The Need to Reference Automatic Valuation Models to The Valuation Process

The purpose of this paper is to examine the details and assumptions used to describe a computer-assisted estimate of residential price and value commonly known as an automatic valuation model (AVM). It contains a brief explanation of the types commonly used and the purposes of each. It is not a discussion of a specific model containing a specific procedure, and it does not contain data analysis. The intent is to provide a discussion that will increase the user's understanding of this technique, and may be read and used with Advisory Opinion 18 of the Uniform Standards1 as a reference (USPAP, Appraisal Foundation, 2016).Several market issues are encountered immediately. Since sophisticated AVMs are used commercially, the producers are reluctant to disclose the inner workings of their respective models to avoid educating the competition. Published material discussing the content is rather dated and not very detailed. In addition, a number of techniques used in various AVMs have patents awarded or pending. Typically, these concentrate on specific concepts employed and/or unique steps used to produce the value, which are arguably different from other known AVM procedures. This paper does not cover differences among these patents. It covers research found in the literature on application and known details of known models. This discussion of the contents of these models should be of value to the practicing appraiser. The need to know the details of one concept versus another and its unique features that could be the basis of a patent are not important to the practical user. The most important information is the accuracy and reliability of the resulting numbers generated by AVMs.This project presents the view that the disconnect between those users who consider the product of a AVM to be an estimate of "value" versus the certified real estate appraiser and USPAP who say that it is not an "appraisal" presents a significant enigma for those who continue to construct, use, and sell their computer-assisted models and results. My position is that the real estate market has room for an AVM that contains a theoretical analysis following the interpretation given by AO-18 and the USPAP. This same recommendation is given by Linne, Kane, and Dell (2000) who want any AVM to be constructed within the constraints imposed by the valuation process that all certified appraisers follow. in other words, appraisers are in charge of the AVM theory, construction, result, and use. The statisticians who assemble the procedures work within the requirements and infrastructure imposed by the procedures that appraisers follow. Thus, the AVM estimate should not ever be labeled as a value because it does not contain the components that all certified appraisers must certify are present in their certification under Standard 2. The best it can be is a price-adjusted estimate similar to the one produced from the known sales comparison grid.Further, this MV versus non-MV difference has created a situation that is much more important than model builders and users may realize. The reason is that it becomes critical when the modeler assembles the housing characteristics to be used and method of analysis that the equation and statistical procedures will follow. Essentially, if the modeler has an incorrect view of the final estimate, how can the specification of the equation and analysis be conceptually correct and consistent within the requirements of a value?in addition, in the current world of several commercial and academic approaches to an AVM model, a critical need exists for answers to two questions. The first is the accurate criteria to use in the model selection process since the details may remain a firm trade secret. The result is that a model constructed around a highly statistical approach, such as regression, will be based on goodness-of-fit measures such as the coefficient of dispersion or mean square error as opposed to criteria derived from the valuation process. …