Why Real Estate Professionals Need to Stop Bashing Automatic Valuation Models (AVMs)

RE - Assessment

By Dean Paul Dominguez, Kaplan Instructor, San Francisco, CA 
Published July 2015

AVMs as Information for the Consumer 

Automatic valuation models are algorithms made by companies in order to value millions of homes simultaneously for the sake of providing users with a ballpark figure of a home's value. It 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).

Nevertheless, AVMs still have their place among 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.

We understand that 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 the AVM valued the house.

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.

AVM as an Ally

Imagine the following: if a seller is having a hard time pricing down a listing, and the AVM shows a price that you want the seller to use, then the AVM should be made credible via your CMA. If the real estate agent consulted the AVM and included it as part of the listing presentation, the real estate agent would have the AVM on his/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 himself/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/her 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 confide in the site's credibility, which will allow the real estate agent to beeline directly to the seller and share with the seller 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 website if the seller swears by that real estate website. Because you know what they say: the friend of an enemy is your enemy and a friend of a friend is also your friend. So befriend your seller and befriend your seller's real estate website, within reason.

Dean Paul Dominguez is an Instructor at Kaplan Professional Schools. The views expressed in this article are solely those of the author and do not represent the view of Kaplan.

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