Why AVM's Lack Accuracy
There is no question that online property value estimators are fast, convenient, and increasing in popularity. The 50,000 dollar question is how accurate are they? This inquiry is not just semantics because the amount AVMs miss from actual sales prices is 50,000 dollars, in Ventura County, based on the average sale. Find below a breakdown of where and why automated value models fail, along with insights about other valuation methods like Broker's Price Opinions (BPO), Competitive Market Analysis (CMA), Traditional Appraisals, and Desktop Appraisals.
How Do AVM's Work and Not Work?
Online Automated Valuation Model (AVM) each have their own proprietary algorithms that are not made public but much is known regarding the generalities of how they work. AVMs run tax assessor records, property listings, sales records, public shared information such as photos of homes taken from the street and satellites, mapping, as well as user-submitted data to create property value estimates. The computers for these services give numerical values for property characteristics based on location related formulas without involving any human judgement or rational.
The speed at which these services can formulated all this data is amazing, but the speed comes at a cost which is accuracy. The most significant items that are not calculated by the AVMs are quality, condition, general appeal, limited analysis of both traffic influence and views. Additionally aspects such as terrain, lot usability, landscaping, patios and special amenities like pools, spa, saunas, solar panels are missed or given base adjustments. AVM's have greater accuracy on newer dwellings since the quality and conditions are known and the home conditions have less deteriorations and alterations.
Problems Associated with Using Inaccurate Values
Imagine you were vacationing in a foreign country and had no idea how much there currency was worth in relation to the dollar. You might not be overly concerned about the price paid for souvenirs, but imagine buying a home in that scenario. Buying and selling a home is like that more than any other type of shopping we do. If we go to the store we see fixed prices of products that we can use to compare products against each other. We know generally what one item is compared to another. A home is not at all like that with so many more variables.
A buyer, seller, home owner with a loan or tax assessment are concerned with the actual dollar amounts for things not just percentages. When AVM are said to have an error rate of 2%, 6% or even 10% those numbers equate to $15,000, $45,000 and $75,000 on a typical $750,000 home. You could be over paying those figures or leaving that kind of cash on the table. Consider the higher interest rates now and you can see these same figures actually coming out to be $106,747, $320,242, $533,737 based on 7% interest alone over a 30 year mortgage as a buyer or seller moving into a different home and loan.
Additionally a listing price set too high can cause potential buyers to walk away, increased days on market, and price cuts to get new attention again. A fraction of these amounts could be spent on a convenient Desktop Appraisal with no interruption to your schedule or home to take some of the guess work before you commit to bigger expensive decisions.
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Buyers using AVM estimates may over or under value a home assuming a property is not worth a specific price due to faulty online value which cause them to underbid or over bid while negotiating the price. Individuals fighting what they feel is a high tax assessment may argue with inaccurate data from an AVM and waste their time with a tax appeal. Parties to a divorce may delay and complicate matters by relying on online values only to discover the algorithm missed important items and was considerably off in it's estimate.
What to Know about BPOs and CMAs
Going back to the analogy of being on a trip to an unfamiliar location we might really appreciate having someone with us to keep us from getting ripped off. A licensed appraiser is the Gold Standard for objectivity. AVMs are not accountable for the values they produce. Real Estate agents are helpful but they have commissions which can create a conflict of interest produced by higher sale prices.
Appraisers are held to a very strict code of impartiality and their work and procedures for arriving a market values are highly scrutinized and regulated. Due to these factors an appraiser and a real estate agent may use different comparables and not arrive at the same value for the same property. An appraisal is what banks trust and demand because of their precision over the potential conflicts of emotions and greed from buyers, sellers and agents.