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Determining Market Value: AVM Report or Full Appraisal?

How much is that house worth?  Today, Low-cost nearly instantaneous estimates are available online at websites powered by Automated Valuation Models (AVMs). AVMs are statistical software packages, often based on multiple linear regression analysis, that approximate the current value of a property using historic values for the local market area. AVMs are also the key components in loan evaluation programs such as Fannie Mae's Desktop Underwriter and Freddie Mac's Loan Prospector.

Banks, lenders, buyers, sellers, brokers all can benefit from AVM reports.

AVMs are used by banks and mortgage lenders to evaluate low risk loans. A homeowner with ample equity looking for a small loan or to refinance his current loan is considered low risk. The property valuation provided by an AVM may be all that's needed to assure a lender that the loan is merited. In these cases, an AVM can speed the lending process. This is a huge benefit to the lender; the faster the commitment, the less chance of losing the loan to a competitor.

Buyers, sellers, and real estate brokers can also take advantage of the speed and low cost of valuation reports produced by AVMs. Using an AVM-powered website, such as Electronic Appraiser, a potential buyer can determine whether a neighborhood is affordable and an offering price equitable. A seller can use the same information to price his home attractively. A broker can use an AVM-generated valuations to add credibility to his pricing recommendations.

AVM valuations have limitations.

While AVM valuations have many uses, they also have their limitations. By design, AVM software mimics the selection criteria and statistical evaluations of the professional appraiser. That's a strength. But AVM results are only as good as the available database of properties and prices -- and that's the limitation.

The quality of the database, furnished variously by Multiple Listing Services, by municipalities, and by credit reporting bureaus, varies widely. Information in the database may be fresh, or several years old, a particular problem in a time of rapidly fluctuating values. Information about the subject and its comparables is never obtained by direct inspection, as in a full appraisal report, and the comparables may be drawn from a market area which can be as big as a town (too big) or as small as a block in a neighborhood (too small). Information is often limited to the number of rooms and bedrooms, age of the house, and sometimes its size. Gross living area (square footage), a key determinant of value, is frequently unavailable. Of course, details as to the condition, quality of updates, type of remodeling, and overall appeal, are never in the database and so cannot contribute to an AVM valuation.

Every house, like every person is unique. When you are ready to sell your home, you will want every special feature that you have enjoyed to be considered in the valuation. Every amenity contributes to value and adds to the appeal of your home. An AVM valuation report can tell you what your neighbor's house sold for, but it can't tell you the worth of your own. That's the purpose of a full appraisal. An appraiser inspects your home and weighs all aspects that affect value to determine the most probable selling price. With an appraisal, you can be assured that you're not short changing yourself. Anything less is just too risky.