Whether you are considering buying, refinancing, or taking a loan on your home, the first step is to determine its value. And the faster you and the lender agree on that value, the quicker you can move forward.
This is where AVMs can help.
What is an AVM?
An AVM or automated valuation model is an approach used by real estate agents, mortgage companies and well-known companies, like Zillow, to quickly appraise a home’s value. AVMs are driven by algorithms that analyze various data points, which can include the tax assessor's value, sales history, sales of similar properties, historical house price fluctuations, and even major improvements.
There are several AVM providers, with each one’s algorithm being slightly different and proprietary. The accuracy of their valuations depends on the data the AVM provider uses in their models.
How long have AVMs been used?
While it may seem like AVMs are a new way to value property, the reality is AVMs have been used for the past 30 years. By the early 2000s, AVMs were a common method for lenders to evaluate home values, though after the Great Recession in 2008, reliance on AVMs dwindled as lenders wanted actual eyes on the properties they might lend against.
Today, the amount of data available and modeling has vastly improved. Lenders have access to much more information, including confidence scores, which has made AVMs more popular than ever.
Why do lenders use AVMs?
AVMs are quick – they can often be provided in a matter of seconds. They are also less expensive than a traditional appraisal. Some people also feel they are less biased and therefor more accurate, especially in terms of default, which is the primary concern of lenders.
Are AVMs accurate?
Well-constructed AVMs have more data available to analyze than a human appraiser, which can make them much more precise. Some estimates, however, are more for entertainment than actual valuations.
David Howell, chief information officer for McEnearny Associates, explains in a 2014 Washington Post article, “As real estate agents, we know that one of our most difficult tasks is pricing a home. That holds true whether we are representing a seller or buyer. Market pressures change from week to week and from neighborhood to neighborhood...No algorithm, however sophisticated, can quantify a value of a kitchen that was remodeled just before a home was put on the market or a yard that is poorly maintained.”
If you’re buying or selling a home, an in person-appraiser is likely worth the cost and time. However, you are simply valuing your home for a smaller loan against it, like a home equity line of credit, AVMs are a perfect way to get a quick estimate of your home’s worth without getting too deep into the real estate process.
What if I feel the AVM value of my home is too low?
Not all AVMs are created equal. It’s important to consider who is providing the valuation and the confidence of their price. Zillow discusses its accuracy, which ranges from one star in Houston to four stars in Washington D.C.. In New York City, Zillow estimates there’s only a 56 percent chance their Zestimate will accurately reflect the sale price within a 5 percent spread.
Again, if you are selling or buying, it’s best to use the expertise of a realtor and possibly an appraiser. They will understand the nuances of the price, including the condition of the home and neighboring homes
If you are getting a loan against your home and you feel that the value the lender is presenting is lower than what you think it should be, ask yourself why that matters to you. It is not a definitive statement on what you could sell your home for; the reality is you could get more or less if put on the market.
Perhaps you wanted a bigger loan? Lenders consider a number of factors when providing you a loan amount. Your equity is one, but your debt-to-income ratio in another. Rather than spending time focusing on what an AVM says your home is worth, focus on paying down other debt. If you choose to take a home equity line of credit from Figure, we offer the full amount of the loan upfront but offer the ability to draw more once you pay some of your balance down, which helps people accomplish their projects even if they go a little over budget.