The Automated Valuation Model and its Impact on Real Estate

The Automated Valuation Model and its Impact on Real Estate
Posted By Jeffrey Hogue @ May 18th 2016 9:30am In: Real Estate

The Automated Valuation Model or AVM is a controversial item these days. I will explain what an AVM is, what to consider when you see them online, and what all the hubbub is.
Two things happen when I meet with a homeowner who wants to sell their property. They want to know what the property is worth and how I will go about getting that amount for them. This article relates to the part of establishing a price.


Today there are a vast number of websites claiming to have the ability to tell you what your, or any home is worth. These sites attempt to do this by using an Automated valuation model (AVM). It is the name given to a service that attempts to provide real estate property valuations using mathematical modeling (or algorithms) combined with a database full of housing information. Most AVMs calculate a property's value at a particular point in time by analyzing values of comparable properties. The question is, are they reasonably accurate, and how much of an influence do they have on the public perception of value?


When evaluating a home price for a seller, I use four different types of analysis. They are a cost analysis, comparable market analysis (CMA), digital footprint, and intrinsic evaluation. Needless to say, pricing a home is an art, takes a good degree of skill to do it consistently well, and is a critical task to all involved.


Admittedly, I look at the Zillow.comZestimate, which is the most popular AVM, before I go on a listing appointment or show homes to a buyer. I do this to prepare for any significant discrepancies in home valuation or price expectation that could adversely impact the client's opinion caused by the AVM.


So how does the Automated Valuation Model work here in Berks County?
The AVM uses home sale data from the local multi-list system. Our public record provides some of the data that is in the MLS like home square footage for example. It is not unusual for the square footage listed in the Berks County public records to be 500, 1000, 2000 or more square feet in error of the homes actual size. AVM's greatly depend on accurate data. If the square footage is wrong, the value assessment will also likely be in error. Garbage in garbage out!


In Berks, we find many luxury homes that are priced far above the AVM or Zestimate. It is my belief that this gap is caused by weak and limited data about these homes. Many of these homes have been modified and improved over the years, and the AVM's have no way of calculating this. AVM's tend to work better with more information. The more home sales the closer the valuation may be. With limited upscale sales in Berks, the data remains limited as well.


Somebody Pays for Bad Real Estate Information.
Think of the home buyer who looks up the Zestimate and sees the seller is asking much more than the price stated by the Automated Valuation Model. They love the home but make a low offer that the seller declines. The buyer does not feel comfortable offering more because the AVM says they would be overpaying. Later, someone else buys the home for more, and they lose the home they love because of a belief and not an educated assessment.


A homeowner recently sued over the use of its' Zestimate. The suit claims Zillow uses it's AVM as a kind of appraisal and since Zillow does not have an appraiser's license in any state, it is a violation. Zillow says the Zestimate is an estimate of value only. It will be interesting to see how this suit, and likely more to come, turn out.

In my opinion, there are two AVM's that should be considered they are the Agent Valuation Model and the Appraiser Valuation Model. I have yet to see Zillow or any other website measure a home or meet with the seller to evaluate their property or even consider the intrinsic valuation model which is all based on feeling. Home pricing is just too important to leave to machines and flawed data. A real estate websites motive is NOT accuracy but website visits. Consider this when you are one of those website visitors.


Knowledge is Power!

Jeffrey C. Hogue

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