How accurate are those various on-line valuation tools that are available?

Sometimes they are pretty close and sometimes they are way off. That’s precisely the problem with the various on-line valuation methods that now exist. Categorically speaking, most of these on-line valuation tools are known as automated valuation models, or AVM’s. You just don’t know when you can rely upon them; and that’s their biggest problem. Most AVM’s look at the average values in particular neighborhoods. So if your house happens to fall within that average value range then you probably think the AVM is pretty accurate. If you type in enough property addresses that you are familiar with however, you’ll start to see some values that are way off from reality. That’s because most AVM’s can’t properly handle property values that differ too far from the neighborhood average. Some of the reasons that AVM’s can be so unreliable include-- 

They don’t know much about your house. Very few of the AVM’s have enough data for your house. When they do have more detailed data it’s usually from the assessor and usually includes the size of your house in square feet. The size of your house figures in heavily in AVM calculations. You need to realize that the assessor’s data often times has mistakes and isn’t very detailed to begin with. That’s why the AVM doesn’t tell you much about your own house when you use it such as what amenities you have, whether your basement is finished, whether you’ve recently remodeled, etc. How in the world can an AVM give you a value you can rely upon if it doesn’t have detailed data about your house? It can’t. Again, if your house is ‘average’ for the neighborhood then the AVM result may be pretty close. But that’s simply because of pure luck.

It knows nothing of externalities. Those factors that affect the value of your house that are located in your neighborhood such as proximity to schools, power lines, cell towers, etc. are called externalities. The AVM doesn’t know, nor does it figure into its calculations, the effect these items may have on value. If your house backs to a nuclear power plant, for instance, you’ll probably be overvalued every time you run the various AVM’s. Or, when the AVM chooses houses that it thinks are similar to yours it may choose sold houses that have these external problems yet doesn’t adjust for them.

It knows nothing of neighborhood boundaries. Some of the AVM’s will show you a list of properties addresses that it considers to be comparable to yours. If you look at enough properties, especially those at the edge of their respective neighborhood boundaries, then you’ll see how many times an AVM just jumps into different neighborhoods and doesn’t know any better. Again, if you happen to be located in the middle of a rather large subdivision then you’ll probably be alright with its guesses.

It knows nothing about the transaction itself. We contact some of the market participants (ie- buyer, seller, realtors) when we find a particular sale of a house that seems to have sold too high or too low. We talk to them about the motivation of the buyers and sellers and find out if there were any seller concessions (seller assists buyer with financing or credits.) It’s absolutely important to know these sorts of things about the sold properties that will be used as comparables. No AVM in existence makes these sorts of phone calls.

What good are these AVM’s then? They are mostly used by large lenders who need to double check the value of hundreds, or thousands, of properties in their portfolio. They are relying upon averages. That is, they are hoping that the errors produced by these AVM’s end up canceling each other out. But on an individual house basis, you never know when the value produced by an AVM is accurate.

Why are these AVM’s so popular. Simple, they aren’t subject to any government regulation. The legal definition of an appraisal was actually changed from an ‘estimate of market value’ to an ‘an opinion of market value’ in order to accommodate AVM’s. You see, an AVM is run on a computer and computers don’t have ‘opinions.’ So by changing the definition of an appraisal to include the word ‘opinion’, an AVM is no longer legally an appraisal and isn’t subject to the various standards that appraisers have to adhere to. The influential lending industry pushed for this change so that they didn’t have to use licensed appraisers.

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