Practice briefing – Automated valuation models (AVMs): their role, their advantages and their limitations

Abstract

PurposeThe current state-of-the-art recognises three traditional valuation approaches. The current division is not sufficient to explain systematically all features that drive the development and usage of automated valuation models.Design/methodology/approachThis practice briefing reviews existing valuation approaches, their pros and cons and more critical other automated valuation aspects or features; both based on a literature review.FindingsThis paper discusses and lists the six critical aspects or features, besides the valuation approaches.Practical implicationsThis paper reveals the list of aspects or features that are important to consider when designing an automated valuation model.Originality/valueThis practice briefing discusses the inclusion of a multitude of aspects when considering an automated valuation model design.

Real Estate Valuation Models Performance in Price Prediction

“…The market approach is widely considered the most appropriate for valuing residential real estate in an active market (Worzala et al, 1995;American Society of Appraisers, 2004;Glumac & Des Rosiers, 2021a). Moreover, this approach is best suited to, and is the most reliable in, the appraisal of single-family homes.…”

Towards a taxonomy for real estate and land automated valuation systems

“…By and large, the comparable method estimates the market value of a subject property based on the sale price of a set of comparable properties, adjusted for differences in the financing conditions, time of sale, location quality and land and building features. A more detailed explanation of the classical valuation approaches, as well as their pros and cons, have recently been reviewed (Glumac and Des Rosiers, 2020).…”

“…Therefore, an automated approach can implicitly influence the practical focus of an AVS (i.e. explanatory versus predictive) that is further elaborated in a practical briefing by Glumac and Des Rosiers (2020) and also included as a critical facet of the taxonomy (Table 1).…”

“…Lastly, each property is observable by a nominal level of measurement (yes or no). The detailed explanation and practical implications of every facet and associated properties are provided in Glumac and Des Rosiers (2020).…”

“…The list of seven facets and their properties (Table 1), their explanation and practical implementation (Glumac and Des Rosiers, 2020), their location within a generic AVS (Figure 3) and the interconnected facets' relations described in Figure 4 altogether compose an AVS taxonomy.…”