An automated valuation model (AVM) is a mathematical tool that estimates a property’s value based on an algorithm. These models use a proprietary calculation, but typically factor in things like the home’s size and assessed tax value, the property’s sales history, and recent comparable sales.
Learn more about how an automated valuation model works, how they are used, as well as their strengths and shortcomings.
Definition and Examples of Automated Valuation Model
An automated valuation model uses a combination of residential property data and characteristics (like square footage), public records, property listings in the area, recent sales, and/or other information to calculate a property’s value.
- Acronym: AVM
AVMs can vary and may be designed for consumers or for commercial purposes. Generally, they help homebuyers, real estate professionals, or lenders get a snapshot of a property’s worth.
If you’re buying or selling a home, you’ll likely encounter various automated valuation models through the estimates on platforms like Zillow or RedFin as you’re researching properties. For example, Zillow provides automated “Zestimates” based on a variety of data. But there are also commercial platforms offered by Freddie Mac, CoreLogic and others that real estate industry professionals and lending institutions use.
How an Automated Valuation Model Works
Automated valuation models use software and complex algorithms to calculate property value. While they can’t assess the actual condition of a property as a human appraiser can, AVMs are still useful tools for buyers, sellers, mortgage underwriters, and real estate professionals. For one thing, someone researching several properties can use AVMs as a quick, easy, and free/low-cost comparison tool.
AVMs are proprietary, meaning that each platform uses a unique formula to determine how much weight to give various components of the calculation. Therefore, if you use a couple of different AVMs to look up the same property, you will likely see some variation in the value estimate.
Values estimated by AVMs also constantly fluctuate, as AVMs pull the latest data available.
So if a few homes in the same neighborhood as your property of interest sell one week, for example, that may have an impact on the estimated value of that property shortly thereafter.
Pros and Cons of an Automated Valuation Model
Objective estimate; no human bias
Useful marketing tool for Realtors
Quick snapshot of property value
Only as good as its data
May not factor in property condition
- Quick snapshot of property value: Whether you’re a buyer, seller, or a real estate agent, AVMs offer a fast way to get an estimate of a property’s worth based on its sales history and other data. Before AVMs, a physical appraisal and manual research would need to be done, which could take days, weeks, or even months.
- Objective estimate: Because AVMs apply the same algorithms to every property, there is no opportunity to introduce human error or human biases.
- Useful marketing tool for realtors: Real estate professionals can use AVMs to reach out to prospective buyers or sellers with potential sales prices.
- May not factor in property condition: Unlike in-person appraisals, AVMs are machine-driven. So they can’t take into account, for example, that a home might have a leaky roof, damaged concrete, or other home elements that need updating.
- Only as good as its data: The most well-known AVMs are built on robust platforms and use reliable data, but they are not foolproof. If public records are not frequently updated, for instance, ag time could affect the calculations.
What AVMs Mean for Property Buyers or Owners
Anyone who owns a home may check out various automated valuation models to get an idea of their own home’s value whenever they like—for instance, when they are interested in selling or refinancing their loan. And if you’re aspiring to buy a home, these tools can help you get a feel for market prices in your area of interest.
If you’re working with a real estate company or mortgage lender, the agent may also use AVMs to some extent in helping you set or negotiate price.
Ultimately, AVMs may be used by homeowners, buyers, and sellers for research purposes. On the business side, mortgage lenders and real estate companies often rely on commercial AVMs. Regardless of AVM usage, an appraisal by a licensed appraiser is often required depending on the type of property transaction.
- Automated valuation models (AVMs) are used widely by both consumers and industry professionals to help determine property value.
- AVMs use public property data, sales history, neighborhood statistics, and other factors to determine an estimate of what a particular home is worth at a specific point in time.
- While AVMs are popular tools, they should be considered estimates since they cannot factor in the actual condition of a property as an in-person appraiser can.