Where's the Real Value in Automated Valuation Models (AVMs)?

A handful of organizations offer Automated Valuation Models (AVMs), yet not one is 100 percent accurate. The truth lies in the types of data that AVM providers use to generate the AVM.

The problem with AVMs

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® (RPR® ). "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 lowball 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 Silicon Valley, especially when a home's list price is dramatically higher than the AVM.

Kyle Else, a Realtor® with Keller Williams in Palo Alto, California, specializes in working with relocation clients who have little time to waste when purchasing in one of the country's hottest markets.

"Demand is everything here and, because of that, we take pricing very seriously," said Else. "It often happens that a home's list price is significantly higher than the AVM. The AVM might say $4.4 million, but the list price is closer to $8 million. In these cases, I use RPR's Realtor Valuation Model® (RVM®) to refine the comps based on high demand, unique property features and other market data; then sit down with my client to have a discussion on my best RVM."

The role of the Realtor® with regard to AVMs

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 $300K home, that margin of error can amount to $15K.

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."

Michelle Gordon, Realtor® and founder of The Gordon Group, JH Realty Partners, based in Ada, Michigan, advocates strongly for getting deep into the weeds when it comes to verifying the AVM. Following the economic crash of 2008, several homeowners in her Western Michigan territory, apprehensive about their ability to pay real estate commissions and still stay afloat, opted to go FSBO as an impediment to ending up in a short sale or selling the property for less than its worth. That trend has continued, according to Gordon.

"The over abundance of FSBOs in our area, coupled with the lack of off-market property data in the AVM equation, caused a lot of hardship for agents seeking a solid CMA," said Gordon. "In these cases, I have personally gone to the tax sites and spent hours looking up parcels to determine a property's value. Thankfully, I don't have to do that anymore."

Gordon is referring to her "go to tool"––RPR's exclusive valuation model, the RVM. "RPR's data includes off-market properties, which is a huge help," she said. "And the RVM gives me a price range for the property based on its own algorithms that also has a confidence score."

One of the RVM's most unique attributes is its exclusivity. Available only through a REALTOR® via RPR's web or mobile applications, the RVM allows agents to deliver this key market information via an array of reports, establishing them as a professional who guides clients using best-in-class tools and market expertise.

The RVM's "secret sauce"

RPR's RVM, which incorporates listing and sales data from the MLS into its algorithm, takes property valuation to a whole new level, says France. "MLS data is the 'secret sauce' that fills in the blanks found in public records," she said. "RPR is partnered with 95 percent of MLSs across the nation. By having that licensed data, including MLS listing, sales and off-market properties, RPR valuations are of a higher quality than those found on public-facing sites. And because RPR has a direct feed from the MLS, the data is updated on a daily basis, much more quickly than public records."

France cautions REALTORS® to consistently remind clients that AVMs and the RVM are not meant to serve as an appraisal. "There's an important distinction that the consumer should know about," claims France. "REALTORS® determine market value that must be validated by an appraiser. Lenders only rely on an appraisal."

To view the original article, visit the RPR blog.