An automated valuation model is a service that estimates the value of real estate property. The estimate is done almost entirely by computer. The computer reaches an estimate of value using a mathematical model and a database of known property values. Some other sources of data may be used as well, such as the opinions of appraisers who have evaluated the home in the past and information about the value of work done on the home. The automated valuation model is used on Wall Street and by appraisers and lending institutions to decide both how much a piece of real estate property is worth and how much to lend against that property.
Two methods are used by the automated valuation model to reach an estimate. First it accesses a repeat sales index. This index measures price changes over the years as the property and others similar to it have been sold and refinanced.
The automated valuation model also uses a hedonic model to determine the current absolute value of the home. A hedonic model finds the value of something by breaking it into parts and assigning each part a value. All the values are then totaled. In real estate, property is valued based on variables like the number of bedrooms, the square footage, and the age of the building.
Real estate experts have pointed out several advantages of the automated valuation model over lower tech valuation methods. The automated valuation model saves time, money, and resources since it can be done entirely online. It is also more difficult to commit real estate fraud using this method because less people are involved. Automated valuation models are accessible to the average homeowner. Some companies offer automated valuation model services to homeowners over the Internet.
As with any technology, automated valuation models have drawbacks as well. The computer can only make an educated guess as to the value of the property. Certain variables are not taken into account. For example, the condition of the property is not considered. This can lead to a higher estimated value for the property than is warranted.
The automated valuation model is also less accurate when evaluating a new build. New builds are more difficult to price because there is less data to which to compare them. The model can only use similar homes in that area instead of drawing on data about the specific property in question.