Where’s the real value in Automated Valuation Models?
A handful of organizations offer Automated Valuation Models, yet not one is 100 percent accurate. The truth lies in the types of data that AVM providers use to generate the AVM.
Although most AVMs are readily and publicly available to consumers, real estate agents, appraisers and lenders, they carry distinct disadvantages. First, without a physical inspection, AVMs do not factor in a property’s condition and thereby, rely on “average condition” scenarios when determining value.
Second, AVMs draw from public records sources which can be inaccurate and incomplete. So says Karen France, senior vice president of Association and MLS Services at Realtors Property Resource®. “Public records are known for being incomplete and slow to react to changing market trends,” said France. “There can be a delay for transactions to be recorded at the local courthouse and then even longer to be published electronically. Every courthouse has their own procedures and many of them are not electronic.”
In some cases, AVMs include listing information licensed from an MLS which, in turn, can provide a more accurate representation of comparable on-market properties and information acquired from a prior physical inspection. Yet, according to France, if MLSs are only sharing on-market listings with an AVM provider, rather than both on-and off-market information, the AVMs generated are only painting part of the picture when it comes to the estimated value.
“Many things can distort the estimated value of a property, including situations where a property is unusual compared to its neighborhood counterparts, access to off-market data is limited or missing, or you’re working in an area with a lot of new construction,” said France.
Perhaps the greatest concern rising from the public dissemination of AVMs is the prevalence of misinformation delivered by consumer-facing real estate websites. Lower values may prompt low-ball offers, used by buyers as a negotiating point; whereas overinflated values create unrealistic expectations among sellers who want every dollar squeezed out of their property.
Low inventory levels in a market can also affect the quality of the AVM. Fast-moving markets with low inventories cause prices to rise dramatically and quickly, so it’s important to know when the AVM was last updated. An agent’s expertise in determining market value is critical in fast-moving markets, such as the Silicon Valley, especially when a home’s list price is dramatically higher than the AVM.
The open-market availability of AVMs, especially to consumers, has become a double-edged sword for Realtors® as well. It can be a challenge to counter a seller’s expectations when there’s a 5 percent price variance on the estimate he found online. On a $300 thousand home, that margin of error can amount to $15 thousand.
Of course, there are times when the reported AVM is good news for both Realtor® and seller, said France. “Imagine the advantages of being the agent who tells a seller that his house is actually worth more than the AVM estimate?” she said. “But only a qualified Realtor®, armed with complete market information, will know how to reach the true market value of the property.”