How accurate are AVMs generally?
AVMs can vary widely in accuracy, reliability and usefulness based upon numerous factors including data
quality, real estate fundamentals and complexity of the underlying technology.
How accurate is Home Valuer and how do we know?
We test the model each week against all of the new sales available and measure how well we predicted
these sale prices. At the date of publication of this document nationally the average actual sale price v
predicted sale price has been +/- 9.5%. In the larger centres, Auckland, Wellington, Christchurch and
larger regional cities the average varies between +/- 6-7%.
What are the limitations of all AVMs?
The values are totally software generated and the property is not physically inspected. The results so
derived have an underlying assumption that the dwelling is in a similar average condition (Ceteris
paribus) as to that of the comparable sales referred to in the report.
There are four possible areas of error. These can be categorised as follows:
- The property record might be incorrect. One or more of the descriptive variables might have been
incorrectly recorded to the data base. For example if the dwelling had an actual floor area of 200
square metres but this was recorded as being 100 square metres in size, the value derived by the
AVM will clearly be incorrect.
- The property might be in a worse condition than that of the comparable sales. For example a
structural element might be in need of replacement (e.g. roof, exterior cladding, plumbing, etc.), or
the property might simply be in poor decorative presentation. As it has not been inspected such
adjustments cannot be made.
- The property may have super adequate features. It might have a superior quality feature or an
additional feature not possessed by the comparables. This is sometimes referred to as
contributory value or super adequacy. Again, as the property has not been inspected, these
adjustments cannot be made.
- Subjective assessments not possible. Property valuation is sometimes described as more art
than science. Fine adjustments along the value continuum are often subjective in nature. A
specific property might achieve a premium because it ‘feels’ better or is better presented than the
comparisons. AVMs are unable to make such discrimination.
Why bother to use AVMs at all?
The major benefits of AVMs are as follows:
- Cost - a significant barrier to obtaining independent advice when undertaking due diligence either
as an intending purchaser or seller is the cost of that advice. For example, a purchaser who is
considering multiple properties would be unlikely to commission a valuation on each at a cost of
$400 + per property. However at a cost of around $40 per property, the option becomes advisable
and affordable. The same benefit extends to sellers and lenders. - Speed – results for all intents and purposes are instant. Opportunities can sometimes be lost
through time taken on research, particularly in a competitive situation. - Independence – results can sometimes be skewed by one party to a transaction exercising
undue influence on a human expert. This is not possible with an AVM. Indeed, even the providers
of the AVM service are unable to intercept and modify the results from any individual transaction.
Is HomeValuer suitable for Commercial or Rural property valuations?
The simple answer is NO. AVMs require a reasonable amount of homogenous data to operate
successfully. Commercial and Rural properties often have characteristics which are unique to individual
properties. Therefore it is not feasible, at this time, to automate valuations for these categories of
properties and still remain within consistent margins of accuracy.
Some Tips on getting the best out of AVMs
AVMs give you access to a rich base of knowledge and in negotiation ‘knowledge is king”.
- One of the most effective ways to use automated valuation models (AVMs) is to supplement
traditional appraisal and valuation methods. If the value indicated by the AVM is at odds with a real
estate agents appraisal or an asking price, always seek a second professional opinion. - AVMs will usually provide you with a list of comparable sales (if there are any). Drive past these
sales yourself to confirm values. - Use the AVM in conjunction with your own physical inspection. For example, if on inspection it is
apparent that a roof needs to be replaced, an AVM supplemented by a builders estimate to
replace the roof will get you closer to the real value of the property.
Remember Home Valuer uses the best technology available but it is not infallible. The application of
common sense can minimise any risks.
How do AVMs work?
There are two possible mathematical models and two statistical models which tend to be used by
competing products. Each model has inherent strengths and weaknesses.
The models are as follows:
- Indexing – this simply tracks price movements within a locality and applies this to a constant
(usually rating value or most recent sale price) which it uses to anticipate the most likely selling
price of the subject.
- Expert Systems – these are heuristic models and emulate the processes of a human expert.
Comparable sales are selected based on similarities of physical characteristics (e.g. size, age,
condition of the property, etc.) The results are mathematically adjusted for differences and a value
is derived.
- Regression Analysis – These models utilise complex mathematical equations to define the
statistical relationship between one or more property characteristic and the value of the property.
- Neural Networks - these are designed to identify the statistical relationships between house
prices and their associated physical characteristics.
Which Model does HomeValuer use?
HomeValuer and may be described as a ‘Cascade Model’ which uses a hierarchy of models. It integrates
Indexing, Expert and Regression onto a single platform. It utilizes the best aspects of each system, which
gives a more consistent level of accuracy than that produced by any single model if used alone.
AVMs are not meant to replace and should NEVER be considered to be a valuation
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