6 Key Questions to Decide Between AVM and Traditional Appraisals

For many years, financial institutions have relied on in-person appraisals to get property valuation estimates for anything from mortgage and loan originations to tax assessments. But recently, a data-driven approach has been gaining traction. Automated Valuation Models (AVMs) provide faster, cheaper valuations to financial institutions and borrowers alike compared to traditional appraisals.

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But both appraisals and AVMs have their own benefits and drawbacks. While traditional appraisals can be slower and costlier, they may be more accurate in some cases. Likewise, AVMs are typically instant, cheaper, and driven by objectivity but could be further away from what an in-person appraisal may reveal. Knowing the differences and benefits of both traditional appraisals and AVMs and when to use each ensures you’re making the right decisions during the loan cycle.

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How Does an AVM Work?

An AVM works by combining public online data and multiple listing service (MLS) data to identify comparable properties, automatically calculate the valuation of the property, and pairs the valuation with a confidence score based on the available information. Lenders use this information to originate portfolio real estate loans much more quickly than an in-person appraisal, which can take weeks to schedule and complete. AVMs are provided by different vendors in the industry.

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Regardless of the AVM company, all confidence scores are derived from a standard deviation, meaning they can determine what constitutes an outlier. Some AVMs may provide a numeric value to their confidence score while others may provide a more subjective report. Either way, an AVM will provide some level of confidence score to help borrowers and lenders alike make the right decision.

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When To Use an AVM Over an Appraisal

Where AVMs are faster and cheaper, not all loan originations should rely on an AVM. But, certain situations are ideal for an automated, data-driven approach. Six questions help you make the best decision for your situation:

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1. What is the property type? An AVM uses the most simplistic property type to pull an estimate with a high confidence score. Single family homes tend to work best for an AVM.
2. Is there more than one house on the property? Additional residences, outhomes, sheds, or barns pull further away from the standard version of the home, which can make the confidence score of an AVM lower. A single residence makes the confidence score much higher.
3. Is the property under construction or undergoing a renovation or remodel? Homeowners that are finishing their basements, changing their homes, or adding landscaping or a pool to their home are actively changing the valuation of their home, meaning that an AVM won’t be reflected accurately.
4. What is the lot size? A standard 600-square-foot-home may be valued at one thing on a standard lot, but could be something vastly different on an acreage. 
5. What is the zoning? County lines play a heavy role in a home’s value. More rural or agricultural areas tend to have a lower confidence score than a suburban neighborhood in a city. This is due to differing characteristics of each acreage or rural property. The greater the lot size or the more buildings on the property, the less the confidence score. Comparable sales within a geographic area are less likely to be found, which in turn results in a no-hit or a low confidence score. 
6. Is the property income producing? Income producing properties require more details to come up with a value, and sometimes lean into the commercial real estate world instead of residential. A Commercial AVM would be a better bet for an income-producing property, which is different than a normal AVM.

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Based on these questions, lenders can more confidently choose to use an AVM or a traditional full appraisal. Because an AVM doesn’t account for subjective characteristics of a property, nor will it reflect information that isn’t available online, lenders can confidently use them in standard, populated areas. For homes that are more rural or deviate from the norm, lenders should rely on traditional, in-person appraisals.

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For lenders that take advantage of the speed and efficiencies of an AVM, Coviance can increase loan pull-through and cut costs of origination by utilizing Home Equity Express  for the AVM and an efficient property inspection. Our customer Avestar Credit Union turned to Coviance for our system to perform AVMs quickly and close a HELOC in less than two weeks.