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AVM's and Commercial AVM's 2013 Update

by Administrator on Aug 28, 2013 General Appraisal 1859 Views

The public has had more than an introductory look at a number of high profile residential AVM's available on the Internet over the past 5 years, and what is their opinion?  I have heard from many users and received nothing but unsolicited negative feedback.  People tell me "the AVM is high or its low or it changes the value of my home overnight for no particular reason."  I have had no one ask me as an appraiser "what are you going to do for a living now that AVM's are doing your job?"

AVM's may be slowly getting better but as soon as someone mistakenly thinks they have been perfected the market will make a sharp turn and the AVM's will not project it and they will not be able to predict what a dynamically changing real estate market will do to prices.  How many real estate market cycles will it take before a machine can predict and adjust to them?

Valuing real property is not like playing chess.  You can't think ahead of the real estate market because you have superior computing power and think that you can survive a serious downturn.  Some of the most savvy real estate investors and speculators lost millions in the last crash they didn't know what hit them.

Commercial AVM's are going to be residential AVM's on steroids.  More data, historic data, more detail and much more sophisticated analytic calculation that takes a lot of computing power.  I'm sure that the coming commercial AVM's will be impressive on the computer, replete with charts and graphs.  It will however only take one market hiccup or one market cycle turn and users relying on them will figure out that they have absolutely no real world application.

Real estate deals are transacted between parties and the information is confidential.  Details are not released until after the deals close, and depending on how quickly the market is changing the escrows can take 30 to 180 days.  Even if you enter market data the day of the closing you are already well behind what is really happening.  Escrows are often used by investors and speculators to hedge the market so even if you knew their details there are no guarantees the deals would close.

That's why commercial AVM's will likely rely heavily on elegantly wrought income approach tools.  As an appraiser who puts together DCF models for a living I can tell you that forecasting cash flows from real property for 10 years to 20 years into the future is not always where you want to "hang your hat."

When real estate markets turn and you get 25% to 30% vacancy rates, like in the Las Vegas commercial retail market, it's time to turn the AVM off. 



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