AUTOMATED VALUATION MODEL (AVM)

Saturday Brain Storming Thought (200) 09/12/2023

AUTOMATED VALUATION MODEL (AVM)

An Automated Valuation Model (AVM) is a software-based tool that is used in residential and commercial real estate to determine property value

The service uses mathematical or statistical modeling with a combination of existing databases to determine the value of a particular property

Key Takeaways of AVM

1) AVMs are software based pricing models used in the real estate market to value properties

2) AVMs are more efficient and consistent than a human appraiser

3) AVMs are also as accurate as the data behind them, meaning they may be outdated or incorrect

4) AVM providers include commercial platforms like CoreLogic, Freddie Mac and Equifax, as well as free consumer sites like Zillow or Truila

Key factors of AVM

1) Deeper Insights

Advance machine learning unearths deeper data insights quickly and efficiently

2) Highly Predictive

Underpinned by an ensemble of sub-models to tap into multiple market dynamics

3) Responsiveness Calibration

Rapid, frequent and continuous recalibration keeps pace with market fluctuations

4) Extensive Coverage

Should built on trusted property data

5) Compliant Lineage

Should built on trusted sources that have been transformed to the highest bank-grade standard

6) Trusted

Should be trusted by majority lenders

7) Quality Assured

Methodologies should be independently audited to help ensure the reliability of all model outcomes

8) Measurable

Extensive accurate reports should be produced monthly to support the regulatory requirements

9) Proven Performance

Should measure performance weekly against properties sold

10) API

Use real-time data seamlessly which enable for lending decisions

AVM possible users

1) Lenders

GSE (Government Sponsored enterprise) increasing appraisal waivers

2) Institutional Investors

Buy homes site unseen using AVM values

3) Buyers/Sellers

I Buyers make near-instants offer

4) Desktop Appraisal

AVM plus value reconciliation

Rising AVM usage faster, cheaper and better

AVM Strengths/Weaknesses/Potential

1) Three approaches to valuation – sales, cost and income

AVM are sales price models – estimating price v/s value or income potential

2) Price models can be trend following or mean-reverting – AVMs are trend following (momentum) models

3) Hybrid AVMs

Means reverting AVM combining sales price with replacement cost

4) AVMs in a capital adequacy framework

using AVMs to ensure adequate capital exists to support a loan using valuation or a expected loss (ES) framework

AVM Accuracy Measures

1) MdAPE – Median Absolute Percentage Error

2) PPE 10 – Percent Predicted Error

How many sales fall within +/- 10% of the actual sales price

3) Forecast Standard Deviation (FSD)

4) Mean Absolute Error ( MAE)

5) AAM – A summary statistics of the prediction accuracy of a model similar to the GINI coefficient, superior to PPE 10 or MdAPE

Use AVM assessment value as a prediction

AI AVMs can leverage big data – making the trove of Appraisal data that the GSEs have applicable to AVM builders

Percentage forecast error based on AVM =

(Surveyor Value – AVM value) / AVM value

AVMs working

AVMs calculate existing data about a home, as well as the area and similar homes in the same area, and use complex mathematical formulas to determine how much the home is worth

Factors considered for AVM analysis

1) Plot Area

2) Built-up area

3) Numbers of rooms/toilets

4) Age of building

5) Recent sales of comparative homes

6) Tax assessments

7) Prior sale amounts

8) Neighborhood crime statistics

9) Local school district ratings

10) Market trends and seasonality

Each AVM algorithm will calculate the worth of a home

AVMs create a valuation based on the data they have about the property

AVM Pros

1) Convenience

You can complete an AVM in just a few minutes, or even less, whereas professional appraisals require appointments, scheduling and in-petson visits

2) Low or no cost

Some sights might require a small fee to get access to their AVM, but the majority are free

Appraisers, on the other hand, charge huge fees

AVM Cons

1) Subjectivity

An AVM is objectively evaluating data points, rather than physically seeing and understanding a home like a person wood

AVM cannot account for condition

In addition, cultural bias may be an unknowing factor

2) Accuracy

AVM Accuracy is variable

The results are only as accurate as the data available

Origins of AVMs

1) AVMs have their origins in North America (1960), the first commercial application was created in 1981 and began to be developed in UK in the 1990s

2) After the crisis in 2008 caused by the insolvency of mortgages, Robinson & Dawnie demonstrated the growing importance of AVMs all over the world

3) In 2009, the European Mortgage Federation stressed that – AVM is useful and efficient tool when used appropriately by an experienced operator

4) RICS 2012 – Output from an AVM can be utilized as part of evidence in support of a valuation

5) American Bankers Association (2010) indicated that – institutions may employ AVMs for a variety of uses, such as loan underwriting and portfolio monitoring