AVM: Automated Valuation Model. A system by which public data is interpretted to come up with an estimation of a property's value. Many lenders rely heavily upon AVMs. IN the past, some lenders used ONLY AVMs in their lending decisions, a practice that has left many of them facing major defaults and losses. Today, AVMs are more typically used by lenders to validate the value of an appriasal. If the appraised value and an AVM value are dramatically different, the lender will require a review of the apraisal, or a second appraisal. To ensure the validity of the AVM, lenders actually pay for the AVM program and have some sort of insurance built in. This keeps the AVM companies working hard to enure as accurate a product as possible.
ZILLOW: Real Estate Website Portal. Zillow is a website that bills itself as providing an "edge in real estate." They offer free tools to the general public, most noteably the Zestimate. The Zestimate is Zillow's branded verison of an AVM. Taking information provided to the general public, Zillow's claims to be able to estimate the value of a property. According to Zillow's disclaimer on the values, they are only accurate to within 5% of a home value roughly 26-28% of the time. The values are only accurate to within 10% of the home's value 49-53% of the time. The estimates are within 20% of the actual value 68-70% of the time. Although they claim a "median average" of error as only roughly 10% (interesting math), the numbers they claim above would indicate that they are pretty far off at least half the time. The service is free and offers no insurance or guarantees. They make money on selling ads.
Reality: The difference between hype and what you really get. When considering Zillow as something to base any idea of value on, one should remember that the information they offer is free, comes with no guarantees or insurance, and is off by at least 10% half the time. AVMs offered by real companies trusted by Lenders will be much more accurate and offer assuances on their values. Lender's stake MILLIONS of dollars on the accuracy of AVMs provided by these companies.
My Conclusion: Zillow is simply an advertising medium, offering a free (and flawed) estimation of real estate property values.
Feel free to draw you own conclusions. However, I will leave you with the 3 questions that I can not shake, as follows:
- What would happen if Realtors lived by Zillow's standards and were considerably off the mark 50% of the time? Would they lose their license? Be open to lawsuits? Go out of business as a whole?
- How many Lenders are willing to risk Millions of dollars on Zillow's 50% accuracy rate? What would happen if they did? Even if it saved them a few bucks on the cost of an AVM, how much would it cost them in losses?
- If Lenders and Realtors would be on the losing end by employing Zillow's standards, why in the world would home buyers and home sellers even consider placing any validity on this website when it comes to the single largest purchase of their lifetime?
The floor for discussion is open....
Ed Nailor, Charlotte Mortgage Lender
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