Automated Valuation Model (AVM)
What is an AVM?
AVM stands for Automated Valuation Model and is typically referred to as a report that estimates the value of a property based on historical data of properties and projection of property values. In layman terms, AVM is an automated appraisal which takes seconds to generate a value estimates versus a manual appraisal which takes days to complete.
Similar to an appraisal, AVM is more or less is a subjective measure relative to the data and methodology that were used. This means that the estimated value and confidence score may vary among the different AVMs and does not mean that one AVM is more valid than the others in all cases.
The underlying assumption in selling AVM is that lenders accept AVMs or that they can be convinced that AVMs has reached a maturity level where the valuations are accurate. AVMs are gauged primarily on their accuracy (confidence score) and hit rate (coverage). Confidence score is evaluated with respect to trustworthy benchmarks, such as an arms-length sales prices and conformity of the property. A low confidence score usually means the subject property was in a non-conforming area or exhibited physical characteristics that were not found in many of the neighborhood sales. Low confidence scores may be found in areas where property sales data is sparse and sales exhibit a somewhat larger range of values. The hit rate is the ratio of AVM values delivered for valid property addresses submitted.
Home Value Explorer
Home Value Explorer® (HVE®) is a Freddie Mac AVM tool that simplifies the mortgage process by streamlining the collateral valuation cycle. For over 15 years, Freddie Mac has effectively employed AVMs internally for its own risk and portfolio management. AVMs have become an integral part of today’s mortgage market and AVM technology has advanced the world of automated valuation services from novelty to necessity.
In nationwide tests conducted by large wholesale lenders, HVE® consistently performs at the top in the areas of coverage, accuracy, and reliability. HVE® encompasses several models rolled into a single product for one low cost. When you use HVE®, you benefit from Freddie Mac’s unique proprietary algorithm that blends multiple model estimates returned by the repeat sales model and the hedonic model. We call this our combining process.
Today, AVMs are efficient, effective, and essential tools for staying competitive. AVMs expedite processes, lower costs, and minimize risk. When choosing an AVM, it’s important to consider coverage, vendor reputation, current technology, accuracy, and price. Freddie Mac’s dedicated team of modeling experts continues to improve and enhance the HVE® tool.
HVE® is a tool that supports:
- Lending functions such as:
- Second mortgages
- Home equity loans/home equity lines of credit
- Loss mitigation
- Processes related to:
- purchase, sale, or construction of homes
- evaluating insurance needs
- Quality control (QC) processes
For example, an appraiser may use an AVM to make sure that his appraised value for a property is reasonable. A lender may use an AVM to make sure that the stated value of the property that comes from the broker/consumer/appraiser is accurate, just as the lender would pull its own credit report on the consumer to make sure that the broker’s credit report is not fraudulent.
Depending on the lenders underwriting the loan, certain AVM can sometime be used to replace an appraisal on a loan because it is cheaper and reduces the amount of time needed to close from days to seconds. AVM are typically accepted by lenders on refinances or a home equity line of credit (HELOC) where there is less risk involved.