Real estate represents a crucial aspect of any investment portfolio. Knowing the accurate value of real estate could give asset managers and investors a better insight and hence, help in making better decisions.
The manual appraisal is effective but at the same time time-consuming, expensive and prone to human bias and errors. Therefore, professionals have been seeking for alternatives that could help the manual appraisal become more efficient. And this is where automated valuation models (AVMs) come in. Automated valuation models is a computer-based program that uses existing databases to calculate property values. To date, AVMs are widely used by financial institutions, asset managers, housing companies, property developers and investors.
What are the advantages of using AVMs?
AVMs, value property based on huge data as inputs without human interference, thereby eliminating the risk of bias and subjectivity. Speed, consistency, accuracy, unbiased and inexpensive are well-known advantages of AVMs. This is because AVMs lower the need for manual review. Value estimations produced by AVMs are not influenced by positive/negative judgment nor client’s pressure, and hence less subject to bias. Moreover, it is more cost-saving comparing to manual appraisal because AVMs do not require many resources such as intensive employee’s working hours, office expenses and so on. In addition, AVMs enable more sophisticated risk management to mortgage business since it provides statistical results on time and could be easily integrated into a qualitative risk management program of the lender. More importantly, the accuracy of AVM can be empirically tested on large samples, which makes the valuation work more transparent.
What about the challenges and how are AVMs going to develop?
Well, there are obviously some. Commercial property doesn’t change hands often so data scarcity has long been a challenge for modelling. Also, because of the heterogeneity of the commercial assets, factors influence prices vary significantly among property type.
At SkenarioLabs, our approach is to take into account all related factors that influence commercial property values. Those are, for instance, property attributes, location, demographic and economic attributes. In addition, we have very effective models for assessing the technical aspect of the building. This means that future cash flows of properties are considered in the valuation. As a result, our approach could fit in every market.
What is the future of AVMs in Commercial Real Estate?
AVMs are not black-boxes that produce valuation information. The way AVMs producing property’s values stimulates the valuation process of any human appraiser. As the world of data increases every day, SkenarioLabs AVM continues to increase in accuracy, speed, and cost efficiencies. As a result, it will benefit everyone who exploits the service and will help in making better decisions.