One of the most well-known online real estate marketplaces, Zillow, created the Zestimate or Zillow Estimate, which provides home value information. The Zestimate is essentially an automated valuation model (AVM) and it’s a widely recognized feature in the real estate industry.
In this blog, we’ll take a deeper look at what an automated valuation model is, how it works, how it impacts sellers, and whether or not they can be trusted.
What Is An Automated Valuation Model (AVM)?
An automated valuation model is a computer program that uses an algorithm to determine a property's value. If you want a ballpark figure for how much your home is worth, you can easily get an idea by inputting the address on these sites. There are several AVMs out there, each offered and designed by a different financial or real estate company and you’ll likely get a varying number with each one.
How Do Automated Valuation Models Work?
AVMs calculate existing data about a property, as well as the area and similar properties in that area, and use complex mathematical formulas to determine how much that property is worth. For example, an automated value model might consider factors like:
- Size of the overall lot
- Square footage of the home
- Number of bedrooms/bathrooms
- When the home was built
- Recent sales of comparable homes
- Market trends and seasonality
The data points and precise formula used vary as each AVM algorithm will calculate the worth of a property slightly differently. Many elements also affect their estimates like the completeness of the data available and whether data is outdated or incorrect.
Additionally, AVMs may not account for intangible factors that can greatly influence the value of the home such as:
- A neighborhood or property’s overall conditions
- Property specifics (interior design and recent renovations)
- Market dynamics
- Human judgment factors (curb appeal, neighborhood feel, aesthetics)
AVM Pros and Cons
There are pros and cons to using an automated valuation model.
AVMs are an easier and faster way to estimate your property’s value. AVMs save time and money by automating the process and eliminating the need to physically assess the property. Moreover, they also eliminate the potential for human error and bias.
AVMs are only as good as the data they use, so a large amount of high-quality data is needed for an AVM to operate successfully. On top of that, AVMs don’t factor in the condition of the property. Any variations in the property’s condition could cause a discrepancy between the actual and estimated property value.
Are They Accurate?
Let’s consider a hypothetical scenario in San Francisco, where the current active listing median error for Zestimate is 3.11%. If a property is valued at $1,200,000 according to Zestimate, accounting for the median error, the actual market value could range from approximately $1,162,680 (lower estimate) to $1,237,320 (higher estimate).
According to Zillow’s website, the Zestimate’s nationwide median error rate for on-market homes is 2.4%. If you think that number is small, that’s still a lot of room for error. On top of that, a wider estimated sales range indicates a more uncertain Zestimate, which might be the result of unique home factors or less data available for that specific home or region.
Zestimate and other AVMs provide a useful starting point for estimating property values, as demonstrated in the example. However, their accuracy is subject to a margin of error, such as Zestimate’s 3.11% active listing median error for San Francisco.
Other Ways to Determine Property Value
An appraisal, conducted by a licensed appraiser, is a method for determining a home’s value. It’s the most effective way to know the true value of your property.
It’s essential to note that the appraised value may diverge from the market value, particularly in a fast-moving market. If a location has high demand and low supply, an appraisal may not accurately reflect how much prospective buyers will pay.
Competitive Market Analysis
A competitive market analysis (CMA) compares the property and its features to similar current, expired, and sold listings in the area. The evaluation considers local factors and property features to determine the potential price that local buyers are willing to pay. A CMA is often performed by a licensed real estate agent who looks at comparable properties in your neighborhood to determine its value.
How AVMs Impact Sellers
Why Accuracy Matters
For sellers, the accuracy of these estimates is crucial. Knowing the potential range of values, as we discussed earlier, helps you set a competitive price. Understanding this range ensures you’re not underestimating or overpricing your home, giving you an edge in the market.
Just make sure that you familiarize yourself with the AVM used by platforms like Zillow. If you can grasp how they calculate values then you can further interpret the estimates intelligently.
Making Informed Decisions
Think of your AVMs as your initial guide. While they offer a starting point, it’s essential to combine this information with the expertise of real estate professionals.
They can provide insights into local market dynamics, the unique features of your property, and recent trends that AVMs might not capture. This collaboration allows you to make informed decisions about pricing and marketing your home.
While AVMs like Zestimate offer a convenient way to estimate property values, their accuracy depends on various factors. For sellers seeking precision, combining the speed of AVMs with the insights of real estate professionals ensures a well-rounded understanding of their property’s true market value.
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