Whether you're buying or selling a home, the process seems like it has a zillion steps, give or take a bajillion. Of all those steps, appraisals are among the most important. They can influence the price a seller sets, the offer a buyer makes, and the size of a mortgage a bank will approve. "AVM" systems are intended to streamline real-estate appraisals.
A real estate appraisal is simply an estimate of the market value of a piece of property. In days of yore, an appraiser would drive out to a property, take pictures and measurements, look at sales of comparable properties in the area, and use that information to come up with an appraised value. Many appraisal firms still work this way, but others have removed the human element, meaning no more property visits or subjective assessments of value — just hard data.
An AVM, which stands for "automated valuation model," is a computer program that takes available data concerning a property, chews it over and spits out an appraised value. Key inputs include the size and location of the lot, the age and construction of the home, the types of systems it has, and how many bedrooms and bathrooms it has. The AVM also looks at information on comparable properties, or "comps," such as how much they've sold for, sales trends in the neighborhood and how fast prices have historically risen or fallen. Companies that produce AVM appraisals closely guard what's under the hood. The exact algorithms they use are a trade secret.
Pros and Cons
Probably the biggest selling point for AVM appraisals is that they're quick, relatively cheap and objective. An AVM with a deep database of information about area real estate can crank out an appraisal in seconds. The big drawback is that they're only as good, and as current, as the data fed into them. They generally don't account for the condition of the property. If a live appraiser visits an address and notices that there's, say, a big, smoking hole in the roof, that fact will factor into the appraisal. But the database probably doesn't have a box to check for "Big Smoking Hole in Roof."
The federal government plays a huge role in the housing market by guaranteeing loans and, through entities such as Fannie Mae and Freddie Mac, providing liquidity to mortgage lenders. For that reason, AVMs are subject to federal regulatory oversight. Companies that generate AVM appraisals must test their models by comparing their predictions to what eventually happens in the real world. (And federal regulations actually use the term "real world.") In other words, if the model is consistently valuing properties at, say, $250,000, then such properties should generally be selling for around $250,000. If they aren't, then something's wrong with the model, and it needs to be adjusted.
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