What Is an Automated Valuation Model (AVM), and How Does It Work?

As technology has evolved, so too have real estate professionals’ and lenders’ toolkits for simplifying the mortgage application process. From fast and easy online prequalifications and applications to streamlined appraisals, new advances have made the process simpler for buyers and lenders. 

One of the technologies some lenders, appraisers, and real estate professionals are using, particularly for home equity loans and home equity lines of credit (HELOCs), is automated valuation models (AVMs). AVMs are online tools that use data and algorithms to estimate a home’s value. If you’re wondering how AVMs work and how they’re used, here’s what you need to know. 

Table of Contents

1. What is an automated valuation model (AVM)?
2. How does an automated valuation model work?
3. How are automated valuation models used? 
4. Which companies use automated valuation models? 
5. Automated valuation model examples

What is an automated valuation model (AVM)?

You might have used an AVM on your own and not even realize it. Consumer-facing tools such as Zillow, for example, employ AVM technology that estimates your home’s value using property data, local sales, and algorithms. Other real estate platforms, including Redfin and Realtor.com, have similar valuation tools, each using its own data to offer insight into what your home is worth. 

Real estate professionals, lenders, and appraisers use AVM modeling to help determine a property’s value. Professionals typically use paid lending-grade AVM tools, such as CoreLogic and Clear Capital, instead of free consumer-facing options. 

Professionals might rely on AVM technology to help buyers make a competitive offer on a home or to understand a home’s market price before approving a home equity loan or HELOC. Automated modeling can save companies time and money because they don’t necessarily need to wait on in-person appraisals or rely on in-depth human analysis to estimate a property’s value.  

How does an automated valuation model work?

AVMs rely on various data points to estimate a home’s value. Data could include recent sales in a particular area, current MLS listings, and your home’s past sales, assessed value, size, and features. Not all AVMs rely on the same data points, so you might see value fluctuations. For instance, using Zillow might yield a different estimated value than Redfin. 

While AVMs can offer valuable insight, they fall short in several areas:

1. These models don’t factor in the current condition of your home. For instance, if you’ve made recent upgrades that aren’t reflected in your home’s assessed value, an AVM estimate is likely inaccurate. The opposite is also true—if your home is in disrepair, AVM estimates could be skewed.
2. An AVM is only as good as the data it uses to estimate a property’s value. So if the data isn’t up-to-date, for example, the estimated value of a home may be inaccurate.
3. AVMs could fall short in determining the value of new construction properties, especially if most recent sales in an area are older homes. A lack of comparable sales can also result in inaccuracies. 

What’s the difference between an automated valuation model vs. appraisal?

AVMs rely on technology to estimate home values, acting as a sort of digital home appraisal without requiring much of a human touch. 

By contrast, traditional appraisals are done in person. An appraiser comes to your home, inspects the interior and exterior, and then uses market data to determine what your home is worth. While AVMs can offer basic estimates, traditional appraisals may provide a more accurate assessment of a property’s value because they factor in a property’s current condition.

How are automated valuation models used? 

You can use a free AVM tool as a consumer to get an idea of your home’s value if you’d like to sell or tap into your equity. Real estate agents, lenders, and appraisers may also use similar lending-grade tools. Here’s how these tools might play a role in real estate and home lending.

Mortgages

Lenders may use AVMs to get a sense of a property’s value during the underwriting process. They’ll likely also schedule a formal in-person appraisal before approving your mortgage; AVMs don’t generally meet regulatory standards for mortgages. An in-person appraisal can offer a more in-depth look at a property and a more accurate value estimation.  

Apart from using AVMs in the mortgage underwriting process, financial institutions may also use them to estimate commercial value and assess risk levels for commercial lending.

HELOCs

Appraisal guidelines for HELOCs and home equity loans are typically less strict than those of first mortgages, so many financial institutions, including our highest-rated lender, Figure, use AVM tools for property valuation in home equity lending. 

With a HELOC, you apply for a credit line against your home equity—the amount you can borrow varies by lender and your creditworthiness. You can tap into your credit line as needed during a draw period, often 10 years. During this time, many lenders require interest-only payments on what you borrow. After that, you’ll enter repayment, making full monthly principal and interest payments until you’ve repaid your balance.

Home equity loans

Likewise, lenders use AVMs when determining a property’s market value for home equity loans. As with a HELOC, you borrow against your home equity with a home equity loan. But instead of a credit line, you get a lump sum. You’ll then make full principal and interest payments for a set term until you’ve paid off your balance.

Read More

How Is Home Value Determined for a HELOC?

Which companies use automated valuation models? 

Figure and Aven are two examples of companies using automated valuation models for home equity lending, reducing the time it takes to borrow money by weeks compared to the time it takes lenders that use traditional appraisals to approve and issue funds. 

• Figure is a financial technology (fintech) company offering a fixed-rate HELOC with a quick and straightforward application process. Instead of an in-person appraisal, Figure relies on AVM technology to calculate your home’s value. Its underwriting process is faster than that of a traditional lender. Figure can get funds to you in as little as five days.
• Aven, another fintech company, also uses an AVM tool to estimate home values for its fixed-rate HELOCs. Approved borrowers can spend against their credit line as needed and pay it down repeatedly. 

Automated valuation model examples

As a consumer, you may use Zillow or Redfin’s free AVM tool to prepare to sell or get a sense of how much you can borrow with a home equity loan or credit line. These sites could help you better estimate your home’s market value. However, keep in mind that every AVM tool is different, so you might get different values depending on the tool you use. 

For instance, Zillow may provide a “Zestimate” of $362,500, with a value range of $350,000 to $375,000. Redfin might give you a lower value estimate of $355,000. It all depends on the data each site uses to calculate property values. You might see slight variations, but you’ll likely find that AVMs provide estimated prices within a close range. Many rely on recent sales and current MLS listings to calculate value.

How a low AVM might affect your HELOC

A lower AVM could result in a lower HELOC or home equity loan limit. Let’s say your Redfin home value estimate is $355,000 and your Zillow Zestimate is $362,500, as illustrated above. 

Assuming your lender lets you borrow up to 80% of your home’s value, here’s how much you might qualify for based on both AVMs:

	Zillow Zestimate	Redfin estimate
Home value according to AVM	$362,500	$355,000
Amount owed on mortgage	$150,000	$150,000
Borrowing limit (80%)	$140,000	$134,000

The difference would be around $6,000. 

Of course, lenders typically use lending-grade AVM tools, which differ from Redfin or Zillow. But the AVM your lender uses could impact the mortgage, home equity loan, or HELOC amount you qualify for in a similar way—meaning one AVM could result in more borrowing power than another, as illustrated above—and it might also affect your loan term.