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While it's been observed that online algorithms, known as Automated Valuation Models (AVMs), have undervalued some homes, many others have experienced the opposite: These AVMs often suggest higher home values than what a real estate agent might appraise for a potential sale.
If a computer suggests selling a home for $250,000, but a real estate agent, using market comparables in the neighborhood, estimates it would likely sell for no more than $225,000, who should you trust?
After all, aren’t computers objective? How could their “sell-my-home” calculators possibly be wrong?
What Is an Automated Valuation Model (AVM)?
If you’re just beginning to learn about what an AVM actually is and does, here’s the description AVM creator, CoreLogic provides:
“An AVM is a computer-driven mathematical formula that uses basic property characteristics, local market information, and price trends to arrive at an estimated value or value range. Lenders use AVMs because they offer a fast, affordable, statistically derived estimate of a property’s value. Each AVM uses its own mathematical formula and may draw property data from different databases. Accuracy and reliability vary depending on the underlying logic, data, and technology quality. There are a number of AVMs on the market developed by different companies.”
Both commercial (CoreLogic, Freddie Mac, Equifax, for example) and consumer-facing platforms provide sell-my-home calculators that offer their best estimates of your home's value. These tools help determine your property's value, whether for personal consumption and entertainment or for real estate professionals, such as a lender or real estate agent.
Learn another facet of home selling: What Home Sellers Should Know About Appraisals.
AVMs vs. Real Estate Professionals
After consulting veterans of the home appraisal, mortgage, and real estate industries, however, we found that the computer algorithms that offer home valuations are not yet sufficiently capable of managing the variables that go into determining a price point for the sale of a home.
Because AVMs do not know the house's physical condition, they assume the property is in average condition unless the updates are listed and accessible through public records. There is also no scale of adjustment for damage or upgrades.
AVMs also cannot account for:
Real estate professionals have the edge in this instance because they can physically evaluate the home and adjust its valuation based on its actual condition. The experts explained that the only homes for which the algorithms seem to prove relatively accurate are "cookie-cutter" homes with the good fortune of a stable market in their area for at least three years. Even still, upgrades and lot locations can skew the numbers.
How to Make an Accurate Estimate of Your Home's Value
1. Consider Location
Let’s start by defining external obsolescence to help you understand the importance of a location’s specificity. According to the Appraisal Institute, external obsolescence may be caused by economic or locational factors, either temporary or permanent, but not curable by the owner, landlord, or tenant.
In short, you can buy a property on a set of train tracks for a steal, but your long-term plans should include customizing the property to become your forever home because a profitable sale in the future will be difficult.
Train tracks aren’t the only reason a home’s location will dictate a lower appraisal. Any perceived undesirable building, even a school or house of worship, can lower appraisal values. Traffic and noise are major negative contributing factors.
Is your home close to any of these undesirable factors? If so, you’ll have to consider that your appraisal might not be as high as you hoped.
- Power lines
- Gun range
- Highway
- Registered sex offenders
- Hoarders

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2. Know the Market
Many experienced real estate professionals know that overpricing is often a significant point of discord between sellers and agents. When a homeowner lists a home at a price point above what the market will typically bear, the seller is at a competitive disadvantage, particularly when a neighbor with a similarly sized home lists a price point commensurate with the market.
However, once a homeowner in a neighborhood lists at a high price, it can often cause other home sellers to try to list their homes at a higher rate. This likely means the homes listed far above market value will simply sit on the market for much longer.
In the meantime, they are missing the opportunity to free up their available credit to purchase a new home. For military families trying to sell their homes during a PCS move, this means holding onto a house and continuing to pay for both mortgage and maintenance while paying for a home at a new duty station. Military families don’t usually have the luxury of remaining in a house while trying to sell it.
Sellers typically lose 5 to 9% more for overpriced homes, and the total loss could be higher if the operational costs are high.
3. Understand the AVM's Limitations
While computer algorithms are helpful, it’s important to realize they have limitations.
Some sites featuring AVMs even self-report that a margin of error on home valuations is as high as 20%. How can they be so wrong? AVMs are limited to data; they have no idea how much your particular market will pay extra for the beautiful upgrade of hand-scraped Amish wood that covers your entire first floor.
Casey Fleming, author of The Loan Guide: How to Get the Best Possible Mortgage, is a veteran of the mortgage and home appraisal industries with 35 years of experience. He broke down the premises upon which the AVMs work for MilitaryByOwner. He explained that the exact algorithms are secret but have a general formula.
First, they apply the average per-square-foot selling price of the neighborhood to each property.
“Then they look at historical data on the subject property…plus the last known sale price…and then home value trends in the area.”
The AVMs then extrapolate a current value for the property in question from this data. Fleming then broke down each of the limitations of the AVMs.
Lack of Market Data
The algorithms require specific data, such as historical data and the last known sale price, but this may not be available online for the AVMs to pull from. In some cases, the public records are available online, but the AVMs cannot access them when computing their formulations.
Further, the homes do not include any information about home inspections, which could reveal problems such as fire damage, water damage, general neglect, or termite damage that would detrimentally affect the home’s value.
Over-Reliance on Square Footage
According to the “Principle of Diminishing Utility,” Fleming explained smaller homes in a neighborhood typically “sell for more per square foot than a larger home.”
AVMs adjust slightly, but not sufficiently, in recognition of this data. The result is that smaller homes in neighborhoods are often undervalued, while larger homes are overvalued.
Delayed Information
Finally, the data uploaded into AVMs regarding comparable sales is often delayed.
If you sold your home today, that information might not be available online for several months. If your market is depreciating and you are trying to sell a home at a price based on comparable properties that your AVM results show, those homes may have sold four months ago, and your home’s value may have since depreciated.
On the contrary, if you have a home in a market with rapidly rising prices or seasonally adjusting prices, such as homes in an area surrounding a military installation that experiences high summer moves, your home may be undervalued according to AVM comparables.
If you are in such a situation and you pull your AVM numbers in April and compare them to homes that sold in December and January, a real estate agent will be able to better guide you to a higher price point for your home sale.
Ultimately, a house is only worth what a buyer is willing to pay.
Looking at the available AVMs online to get a general range estimate is fine. Still, it’s a good idea to consult a real estate professional with considerable experience selling homes in your area to get a full market analysis of your property’s value. Real estate agents bring valuable expertise and insights. If you have questions or need further clarity, they can provide additional market comparables or even recommend a second opinion to ensure you feel confident in the valuation.
Get more home selling help with our free guide below.
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