Automated Valuation Models....Buyer Beware

Buying A Home

Should a buyer (or an agent) rely on Automated Valuation Models (AVM) that produce an estimation of "Market Value."

My answer is: No. 

Reason:  Real estate is far too complex with far too many independent and conflicting variables for some expert algorithm to model something as complex as "market value."  Who is this expert anyway - a statistician, a mathematician, real estate appraiser, or a combination thereof?

For example, in a neighborhood that is very dense and all the homes are almost the same in size, age and uniformity, AVMs can come close sometimes.  But there are many factors, even in this type of conforming neighborhood, that even the most complex model do not capture. 

For example, how does the AVM analyze:

1. When the market is rapidly declining or appreciating?
2. When a home has been substantially improved (new roof, windows, furnace, kitchen, baths, finished basement, etc.  AVMs don't know this information.
3. Even if an AVM knew about #2, how does it evaluate the quality of the improvements?
4. Have there been any sales in the neighborhood that were lower than the actual value of the neighborhood due to a seller having to sell quickly, eg, divorce, relocation, loss of job, etc.? It's not to say that other homes in the same neighborhood are not worth more, but the recent comps would support reduced value.
5. Are there major electrical power lines running behind the home?  Does the home sit next to the county landfill? Is there is a Burger King across the street?  Is it a corner lot?  Does the lot have steep ravines in both the front and the rear yards?  (These are just a fraction of the potential problems that can affect value that AVMs do not know and do not include in their models.)
   

I could write 500 reasons why AVMs are oftentimes wrong.  I think they are beneficial when it comes to looking at generalities, but the focus should stop there and not be looked at as an indicator of market value any more than an outdated county auditor's opinion of market value.

Date: Wednesday, January, 7th 2009 @ 11:19:51 AM
Views: 191

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