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Determining home prices is an inexact science. When you’re ready to sell your home, figuring out its fair market value takes time and experience, with agents often pulling extensive real estate comps to compare the home against other similar ones nearby. And there’s also the appraisal process, by which lenders ensure that the home is worth enough to secure the mortgage loan being offered. It’s no wonder frazzled sellers often turn to the online pricing models known as automated valuation models, or AVMs, for a quick and easy estimate of how much their home is worth.
What is an automated valuation model (AVM)?
An automated valuation model is a computer program that uses an algorithm to determine the value of a property. If you want a ballpark figure for how much your house is worth, you can easily get an idea by typing in the address on these sites.
But there are many different AVMs out there, each designed and offered by a different real estate or financial company — and you’re likely to get a different number with each one. One of the most popular examples is Zillow’s Zestimate, a dollar figure that’s displayed on each property listed on its website. Realtor.com, banks like Chase and big brokerages like RE/MAX offer their own versions as well.
AVMs consider various factors about the home and its location to come up with an approximate value for a property, without a professional appraisal. However, while their approximate values can be useful for buyers, sellers, agents and even lenders, it’s important to keep in mind that they are just that: approximate. In other words, just because a home’s Zestimate is $500,000, it’s no guarantee that the home will actually sell for that much.
In addition, if you’re financing your home purchase, your lender will almost certainly require a professional, in-person appraisal.
How do AVMs work?
AVMs calculate existing data about a home, as well as the area and similar homes in the same area, and use complex mathematical formulas to determine how much the home is worth.
For example, an AVM might consider factors such as:
- Square footage of the home
- Size of the overall property
- Number of bedrooms/bathrooms
- When the home was built
- Recent sales of comparable homes
- Tax assessments
- Prior sale amounts
- Neighborhood crime statistics
- School district ratings
- Market trends and seasonality
The precise formula and data points used vary: Each AVM algorithm will calculate the worth of a home slightly differently. One might value an additional bedroom slightly higher than another, for example, leading one AVM to value a home at $250,000 while a second estimates the same home at $265,000.
AVMs create a valuation based on the data they have about the property. The accuracy of their estimates are subject to the accuracy and completeness of the data available, and data may be incorrect or outdated. They also can’t detect intangibles, like a property or neighborhood’s overall condition, that can affect a home’s value.
AVMs vs. home appraisals
AVMs and home appraisals both aim to accomplish the same thing: provide an idea of how much a property is worth. However, there are essential differences between the two.
For starters, AVMs are typically free. In addition, they are easy — you just type in your address. Anyone can use an AVM to value a home, even from thousands of miles away. And because they rely solely on data, human bias and potential discrimination are not a factor.
However, AVMs can’t account for more subjective things, such as whether the home is in good repair or the overall vibe of the area. That’s where professional appraisals come in. Appraisals require a professional to physically visit a property and evaluate it in person. They are not free — in fact, appraisal costs can run several hundred dollars or more. Pro appraisers will account for many of the things that an AVM would, like the home’s size and number of bedrooms, but they can also account for subjective things that may influence the home’s value. While appraisals are slower, they do provide a more accurate picture of a home’s value.
AVM pros and cons
Along with other digital-based real estate tech trends, AVMs have gained in popularity. Their main benefits include:
- Convenience: You can complete an AVM in just a few minutes, or even less, whereas appraisals require appointments, scheduling and in-person visits.
- Cost: Some sites might require a small fee to get access to their AVM, but the majority are free. Professional appraisers, on the other hand, cost hundreds of dollars.
Of course, there are drawbacks when complex decisions are made by a computer rather than a live, experienced human being. Two big cons of AVMs:
- Subjectivity: An AVM is objectively evaluating data points, rather than physically seeing and understanding a home like a person would. It may, for example, overvalue a home that’s in poor shape because it cannot account for condition.
- Accuracy: AVM accuracy is variable — the results are only as accurate as the data available. The more data that’s available, the more accurate their estimations will be, which means they’re most accurate in large, busy markets with lots of real estate sales and purchases.
Automated valuation models are an easy way to get an idea for the value of a home. They are much faster and cheaper than hiring an appraiser, which makes them extremely popular. However, keep in mind that AVMs only provide an estimate of a home’s value and are in no way guaranteed — the final sale price may be higher or lower. A professional appraisal is still the best way to get the most accurate estimate, and for a mortgage transaction, the lender will still require one.