How AVMs Provide Intelligent Valuations in an Uncertain Market
A Critical Tool for Investors to Mitigate Investment Risk and Determine ROI
By ATTOM Team
AVMs (automated valuation models) are found on almost every real estate site — from Zillow to Redfin. They are perfect tools for a quick property valuation, but what about their accuracy in times like these, when nobody really knows which way the market is going to go? Is inflation going to continue to slow the rise in property prices or is low inventory going to push them higher? Do these AVMs consider macroeconomic or critical local economic factors?
While most AVMs consider the usual data points like comps and property characteristics, many fail to consider the macro environment or the smaller details, like the fact that a home has not been renovated in twenty years and is decked out with outrageous floral wallpaper and shagpile carpets. So how do you reliably depend on an AVM when making investment decisions?
Real estate professionals generally use AVMs to more accurately price properties and to aid in negotiations. It is an essential tool in real estate investment decision making. They also may use AVMs when deciding how to structure a deal (should they waive the appraisal contingency, for instance?) and in marketing their services and properties.
Since real estate is a highly local profession, having detailed and granular valuation data can be a huge advantage in many ways for these professionals.
Valuations in Volatile Markets
The more volatile the market, the harder it is to value a home or to price it well. Take today’s real estate market as an example, where there are so many uncertain macro forces affecting a property’s valuation.
A look at the most recent nationwide data shows the median price of $339,815 in the third quarter of 2022 was down 2.7% from $349,266 in the second quarter of 2022, but still up 9.4% from $310,500 in the third quarter of last year.
Two diametric macro forces are currently at play in the real estate market. Rapid inflation is causing property prices to slow because high interest rates are making mortgages expensive. But, at the same time, housing inventory remains low. It is a complex macro environment, unlike any we have seen in several years and one that investors and real estate agents are having difficulty navigating.
The hardest part of a property valuation in the current climate is ascertaining exactly where the market is at any one time. Property valuations based on a sellers’ market of just a few months ago are particularly unreliable, the market could slow, stagnate, or reverse course at any time.
Property valuations in volatile markets are much less complex when leveraging valuation intelligence based on data — the exact type of data utilized in AVMs (automated valuation models). These models use property, environment, and macroeconomic data, combined with predictive analytic algorithms, to produce accurate valuations, even in current market conditions. An AVM provides a more realistic perspective to property valuation.
A Winning Team
While a data-based approach to valuations can prove more accurate, not all AVMs are the same. AVMs are software-based tools that determine property values using mathematical or statistical modeling combined with a variety of data. However, the valuations produced by an AVM, are only as good as the data being used. If the data is outdated or inaccurate, the valuation will be outdated and inaccurate also.
Almost every AVM will use data points such as tax assessor value, property features, and sales history for similar properties in the area, but many are not equipped to consider factors like the condition of the property, recent renovations, or even the proximity of comparable properties. Some will include outliers in the comp data —properties that sell for extremely high or low prices and skew the results — while others will not.
Of course, the best valuations use a combination of AVMs and human appraisal. The AVM can place a check on errors and omissions from the real estate appraiser, and the real estate appraiser can make sure the valuation reflects the condition and aesthetics of the home and its salability.
In the absence of a paid appraiser, AVMs offer fast, accurate results to mitigate investment risk, determine ROI and inform purchasing decisions.
How Do You Find the Most Accurate AVM?
AVMs that utilize data outside of public records information and consider the most current and local transactions have a higher degree of accuracy. ATTOM’s AVM relies on neighborhood boundaries and recent sales transaction data, which always contains the most up to date information available. This helps to capture the micro-location deviations in the local real estate market, in order to provide a more well-rounded individual property valuation.
The valuation differs from property to property depending on which is likely to yield the best results: statistical models, market metrics derived from small clusters of similar properties, or ensemble (value blending) approaches.
AVMs that are based on a robust set of data points, updated weekly, and go through a number of modeling techniques are generally quite accurate. At ATTOM, 70% of the valuations are within 10% of a home’s eventual sale price, and 82% are within 20%. Over a recent three-month period, the median difference between valuation and sale price was 3.5%. Some AVMs, similar to ATTOM’s, will also provide both minimum and maximum valuations and a unique confidence score for each property. This allows users to get a big-picture view of a property’s value, as well as any potential for variance.
Rental AVMs
Rental AVMs are another critical tool for investors. These are best utilized when looking to evaluate the potential profits, return on investment, and viability of new investment properties. Investors may also use a rental AVM for analytics purposes, often to identify trends in specific geographic areas and markets.
ATTOM has recently introduced a proprietary rental AVM, yet another valuation tool for investors and real estate agents. The rental AVM is a valuable tool because it estimates the potential income for rental properties under current market conditions.
Basically, it considers both macro and local economic dimensions to provide accurate rental information. ATTOM’s rental AVM is designed for analyzing single-family residences nationwide. The estimated rental values are based on data from over 72 million similar properties across the country. It can provide users with an estimated monthly rental value (as well as a high and low range) for a property they may be considering investing in. It can also help users extrapolate local trends and for mortgage lending purposes.
The rental AVM is calculated by collecting rental data for the nearby comps that have either recently been rented or are currently being offered for rent. After adjusting for property characteristics, such as the neighborhood and the distance from the subject property, a combination of statistical algorithms and historical trends estimate the most likely rental price for the subject property. Investors in rental properties can use this data to project returns for the property they are interested in, and can make informed, data-driven decisions.
Better Risk Management
An accurate valuation is a component of risk management for investors and real estate agents but finding that value is a challenging task when the market is unstable. Reliable AVMs offer a more confident path to a valuation, even in a volatile market.
It is possible that, in the future, an AVM will incorporate photos of ghastly wallpaper and dated appliances into its valuation, but until then, data-driven AVMs offer the most realistic valuation of a property and are a critical tool for investors in today’s changing market.
To learn more about ATTOMs AVMs at a property level, visit attomdata.com/solutions/property-reports or call 800-306-5870.
