What is an automated valuation model (AVM)?

Have you ever wanted to know the value of a property? Knowing your home’s value has many benefits, but determining the fair market value isn’t an exact science. Instead of hiring an appraiser, an automated valuation model (AVM) could allow you to get a quick home value estimate.

An AVM is a data-based tool that uses algorithms to quickly estimate a property's value, making it highly useful in real estate. We’ll explore how these models work, their pros and cons, and how they differ from a traditional home appraisal.¹

How do AVMs work in real estate?

An AVM takes in property data, along with information on the local real estate market and neighborhood, and uses an algorithm to estimate home values. It uses mathematical or statistical modeling and existing databases to estimate your property value.

These tools are widely used by consumers, mortgage lenders, and real estate investors to get an initial estimate of a home's value. However, it's important to understand the limits of an AVM estimate. For example, lenders won't use an AVM when approving mortgages for home purchases or standard refinances.

It's one thing to talk about the AVM meaning in the abstract, but you’ve probably used one without realizing it. Mortgage lenders and large real estate brokerages like Redfin use AVMs to determine home values in their home search tools². Because each AVM uses its own proprietary algorithm, results will vary.

How do AVMs work?

AVMs run mathematical formulas based on property details and property database information to estimate a home’s value.

AVM reports use multiple data points, including:

• The property's sales history
• The year the home was built
• The assessed value used for property taxes
• Features like the home's size and the number of bedrooms
• Real estate market trends, like whether you're in a buyer's market vs. a seller's market
• Recent sales of nearby comparable homes, also known as real estate comps

An AVM will likely produce an inaccurate property valuation if it's based on outdated, incomplete, or incorrect data.

AVM pros and cons

Using an AVM to estimate a property’s value offers both advantages and disadvantages.

Pros

• Speed and convenience: An AVM is faster and easier than scheduling an in-person visit from a licensed appraiser.
• Affordability: AVMs are often free. Even when you have to pay to use a more sophisticated AVM, it's often cheaper than hiring a human appraiser.
• Consistency: Because an AVM uses the same algorithm for all homes, results are more consistent, and there’s less room for human bias or error.

Cons

• Only as good as the data: AVM results are only as good as the data they’re based on. If the property data is outdated or incomplete, the results are inaccurate.
• Doesn’t account for property condition: AVM results don’t factor in a property’s condition or appearance, which can reduce their accuracy.
• Doesn’t replace a traditional appraisal: Even with AVM data, you’ll still need a traditional home appraisal if you’re buying or refinancing your home. Lenders may allow the use of AVMs for Home Equity Loans³ and bridge loans.

AVM vs. home appraisal: What’s the difference?

A home appraisal is conducted by a licensed appraiser who physically inspects a property to gather details on its condition and determine its fair market value. It's a key requirement for most mortgage approvals.

While AVMs and appraisals use much of the same data, appraisals are more accurate because they account for the property’s appearance, physical condition, and compliance with safety standards.

The bottom line: Take advantage of AVMs

AVMs offer a fast, convenient way to determine a property's value. While they aren't as accurate as a traditional home appraisal, they provide home buyers and homeowners with a helpful starting point when navigating the real estate market.

Whether it be a home purchase, refinance, or Home Equity Loan, Rocket Mortgage can help with your home financing needs. Apply online to get started today.

¹ Automated valuation model (AVM) is software that uses existing property details to generate a property’s estimated value. AVM appraisals are valid only for Home Equity Loan products. Not eligible for loan amounts greater than $400,000. When eligible for an AVM, the valuation will automatically be applied. Traditional appraisals available by request. Not eligible for loans already in process. AVMs are not available in all states or on higher-priced mortgage loans that don't meet Qualified Mortgage (QM) requirements. Additional restrictions/exclusions may apply. This is not a commitment to lend.

² Rocket Mortgage is an affiliate of Redfin. You aren't required to use its lending services. Learn more at redfin.com/afba.