Real Estate Evaluations vs. Automated Value Models

Real estate evaluations and automated value models (AVMs) are two popular methods used to estimate property values. 

Real estate evaluations involve real estate professionals conducting a thorough valuation of a property, considering various factors, and applying professional judgment. On the other hand, AVMs employ algorithms to generate estimated values.

In this blog post, we will dive into the difference between evaluations and AVMs, including their key characteristics and if they’re compliant with federal guidelines.

Real Estate Evaluations

Real estate evaluations, commonly conducted by professional real estate valuation analysts, involve a comprehensive assessment of a property’s value. Here are some key characteristics of real estate evaluations:

Human Involvement

Real estate evaluations typically involve a physical inspection of the property by a qualified analyst. The analyst considers various factors, such as the property’s condition, location, size, amenities, and comparable sales data, to determine its value. 

Subjective Analysis

Analysts use their expertise, knowledge of the local market, and professional judgment to evaluate the property. They consider both objective data (recent sales of similar properties) and subjective factors, like a property’s unique features, to arrive at a professional opinion of value.  

Compliance With Standards

Real Estate Valuation Analysts are typically required to follow industry standards, such as the FIRREA, HMDA, and Interagency Guidelines. These standards ensure a consistent and ethical approach to real estate evaluation. 

Looking for more information on real estate valuations? Check out What is a Real Estate Evaluation & When Can My Lending Institution Use Them? 

Automated Value Models (AVMs)

AVMs are computer-generated algorithms that estimate property values based on available data and mathematical models. Here are some key characteristics of AVMs:

Data-Driven Approach

AVMs rely on large databases of property information, such as recent sales data and market trends. While AVMs generate values quickly, they are known to be inaccurate and will often provide a “confidence score” for their estimated values.

Limited Human Involvement

AVMs do not involve a physical inspection. Instead, they rely on data inputs and algorithms to estimate property values. There is little to no human element to this approach. 

It’s important to note that while AVMs can be a useful tool for providing initial estimates, they may not capture all the nuances and unique characteristics of a property that a real estate professional can assess. 

Real estate evaluations are generally considered more accurate and reliable, especially for complex properties or in markets with limited data availability.

Are Real Estate Evaluations Compliant? 

Real estate evaluations are compliant with a certain set of regulations and guidelines. While it is not necessary for financial institutions to use evaluations, they are a great cost-effective way to close loans faster. 

Are Automated Value Models Compliant? 

While institutions are allowed to use AVMs to help them in developing a value for a property, an AVM is ultimately a tool and not an opinion of value. To reconcile the most accurate value, a legitimate evaluation should be performed by a trained real estate analyst who is familiar with current best practices to derive home values.

The use of AVMs is permitted in assisting evaluators as a starting point, but they shouldn’t be substituted for professionally derived evaluations. 

Choosing Real Estate Evaluations vs. AVMs

Choosing between an automated valuation model and a real estate evaluation depends on the specific circumstances and requirements of the situation. 

Here are 5 factors to consider when deciding which option is more appropriate: 

1. Purpose & Scope

First, determine the purpose of the valuation. If you need a general estimate of a property’s value for personal reference, initial research, or a quick assessment, an AVM can be a suitable choice. 

However, for more critical decisions such as buying or selling a property, obtaining financing, or for legal purposes, a real estate evaluation by a professional is often necessary. 

2. Property Type & Location

AVMs typically perform better in areas with a large volume of comparable property data, such as densely populated urban areas. They may be less accurate for unique or rural properties with limited market activity. 

In such cases, a real estate evaluation conducted by a trained real estate analyst would be more reliable. 

3. Data Availability

AVMs rely on vast databases and algorithms to generate estimates by comparing a property to recent sales and market trends. If comprehensive and accurate data is readily available, the AVM can provide a reasonable estimate. 

However, if reliable data is scarce or incomplete, a real estate evaluation can provide a more thorough analysis by incorporating additional information and professional judgment.

4. Complexity of a Property

AVMs typically work best for standard residential properties with few unique characteristics. 

If the property has distinct features, such as extensive renovations, architectural significance, or unusual zoning, a real estate evaluation is more likely to capture these nuances and provide a more accurate valuation.

5. Legal or Financial Requirements

In certain situations, such as mortgage underwriting, legal disputes, or tax assessment appeals, a more comprehensive analysis, such as a real estate evaluation, may be mandated by regulations or required for documentation purposes. 

AVMs may not meet the specific requirements of these scenarios.

To learn more about how Akrivis can help save you time and money with our compliant lending solutions, fill out our contact form. Upon completion, one of our dedicated Real Estate professionals will reach out to you with more information.

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