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The Risks of Relying on AVMs like ClearAVM for Real Estate Valuations
May 12th, 2023 9:13 AM
Automated Valuation Models (AVMs) have become increasingly popular in recent years as a quick and convenient way to estimate the value of real estate. ClearAVM is marketed as one of the more accurate AVMs available, but in reality, it may not be as reliable as advertised.

As a licensed professional appraiser, I have seen firsthand the limitations of ClearAVM and other AVMs. In fact, a colleague of mine recently had a ClearAVM done out of curiosity on their own property, and the results were shocking.

ClearAVM used comparable sales that were nothing like the subject property. The main characteristic of comparison that ClearAVM appears to have used was the presence of an in-ground pool. However, none of the comparable sales were on the subject's lake or any lake for that matter. It doesn't even take a trained professional to know that lake frontage is usually the most important contributor to value for a property on a lake. Furthermore, ClearAVM indicated that the subject property was a modular home, which is not accurate as it is a normal stick-built home. These are not minor issues that don't affect value. Imagine if you were relying on ClearAVM to decide on listing your lake home and they suggested a list price significantly lower than market value?   These issues highlight a significant limitation of AVMs - they often lack the context and nuance that only a licensed appraiser can provide.

The limitations of ClearAVM go beyond the lack of context and nuance. ClearAVM and other AVMs are entirely computer-based and do not involve a human appraiser physically visiting the property or analyzing the local market trends. This can lead to inaccuracies in the estimate, especially in areas with complex or unique properties or in neighborhoods with rapidly changing market conditions.

Furthermore, AVMs like ClearAVM rely on publicly available data such as recent sales and property characteristics to make their estimates. However, they do not take into account factors that may affect a property's value but are not publicly available, such as the condition of the property, any recent renovations or upgrades, or the neighborhood.

Finally, while ClearAVM and other AVMs may be convenient tools for estimating a property's value, they should not be relied upon as a substitute for a professional appraisal completed by a licensed appraiser. The limitations and inaccuracies of AVMs like ClearAVM can lead to costly mistakes and legal complications. Again, imagine relying on ClearAVM to come up with a list price for your home on a lake, and it used comparable sales that seriously undervalued your home. The loss of potential proceeds could add up to hundreds of thousands of dollars. It's particularly concerning that AVMs are increasingly being used by banks and lenders to make lending decisions, as this could have far-reaching consequences for both consumers and the economy. Without accurate and reliable valuations, there's a risk of undervaluation or overinflated property values, higher rates of default and foreclosure, and instability in the real estate market. If you want an accurate valuation of your property, it's best to hire a licensed appraiser who can provide a thorough analysis of the property, local market trends, and other relevant factors.

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