re usually within the ballpark range of actual market value.”
The estimate from an AVM can point buyers to a starting bid or help sellers figure out a listing price.
How do AVMs work?
AVMs collect available data on a property and feed it to a computer algorithm. An algorithm is a standardized process computers use to perform a specific task. In this case, it weighs the importance of various data points and calculates the property’s value.
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Every AVM—the Zestimate, Ownerly’s home value estimator and so on—uses a different algorithm. Each one uses data in a different way. Some focus more on physical characteristics like square footage and construction style. Others rely more heavily on a property’s past sale prices or the sale prices of similar properties.
As the quality of available data improves, so does the accuracy of valuations from AVMs. Still, even the best AVM model only draws from data that’s already on the books. They can’t account for the property’s current condition, which is why an AVM sometimes falls short of an appraisal.
Difference between AVM and appraisal
Appraisal is another way of determining real estate value. For an appraisal, a third-party professional visits the property and examines its condition and features. They’ll look for updates and improvements that make the home worth more, as well as damage that might reduce its value.
AVMs don’t consider those factors. They only rely on data that exists on record, leaving out the state the property is in—which can affect value significantly. Two houses with the same square footage and basic features might have a similar AVM, even if one has severe flood damage and the other has a new in-ground pool.
Pros and cons of AVMs
In real estate, an AVM’s meaning is tied to its accuracy and convenience. It’s indisputably easy and quick to use, but its accuracy depends on where it gets its data. Here are some of the benefits and drawbacks to be aware of.
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Convenience. A consumer can find an AVM on a website in seconds. “It’s all automated, so it’s instantaneous,” Meagley said. “If you want to get a quick idea of value, you can pop in your address and have a quick number in front of you. It’s super easy, super accessible.”
Objectivity. While appraisals rely on a person’s educated opinion, an AVM only uses data. It won’t leave out a statistic that a person might dismiss as unimportant, nor will it let the “look” of a property influence the estimate.
Incomplete data. Even the best computer algorithm can’t generate an accurate estimate if it doesn’t have all the information. AVMs only use data on record, so they miss a lot—especially in a state that doesn’t require sale price disclosure.
“In a nondisclosure state, the AVM can use only the listed price for its valuation point,” said Carolyn Barnes, a real estate agent in Houston. This causes AVMs to err too high in a buyer’s market, when prices tend to be lower, and too high in a seller’s market. “A buyer may pay $515,000 for a house listed for $495,000,” she said.
Lack of human insight. Barnes also pointed out that AVMs only look at quantifiable metrics such as age, square footage and lot size. “Even in states that do disclose actual sales prices,” she said, “AVMs are unable to ‘see’ a property’s condition compared to other comparable home sales, or factor in what upgrades have been done—whether or not it sits on a greenbelt, or if it has power lines running through the backyard.”
Without feet on the ground of a property, there’s no way to tell definitively what it’s worth.
Inconsistency. Finally, every AVM generates a different estimate. This can confuse consumers, especially if the estimates vary significantly or don’t match the seller’s asking price.
Other valuation methods
AVMs are good starting points for estimating home value, but they’re not the end of the story. Here are some other ways to learn what a property is worth.
Comparative market analysis (CMA). A more detailed estimate by a real estate agent. The agent will look at market trends, sales of comparable properties and the home’s condition. This is usually a free service.
Appraisals. An appraisal works much like a CMA but is conducted by a third party, usually hired by a bank as part of a mortgage approval. The cost usually hovers around $500, Meagley said.
Broker price opinion. If a bank wants to know the value of a property, a representative might call a broker or agent and ask for a price opinion. This non consumer-facing process works like a CMA but happens behind the scenes. It usually costs the bank a few hundred dollars, Meagley said.
Getting home value
It’s never been easier for consumers to get an AVM estimate. You can visit almost any major listing site—Trulia, Realtor.com and so on—and look up the value of almost any property, and whether it’s on the market.
But if you’re further along in the process of setting an asking price or making an offer, you’ll want to go deeper. Relying solely on data is too risky, especially considering how heavily a home’s condition factors into its worth.
“The best way to get the value of your property is to either hire a professional appraiser to conduct an appraisal, or bring in a [real estate agent] to do a comparative market analysis,” said Christopher Avallon, a real estate agent and owner of the Avallon Real Estate Group in Princeton, New Jersey. “Both of these will give you an accurate representation of the properties’ correct value.”
AVMs aren’t perfect, nor are they the only tool you should use to determine a home’s value—but they’re valuable tools, and they’re becoming more so with every passing year.
“I think AVMs have come a long way,” Meagley said. “They’re definitely more in line with what the home is actually worth. They’re a great starting point for consumers.”
If you’re getting started buying or selling a home, check out its AVM. You’ll get a useful jumping-off point that saves you time and energy—both of which are extremely valuable when you’re dealing with real estate.