The average homeowner probably can’t tell you exactly what their home is worth — but that is all changing thanks to the rise of automated valuation models (AVMs) in the real estate and mortgage industries. More homeowners than ever before can easily identify the value of their biggest financial asset.
With automated valuation models becoming more of a modern alternative in recent years, there are a few reasons why AVM algorithms are being chosen over a traditional appraisal.
An automated valuation model is a name for a software-based service that takes residential real estate data from existing public databases and uses mathematical models to determine the value of a property. One of the more well-known ones is Zillow’s Zestimate, which was among the first to be offered to the general public. But many companies offer AVMs.
During the COVID-19 pandemic, a lot of financial institutions pivoted toward AVMs and away from traditional appraisals for underlying home valuations. Mortgage originators should have a good grasp on the strengths and uses of this technology as the industry starts to utilize automated valuation models even more frequently.
Automated valuation models rely on readily available information online. By doing so, these models can instantaneously populate an estimate of value for a house based on different points — such as property taxes, home features and sales histories, among a list of other factors.
These factors are available online via public databases, so an AVM can use its algorithms to pull the necessary real estate information, compile the data and begin to put together a full valuation of a home for an owner or potential homebuyer. By providing research into the housing market, including pricing trends, and offering fast, reliable technology, this service can show homeowners exactly what they need to know about the value of their home.
Traditionally, to determine a home’s value, a certified appraiser would conduct a thorough inspection of a home, calculating its square footage and evaluating its features. The appraiser would then compare the house to similar homes in the neighborhood to price and appraise the property accordingly.
With automated valuation models becoming more of a modern alternative in recent years, there are a few reasons why AVM algorithms are being chosen over a traditional appraisal. For one, it’s faster. AVMs provide some of the most accurate real estate insights into a home’s value — almost instantly when compared to that of an appraiser, who could take several days or weeks.
These models also eliminate any potential bias or opinions from a human standpoint. Their accuracy depends upon the exact data available for a property and not what an appraiser thinks a home is worth. Plus, there’s a considerable amount of time and money saved for the homeowner without having to endure the timeline of the current appraisal process. While the traditional home appraisal process is still required in many cases, the mortgage industry could start to see a significant change to the process in the future with the rise of automated valuation models.
With more technology being introduced to the mortgage industry, the financing process is becoming more competitive than ever. With online applications and e-signing capabilities, homebuyers can apply for a mortgage at any time or place. Eventually, they’ll be able to sign closing documents from anywhere in the world.
Using technology in lending enhances a mortgage originator’s ability to help homeowners — and most lenders are jumping on board. With everything from automated emails to streamlined documentation, almost every aspect of the lending process can be digital. Automated valuation models could be the next step in solidifying a competitive edge in the industry.
With customizable algorithms, the accuracy of an AVM is exactly what an originator needs to help calculate the numbers for their borrowers — and fast. If an originator knows the accurate value of a house upfront, it’s easier for them to build a plan for when the owner decides to sell and buy again. It gives homeowners the opportunity to confidently jump into the market — knowing how much their home could sell for or how much they can afford for a new home — and allows originators to know this information faster than competitors that aren’t using the same technology.
By actively supplying borrowers with the immediate information they need regarding the equity and valuation behind their home, there is a tremendous opportunity to unlock data integrity, which will allow homeowners to make data-driven decisions around financing and insuring their assets. With automated valuation models becoming more of a dependable resource for home values, it can bring a better overall experience to the financing process.
Ultimately, along with showing homeowners how to benefit from equity in their home, these models are saving originators a significant amount of time in completing their work. With typical wait times for the financing process lagging to three weeks or more, it requires almost no effort to generate a report with an AVM and eliminates the waiting game. With less time spent on each loan, the originator has more time to focus on closing more loans.
Although automated valuation models have existed for the past few decades, they’ve quickly grown in popularity in only the past few years. It seems that AVMs have become more accepted by the mortgage industry, and the growth in their knowledge and their algorithms have the potential to continue evolving.
With more data becoming available online every day, the ability to capture what the internet has to offer is only the start to developing everything an automated valuation model can achieve. With the digital recognition on property features, homeowners gain insight into what makes a home more valuable, such as how much value a kitchen renovation or a new roof will add to a home, or knowledge about a home that your client is thinking of buying.
Currently, a lot of AVMs are only using readily available public databases to pull information. With further advancements in technology, companies that offer these services can explore the addition of drone inspections of properties and the use of geospatial technology (geographic mapping as it pertains to neighborhoods) in their future models. Automated valuation models that rely on data and artificial intelligence could turn a standard home valuation into a complete 3D digital model of an asset’s value.
An automated valuation model will not only enhance the homebuying process but also the continuous home asset management process. So, what’s next only hinges on how soon a company plans to integrate the benefits of an AVM. ●
Jim Hawksworth is director of operations at Realfinity, which passionately believes in providing homeowners with the insight they need to make the right financial investments at the most pivotal times. In working with the nation’s leading mortgage lenders, Realfinity enables loan advisers to offer homeowners the unique HomeDashboard platform, allowing borrowers an opportunity to gain access to up-to-date housing information daily. To learn more, visit realfinity.io.
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