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Automated Valuation Models (AVM) and the Future of Real Estate

Automated Valuation Models (AVM) and the Future of Real Estate

Posted by: Dean Paul Dominguez
Updated January 17, 2019

Automated valuation models (AVMs) are algorithms made by companies that value millions of homes simultaneously to provide users with a ballpark figure of a home's value. An AVM is usually found on a real estate website and is often named "estimate" or "suggested price" if a house is on the market. The real estate website uses AVMs to provide additional information to their consumers, much in the same way that these websites will automatically rank public schools for consumers.

One opinion of AVMs is that they are inaccurate and not worth paying attention to. This article investigates why people think this, what role real estate agents play in this, and how we can use AVMs to our advantage as professional real estate agents.

AVM's Place in Real Estate

AVMs have to value millions of homes in a short period of time. An endeavor like this will have a higher margin of error versus a real estate agent carefully crafting a competitive market analysis (CMA), which is an important part of what a real estate agent does for clients. Nevertheless, AVMs still have their place for those users who need a quick number when an expert is not available. If someone views 10 properties in a particular area, and there is no recent sold history, an AVM is a good way to understand the values of that neighborhood. From there, it can be a stepping stone or conversation starter with a real estate agent to find out exactly how much a particular home is worth.

Real estate agents are there to verify the AVM’s work. The AVM could be accurate or inaccurate. Its inaccuracies exist in two forms: overvaluing or undervaluing. Real estate agents will need to carefully consider the AVM and make inferences on how it valued the property.

Leverage the AVM

The real estate agent should be charitable to the AVM and determine how the AVM came up with that value. If the AVM is inaccurate, the real estate agent owes the client an explanation of why that is the case. If possible, the CMA should include the AVM as part of the analysis to see where the AVM falls. It is possible that the AVM falls within the market price of the house determined by a CMA, and it can be credited as a secondary source outside of the real estate agent to justify price.

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AVM as an Ally

Imagine the following situation: if a seller is having a hard time pricing down a listing, and the AVM shows a price that the real estate agent wants the seller to use, then the AVM should be made credible via the agent’s CMA. If the real estate agent consulted the AVM and included it as part of the listing presentation, the agent would have the AVM on her side.

Suppose further that the AVM convinced the client to list the property at a lower price that could allow for more offers (assuming the AVM did come in lower as the real estate agent had wanted). The results are beautiful. The real estate agent can refer to another expert opinion (the AVM) to determine that somebody other than herself believes the price should be at a certain threshold, and the seller now has to consider this information wisely.

Consumer Perception of AVMs

How will a seller perceive the AVM? If a seller is frequently on his favorite website, and that website is informative, then it could be the case that the AVM is well-trusted based on the prior relationship the seller has with that website. Instead of working so hard on earning the seller's trust, why not put confidence in the site's credibility, which will allow the real estate agent to beeline directly to the seller and share in the credibility that exists between the seller and the website? Credibility by association is useful here, and there's no point making an enemy of the real estate website if the seller swears by it. Because you know what they say: the friend of an enemy is your enemy and a friend of a friend is also your friend.