What Is an AVM in Real Estate and Should I Trust it?
Calculating a home’s fair market value has never been an exact science. Traditionally, the process is quite time-consuming, with people having to pull “comps” (comparable homes) and evaluate factors like lot size, square footage, age, and location.
There is a level of subjectivity to evaluations done by people, which is why buyers, sellers, agents, and even lenders have begun to favor AVMs in real estate. Here’s what AVM in real estate means and how it stacks up next to other valuation methods.
What Is an AVM in Real Estate?
AVM in real estate stands for automatic valuation model. As the name implies, AVMs in real estate generate valuations automatically based on various data about a property and the surrounding area.
There is no standard AVM in real estate. Instead, different real estate and financial companies have created their own proprietary models. This means that one model might weigh a certain factor (for example, an attached garage) more heavily than another. As a result, you may see variations in the range of $10k to $20k across models for the exact same property.
AVMs in real estate are not meant to completely replace traditional valuation methods but to augment them. For instance, a homeowner can use AVMs to track the estimated market value of their home. Without AVMs, that same homeowner would be left guessing based on data they compiled themselves, like recent sales in the neighborhood.
What Factors Influence AVM in Real Estate?
All AVMs are proprietary, meaning companies do not explicitly state all the factors that go into their calculations or how they are weighted. However, several elements will impact the AVM, and they are the same elements people consider when manually evaluating a home.
The key elements that influence AVM in real estate include the following:
- Lot size and square footage of the home
- Number of bedrooms and bathrooms
- Age of the home
- Tax assessments
- Prior sales amounts
- Recent sales amounts for comparable homes
- Area safety and school ratings
It’s worth noting that AVMs also try to account for market trends and seasonality. So, if sales tend to slow as winter approaches, a home’s value may drop significantly during those months and spring back as the buying season approaches.
Seasonal changes in value reflect how a home will sell for less during slow months when there are fewer buyers and more homes on the market. However, these changes in value are not completely accurate. In fact, AVMs are never entirely accurate.
Because AVMs rely on a large amount of data to generate property values, AVMs tend to be most accurate in metro areas with a wealth of recent sales data.
Are AVMs in Real Estate Reliable?
The reliability of an AVM is largely based on the amount of data available. The more rural an area is, or the more stagnant the local housing market is, the less reliable AVMs will be. In general, people should be wary of relying wholly on AVMs when listing a home or making an offer.
While the lack of human subjectivity and reliance on hard data points can make AVMs more appealing to some degree, you would have to gauge the amount of recent data available to the AVM to determine its accuracy.
Additionally, human subjectivity is important when it comes to things that data points can’t convey — like recent storm damage or an outdated kitchen. An AVM will also have a difficult time taking into account small, specific elements that could add significant value for buyers, like heated floors throughout a mountain cabin.
Still, despite the drawbacks of AVMs, they offer a level of accessibility and convenience that’s worth praising. AVMs allow homeowners, shoppers, and investors to get a “ballpark figure” for a property before they fuss with an expensive appointment with an appraiser. Of course, appraisals still have their place in real estate.
How Do Appraisals Differ From AVM in Real Estate?
Real estate appraisers are licensed professionals who are highly familiar with local housing market trends, neighborhoods, and buying behavior. Appraisers generally charge a few hundred dollars or more for an appointment, and they may require an appointment weeks in advance.
Despite the cost and delay of working with an appraiser, it is a valuable step in any real estate transaction. While both an appraiser and AVM work to assign value to a property and start with the same hard facts (such as home size, age, and lot size), appraisers go much farther.
While AVMs cannot process aspects like an outdated kitchen or the smell of cigarette smoke in the carpet, an appraiser will consider all of it. Appraisers will even look at dilapidated homes next door when deciding just how much a home is worth. This extra due diligence is what sets an appraiser apart from AVMs.
For this reason, lenders still require an appraisal in most circumstances, and it’s in the best interest of buyers and investors to get one as well. Sellers may even benefit from getting an official appraisal, especially if their home has unique value that is not reflected in the comparable home prices that AVMs will use in calculations.
In other words, when it comes to subjective elements like a home’s style, appraisers are the only ones able to account for such nuances accurately.