Automated Valuation Models (AVMs) - Can You Afford a Large Margin of Error?

Automated Valuation Models (AVM's) have become prominent on the Internet over the past few years, and as an appraiser and a broker I receive many phone calls from home buyers and sellers about them. Most individual buyers and sellers ask me why the value indication displayed for a property by a particular AVM site differs so much from the opinion that was concluded by an appraiser.

There are a number of reasons why a difference can exist between an AVM model's report and an appraisal report completed by an appraiser. One reason is that AVM's, which are computer models, do not react quickly to changes in the market nor do they anticipate market movements the way an appraiser would. Appraisers do factor into their reports perceived changes in market conditions, even though they may not make a time adjustment.

When is the last time you bought an automobile, a diamond ring or another high-priced item without looking at it?  It's a fact that you just can't get a feel for what something is worth without seeing it yourself.  The same concept applies in the appraisal business.  If no one has even taken the time to see what is there, how good can the value opinion or the AVM value indicator be?  No one makes major purchases or responsibly makes large loans without having an appraiser inspect a property, so why are you using that Internet based program and thinking you can trust its information?

While a great deal of detailed information is collected and reported by appraisers on forms, information that is then used to fuel AVM models, the forms simply provide a portion of the information that an appraiser uses to conclude a value opinion. Thus, differences between AVM's and appraisals can also exist because AVM's simply do not consider some of the most basic, subjective considerations made by appraisers. Not everything considered is found as a checkbox on the standardized form, and thus AVM's are flawed by these omissions.

Appraisers will readily admit to you that their market value opinions are inherently subjective. Yet an AVM on the Internet displays a value to you as if it were a fact. It is important to note that AVM's cannot and do not claim a high degree of accuracy. Some sources have noted that many of the models that are currently in use conclude values within the plus or minus 15.0% range. So even though a value number is displayed by the AVM as if it were a fact, it is actually only a computer-based guess.

If you are a buyer of seller who can afford to "miss" the market value of a home by 15.0% or more, which is $ 37,500 on a $ 250,000 home, then I guess an AVM report is ok for you. If you are, however, a normal buyer or seller who is sensitive to a margin of error of that size, then you should consider an appraisal completed by a licensed (human) appraiser. It will consider all of the individual features and factors affecting the value of a home.

This article is copyright protected 2008 by Glenn J. Rigdon.

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