What is an automated valuation model (AVM)?

Automated valuation models (AVM) are software-based pricing models used to value real estate. Automated valuation models use statistical modelling techniques with databases of existing properties and completed transactions. In this article we will define AVM and learn how an automated valuation model works.

Evaluating real estate can be difficult due to the various factors influencing the price of properties and land. Automated valuation models are used by institutional investors and mortgage lenders to value residential and commercial properties. These models are also available to consumers on property listing sites like Zillow and Trulia.

According to data company CoreLogic, AVM is a computer-driven mathematical formula that uses basic property characteristics, local market information and price trends to arrive at an estimated value or value range. 

Automated valuation models provide consumers and lenders with fast and easy access to property valuations, reducing cost and time delays. Lenders use AVMs in loan processes for determining values for downpayments or collateral.

However, AVMs do not always provide accurate valuations. These tech-driven valuation models depend on public data, which if inaccurate, will generate incorrect AVM valuations. 

Property renovation or modification works may also not be included in public records in AVM databases, which will also reflect in inaccurate valuations. Moreover, AVMs cannot determine the physical condition of the property.

Automated valuation model examples

Below are some examples of how AVM is used according to the UK’s Royal Institution of Chartered Surveyors (RICS) :

• Automated valuation models are used by lenders for loan origination process or revaluation for credit decision purposes.

• They are used for in-arrears assessment and planning, as lenders may wish to check the value of a collateral to see if the loan is still likely to be secured by the value of the property.

• Automated valuation models are used in an audit of valuations. Lenders may sometimes obtain a second valuation from an AVM supplier to serve as an audit for original valuation.

• Automated valuation models are used for mass appraisals, such as local taxation purposes.

• They are used to provide valuation estimates for individual tax purposes

• They are used to identify fraud by finding market activity that does not follow normal market trends.

Pros and cons of automated valuation models 

Learning about the advantages and disadvantages of the model will help us understand the AVM meaning better.

Advantages 

AVMs are attractive to lenders as the software can be built into existing electronic valuation-processing platforms. They can “tease out nuances” that may not be ordinarily be able to be observed in the course of traditional investigations. These models are also time-efficient a they save time, money and resources, and remove the human element and risk of fraud. 

Limitations

AVM does not involve inspecting properties, plus there is low consumer transparency when the model is used. Systems can be subject to fraudulent activity, and inaccurate data can lead to incorrect valuations, so the reliability of the underlying data is crucial. 

Using artificial intelligence, machine learning and neuro-linguistic programming makes AVM highly sophisticated, which means valuation outcomes can be independent of human input.