Ever wondered how some websites give you an instant value for your home? Or how banks sometimes approve mortgages without sending someone to view the property?
Welcome to the world of Automated Valuation Models, or AVMs for short.
AVMs are computer programmes that estimate property values using data and maths. More and more UK lenders are using them and you’ve probably come across consumer versions on sites like Zoopla.
AVMs can greatly speed up the processing of loan applications. We have lenders that receive their AVM results so quickly, that a case can move to the legal stage on the same day it is received.
Let’s explore what AVMs are about and why they matter to you.
What is an Automated Valuation Model?
Imagine you could feed a computer all the info about houses in your area – their size, location, when they were built, and how much they sold for.
Now add in data about the current market, recent sales and even things like local schools and transport links. That’s basically what an AVM does, but on a much larger scale.
These models use statistical analysis and mathematical modelling to come up with a value. It’s a bit like how your phone’s GPS works out the fastest route, but instead of roads and traffic, it’s using house prices and market trends.
The Royal Institution of Chartered Surveyors (RICS) defines an AVM as a system that uses one or more mathematical techniques to provide an estimate of value at a specific date. Quite different from a surveyor with a clipboard!
How Do Automated Valuation Models Work?
You might be wondering how a computer can value your home without visiting.
It’s all about data.
AVMs collect information from many sources, including:
- Recent sales of similar properties in your area
- Your property’s size and number of bedrooms
- Local amenities and transport links
- Economic factors that affect property prices
This information is fed into complex maths. Some AVMs use a ‘hedonic pricing model’ which calculates how each feature of your home contributes to its value. Others might use a ‘repeat sales index’ which looks at how prices of the same properties have changed over time.
The clever bit is how AVMs weigh up these different factors. They use algorithms to decide which bits of information are most important and how they should impact the final valuation.
Some of the biggest property tech companies in the UK are behind these AVMs. Hometrack and Rightmove have their own versions, each with their own data and algorithms.
The Role of AVMs in Property Finance
So why are AVMs so big in the property world?
Well they’re being used for lots of things.
Lenders are using them to make quicker decisions on mortgages, especially for remortgages or when the loan amount is relatively low compared to the property value. They’re also useful for monitoring the value of properties on their mortgage books.
Estate agents might use them to get an initial idea of pricing when taking on a new property. Investors and developers can use AVMs to quickly assess potential opportunities.
Take a major UK bank for example. They might use an Automated Valuation Model to do an initial check on a property for a mortgage application. If the AVM gives a value that supports the loan amount and has a high confidence score (more on that later) they might approve the mortgage without needing a physical valuation.
This speeds up the process and saves costs.
Benefits of Automated Valuation Models
AVMs have some great benefits.
For starters they’re fast. We’re talking seconds to minutes for a valuation, compared to days or weeks for a traditional survey.
They’re also cheaper.
A full property valuation will cost hundreds of pounds, an AVM can often be run for a fraction of that. This can be a real cost saver for lenders who need to value lots of properties.
Another big plus is consistency.
AVMs don’t have bad days or favourites. They look at the data and apply the same rules every time. This can help reduce bias in valuations.
Limitations and Risks
Now Automated Valuation Models aren’t perfect.
They have their limitations and we need to be aware of these.
One big problem is AVMs can’t see inside a property.
They don’t know if you’ve just installed a new kitchen, added an air source heat pump or if there’s rising damp in the basement. This means they might miss factors that could impact the value.
Data quality is another challenge. AVMs are only as good as the data they’re fed. If the data is out of date or wrong the valuation will be too.
AVMs can also struggle with unusual or unique properties. If your home is a converted windmill or a houseboat an AVM won’t be the best way to value it.
Market volatility can be tricky for AVMs too. In fast moving markets historical data may not reflect current values.
Accuracy and Confidence Scores
When an AVM produces a valuation it will usually come with a confidence score.
This is the model’s way of saying how sure it is of its estimate.
Confidence scores are usually expressed as a percentage or a scale. A high score (like 90% or 5 out of 5) means the AVM thinks its valuation is spot on. A lower score means you should take the valuation with a pinch of salt.
These scores are based on factors like how much data the AVM had to work with, how recent that data is and how similar the property is to others in the area.
For example an AVM might give a confidence score of 95% for a 2 bed flat in a large development where lots of similar flats have sold recently. But it might only give a 60% score for a unique countryside property where there have been few local sales.
UK lenders often have minimum confidence score requirements for using AVM valuations. They might require a score of 85% or higher to use the AVM for a mortgage decision.
Are AVMs the Same as Desktop Valuations?
You may have heard of desktop valuations and wondered if they’re just another name for AVMs?
Well, they’re not quite the same thing, although they are both ‘remote’ valuation methods.
A desktop valuation is carried out by a human valuer, usually a qualified surveyor, without physically visiting the property. They’ll use online resources, property databases, and their professional judgement to come up with a valuation.
AVMs, on the other hand, are mostly fully automated. There’s no human involved in the actual valuation process – it’s all done by computer algorithms.
The Future of AVMs
So what’s next for Automated Valuation Models?
Unsurprisingly, they’re getting smarter all the time. Advances in artificial intelligence and machine learning are making AVMs more accurate and able to value more complex properties.
We’re also seeing AVMs being integrated with other property tech. Imagine a future where an AVM could use data from smart home devices to factor in a property’s energy efficiency or use satellite imagery to assess the condition of the roof.
In the UK there’s potential for AVMs to have a bigger role in the property market. They could speed up transactions, make secured loans and mortgages more accessible and give everyone better insights into property values.
For short-term finance, AVMs are used for low LTV loans. The threshold is different for all lenders, but at 75% LTV or below they are being increasingly used.
Great news if you have a 70% LTV bridging loan you want approved in 24 hours.
AVMs and Short Term Lending
AVMs are regularly used in short term lending, including bridging. Not every lender accepts them, but they are becoming more popular.
For us they are a massive time saver, and for you they generally cost less.
A few things to bear in mind:
AVMs are only suitable for ‘standard’ residential properties, and there needs to be other similar properties to generate the price data needed.
Loan to value
1st charges available up to 70%
2nd charges available up to 65%
Maximum property values
Max £1.25m within London and the Home Counties
Max 750K for other areas.
Alternative valuation methods
If your property falls outside of these parameters then don’t worry. We will still have access to lenders who can work with a desktop valuation, which doesn’t require a physical inspection.
