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Location: Mars Hill, NC, United States

A small, highly personalized real estate firm specializing in mountain homes and land in greater Asheville.

Wednesday, June 20, 2007

AVMs: Looking At Auto Valuation Models in a Mountain Micro Market


I am prompted, by a call from a client yesterday, to revisit and expand on some issues surrounding automated valuation models, or AVMs. AVMs allege to determine the "true value" or to appraise homes and land by crunching a database with various algorithms. These models are increasingly common with lenders, and the burgeoning online valuation industry.

One does not need to know what an algorithm is to comprehend immediately that any such valuation will only be as good as the database itself. A database for this purpose must be complete and timely, i.e., it must have ALL sales, and it must do so in REAL TIME.

As our blog showed in a Feb, 2007 posting which looked at a number of AVM, online valuation websites, none were complete or timely when compared with our mountain micro market in real time.

Nevertheless, this remains a hot topic, not only in the real estate blogosphere, but for the industry in its day to day workings. The issue will continue to be topical as consumers flock to the internet for buying/selling information, and as lenders seek to eliminate human beings from the process and streamline costs.

Who Is Pushing AVMs?
To this observer, the only people praising AVMs turn out to be lenders, and the online valuation industry, both of whom have weighty financial imperatives to do so.

It is very difficult to find an online valuation website that is NOT backed by a big money, nationally branded realtor or lender. Their sites are heavily weighted to their own listings or interests, and nearly ALL require registration for their services. Can anyone say bias? And, what's with the required registration? Buyers and sellers beware.

Fannnie Mae's Official Guide has this to say on the "Strengths and Weaknesses of AVMs":
The strengths of AVMs relative to traditional real estate appraisals are speed, reduced costs, consistency, and objectivity. This is not to suggest that conscientious, skilled appraisers lack consistency and objectivity.
As the poet said, "damned by faint praise"?
And later:
AVMs have three principal limitations:
* First, they are dependent upon the accuracy, comprehensiveness, and timeliness of the data they use. Data issues can include incomplete public records, insufficient sales of properties with comparable features within a specified geographic area, and a lag between the time when the market data are current and the AVM uses the data to generate an estimate of value.
* Second, AVMs cannot be used to determine the physical condition and relative marketability of a property.
* Third, AVMs can never fully incorporate the breadth of knowledge and judgment of a skilled appraiser. (Emphasis Added)
The Real Estate Tomato, (an odd name to be sure, but one of the most influential real estate blogs), did a more detailed comparison of AVMs and humans. Again, speed and cost are the only positives attributed AVMs. Some added drawbacks, not pointed out by Fannie Mae can be seen in the table, approximately 1/3 of the way down the page.

What jumped out at me in The Tomato posting was that AVM databases are typically 30 days behind real time, and the AVM "search criteria" is usually "address" alone. Never mind square feet, bedrooms or breathtaking mountain views it would seem.

Consumers' Summary:
For the forseeable future, both buyers and sellers should look to AVMs as mere ballpark suggestions. Their databases are clearly inaccurate as my February survey showed. When push comes to shove, for a true value, especially in a mountain micro market, there is no substitute for a human being.

Thanks for stopping by,
Tom Ploski

Black Bear Realty Website
828 689 2055
Anti Spam Graphic: info AT blackbearre DOT com

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