Automated Valuation Model: a solution for an old conflict
As is the case with other types of investments, the key for a successful real estate investment has always been to “buy low; sell high.” However, when it comes to real estate investment, the stakes are even higher due to the fact it is the most costing investment.
For this reason, the need for an unbiased way of assessing and evaluating a property has been on a continuous rise; this eventually resulted in the creation of the Automated Valuation Model technology (AVM).
What is the Automated Valuation Model?
As the name indicates, Automated Valuation Model is a computer program that aims at overcoming the usual shortcomings of manual property appraisal in order to come up with a reasonable estimate of the true current value of the property you are putting up for sale.
As we mentioned before, the key behind a successful real estate investment is to “buy low; sell high.” Naturally, this has been a source of conflict of interests between buyers and sellers; in the end, everyone seeks the deal that best serves their own interests.
To avoid such conflict, real estate companies, brokers, and agents use the Automated Valuation Model as an unbiased neutral method to estimate the market value of the sought property.
How it works?
Mostly, the Automated Valuation Model is an online engine where a user inputs the address of a specific property; the engine then accumulates data about different factors that naturally affect the value of the property (property age, geographical location, features and specifications, history, etc) at a specific point in time and compare it to the prices of similar properties.
After that, the AVM uses mathematical modeling to analyze the gathered data and compute an estimated realistic value for which the property should be put up for sale.
Advantages and disadvantages:
Like any other technology, Automated Valuation Model has its own ups and downs that would make them an almost perfect choice for a specific scenario and a completely wrong approach for another. We here demonstrate both the pros and cons of the technology briefly:
- Cost efficient: by nature, the automation of any process mainly aims at reducing the time, cost and effort required by this process when performed manually. Automated Valuation Models save the costs of a manual visit (or more) the appraiser needs to make to assess the property and the time it would take them to compute its value.
- Minimal mistake risks: with manual property valuation, there is usually a considerable risk of receiving undermined value estimations, let alone the human error margin. With the AVMs’ fixed set of standards used databases, it is more likely and more often that it would calculate a realistic value for the property than the manual approach.
- Lack of physical inspection: the other face of the aforementioned advantage. While AVMs might help save effort, money and time, they do not put into consideration the present physical condition of the property while valuing it.
For this reason, it is likely that the final conclusion of the automated process regarding a specific property would not precisely reflect its present realistic value.
- Human element: while the lack of the human factor from the process Automated Valuation Models utilize to compute the property value leads to a more well-informed unbiased results, it ignores several more crucial intangible factors that indirectly affect the value of this property.
Such factors include the changes taking place in the area or the neighborhood around the property and other similar factors that need to be assessed manually or by a human appraiser.
Overall, while the Automated Valuation Model has its shortcomings, the technology is expected to go through several upgrades and advances in the future to help overcome or at least minimize the effect of its current disadvantages.
Needless to say, this expectation is further supported by the growing role which technology is taking in almost all of the industries including the global real estate market.
Thus, it is safe to say that the role of the Automated Valuation Model is going to become more developed and more utilized rather than being diminished or be reduced.