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 how much a house is worth. Typically, nearby homes are used as part of the model and recent sold homes of similar size are placed into a sort of equation that spits out a value that persons can use to estimate the value of the house.
Recently, it is often found in the media that people like to bash AVMs, saying they are inaccurate. I will now investigate why people think this, what role real estate agents play in this, and how we can use AVMs to our advantage.
AVMs have to value millions of homes in a short period of time. You can imagine right away that an endeavor like this will have a higher margin of error versus a real estate agent who will sit down for 2-3 hours to pound out a competitive market analysis (CMA) in order to find out accurately a good list price for the home.
Nevertheless, AVMs still have their place among users who need a quick number when an expert is not available. If someone views ten properties in a particular area and there is no recent sold history, an AVM will step in as 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 have now established that AVMs serve a purpose when experts are not available and can be used as conversation starters with real estate agents who can either affirm or deny the findings. 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. Whatever the situation, I think professional real estate agents perceive the AVM as a viewpoint that needs to be considered carefully as part of the overall picture of the house. If the general public has access to the AVM and the real estate agent vehemently denies its credibility, then real estate agents and clients cannot see eye to eye on a fundamental level that could cause rifts in the relationship later on in critical junctures of the transaction.
That said, 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 could be the case that the AVM falls within the possible market price of the house and it can be credited as a secondary source outside of the real estate agent to justify price.
Imagine if a seller is having a hard time pricing down a listing. An overpriced listing will remain on the market and have sluggish activity—consequences that can eventually be traced back and blamed on the real estate agent. Now imagine that the real estate agent consulted the AVM beforehand and included it as part of the listing presentation. And suppose further that the AVM convinced the client to list the price at a lower price that could allow for more offers (assuming the AVM did come 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 herself believes the price should be at a certain threshold, and the seller now has to consider this information wisely.
How will a seller perceive the AVM? Well, if a seller is frequently on 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 also an enemy and a friend of a friend is also a friend. So befriend your seller and befriend your seller’s real estate website, within reason.