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Automated Valuation Model (AVM) – examples of uses of Big Data in the Real Estate Industry
- We will introduce the definition of Automated Valuation Model.
- Big Data in Real Estate.
- Who really uses AVMs? Companies that incorporate AVMs into their work.
Nowadays, however, with AI swiftly overtaking many industries with its incredible streamlining capabilities, it’s little wonder that it’s been making an impact on the real estate industry as well. This takes the form of an AVM, or Automated Valuation Model, and Big Data. Let’s take a look at how these developments in AI have changed the face of real estate as we know it.
Before the introduction of AI this was the only means of appraisal, and even today it is still being used in tandem with AVM. The main idea behind the manual valuation process is quite simple – a real estate agent personally evaluates the worth of a building by means of physical inspection. They do this by taking a look at every part of the building, its location, the state of the market at the time of the appraisal, etc. All of these factors are analyzed and collected. While this data is analyzed in a more subjective manner, if only because it’s performed by a human being, meaning that there may be a slight margin of error in human-provided sales prices compared to the ”real value” of a given building.
What is an Automated Valuation Model?
An AVM is a tool that is designed to perform the same function that manual appraisals do – establish the value of the building. In order to get that kind of valuation, they use historical databases that contain similar transactions. Of course, since the context changes over time, they also take the present physical infrastructure into account in order to get a more or less objective estimation. While these tools are quite effective, the industry has been taking its sweet time to adopt them, as humans are still considered to be the cheaper and more reliable alternative.
This looks like it may be changing in the near future, however, considering the fact that AVMs rely on Big Data, which means that their potential for making accurate, reliable valuations in the future far surpasses that of man.
Big Data in Real Estate
All that being said, AVM still has a lot to offer even today. Many real estate agents, or proptech companies, major financial institutions, as well as mortgage lenders utilize the services of AVM providers in order to boost their performance. The reason for this is quite simple: AVMs offer incredible accuracy, a much more comprehensive coverage, and they streamline the process immensely, making it much less time-consuming.
AVMs utilize a hedonic model in their algorithms, along with a repeat sales index, which helps make the price estimate much more accurate. A good AMV will have access to all information relevant to the property in question, such as its sales history and sales data for other similar buildings. The effectiveness of this process depends on the data used, as only high-quality data can really be considered reliable and representative. It’s important to note, however, that an AVM cannot simply physically enter the building to perform the evaluation, which in this case gives humans the edge, as they may spot faults that are otherwise undocumented in the data.
Automated Valuation Models have more uses beyond that, however, as they can be used as added support by mortgage lenders for equity loan cases. They’re a great aid in credit risk management, as they provide another layer of evidence of the building’s state that may otherwise be put into question, improving the general confidence score regarding a given piece of real estate. It’s also important to note that AVMs aren’t exclusively used to value residential buildings.
Who uses AVMs?
An increasing number of real estate companies around the world are using AVMs, revolutionizing the industry as we know it. With more specialists employing these technologies, the AI systems used only have more room to grow. Here are some of the most prominent companies that incorporate AVMs into their work.
Zillow is a Seattle-based company that utilizes AI for digital photo evaluation as a basis for property value estimates. Their technology is based on a neural network with millions of photos in its database, making it very reliable, with only a two-percent median error rate in terms of property value prediction.
A New York City-based company with ambitions to expand their horizons to other cities in the future, they use AI for the purposes of fact-checking apartment buildings, comparing various facts listed in the listing (e.g. size, amount of light) to the physical reality.
This San Francisco-based agency uses AVMs to accurately estimate a home’s value in the present, as well as predict how it might change in the future. To achieve this, the AI draws on a database of over 40 years worth of housing sales data from all around the US. The estimates can get very detailed, taking into account things as specific as back porch views.
While AVMs are still in the process of making a name for themselves in the realm of real estate, it seems inevitable that, as Big Data expands and algorithms improve, that human real estate agents will rely more and more on them. The results they provide are already apparent even today, serving to streamline the process greatly. The few holes in their data, such as the current state of the building, may soon be filled with better access to data or even just better integration into the process of human appraisers.
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