An automated valuation model (AVM) is a piece of software that uses data and statistics to estimate real estate market values. AVMs are widely used by real estate professionals, and they have become familiar to many consumers thanks to the free home-pricing websites that provide tools such as the Redfin Estimate and Zillow Zestimate.
AVMs can be useful, but they're not always accurate, and it's important to understand their limitations when considering their estimates.
How Do AVMs Work?
Each AVM uses its own statistical methods, but all analyze data from similar sources to arrive at a price estimate for a given property. A property's physical characteristics, including square footage, lot size, number and type of rooms, and amenities such as fireplaces, garages, patios and decks, are taken into consideration, as are recent sales figures for similar properties nearby. (How "similar" and "nearby" properties are defined is part of the statistical approach that distinguishes one AVM from another.)
It's important to remember that AVMs do not take account of all the factors that can influence a property's selling price. Variables AVMs do not include are:
- Overall condition of the property, including maintenance and upkeep.
- Interior improvements, including finished basements, updated appliances, refinished floors and new carpeting.
- Curb appeal, which is a subjective sense of a home's attractiveness based on factors such as paint color, landscaping, the home's orientation on the lot or its placement within a block or neighborhood.
How Are AVMs Useful?
Real estate agents and brokers typically use AVMs to get a general sense of home-sale trends in a specific locale, and may use them as a starting point in determining the asking price on a new listing.
If you're planning to sell your home, an AVM can give you a general idea of what your home is worth, but a real estate agent familiar with the local market can help you fine-tune the pricing after visiting the property.
If you're a homebuyer, you can use an AVM to get a sense of prevailing prices for homes of different sizes in neighborhoods that interest you. Keep in mind, however, that some homes currently for sale may be removed from AVM listings at the request of the seller.
As a homeowner, even if you don't plan on selling anytime soon, you can use AVMs to get a general sense of your property's value and whether it has appreciated since you bought it. Appreciation can increase your equity in a property—and potentially speed removal of private mortgage insurance (PMI) from your monthly payments, which you can do after you've secured a 20% equity stake in the property. Understand, however, that AVMs are typically less accurate for off-market homes, and you'll need to hire an appraiser to value the property before PMI can be removed.
Are AVMs Accurate?
AVM publishers Zillow and Redfin both claim their estimates have high degrees of accuracy on homes' actual sale prices. But their accuracy, just like those of any other mathematical models, relies heavily on the quality of the data used in their calculations.
A common source of local home-sale data for AVMs is the multiple listing service (MLS) real estate agents use to share the availability of homes for sale and the prices for which they eventually sell. In energetic real estate markets, such as those in recent years, MLS entries are updated frequently as homes are bought and sold relatively quickly.
Lots of recent sales data can help with the accuracy of AVM price estimates, and may also mean estimates can change weekly, or even daily. Conversely, in slower housing markets the lack of recent sales data can impair AVM accuracy.
Both Redfin and Zillow acknowledge that their estimates are more accurate on homes that are listed for sale than they are for "off-market" homes—those that aren't for sale or have not sold recently. This reflects the fact that data on homes that are currently on the market or that sold recently has typically been updated. It also reflects the property's characteristics and condition with greater accuracy than database entries on properties that haven't been appraised or sold in years. If you are using an AVM to estimate your own property's value, keep that in mind if you've been in the house for a long time.
The Bottom Line
AVMs are useful for seeing big-picture patterns in local real estate markets, but they are not a replacement for an appraiser or experienced real estate agent who knows the attributes that can make a property stand out. Recognizing what qualities might make it viable to raise your asking price, or that warrant scaling back your price a bit is part of what makes a skilled agent valuable.