Automated valuation models (AVMs) are growing in acceptance. These rely on statistical models such as multiple regression analysis and geographic information systems (GIS). While AVMs can be quite accurate, particularly when used in a very homogeneous area, there is also evidence that AVMs are not accurate in other instances such as when they are used in rural areas, or when the appraised property does not conform well to the neighborhood.
This is most evident where there is a renewal or "revitalization" of a particular area or neighborhood. There can exist within a single city block homes that are in poor condition to homes that have been completely rehabilitated and are in good to excellent condition. The differential of sales prices can be demonstrated to be from 50% to 125%. This can lead to an inaccurate model. In San Francisco, California, something like half of price can be predicted using readily quantified measures and a multiple regression (MRA) AVM. In suburban Redwood City, California, by contrast, over 90% of price can normally be captured. Extreme caution should be exercised when relying on AVMs, especially if the user is unfamiliar with modeling and the math.
Because of the limitations, AVMs have begun to fall out of favor with many lenders but are widely used in other appraisal problems such as mass appraisals for ad valorem real estate tax purposes. One of the problems of using AVMs for lending purposes is control of inputs and results. Everyone in the loan origination process is interested in some way in making the loan. Modifying the inputs (boundary of comparable search, even size of building) to create a favorable answer is a mighty temptation. Even foreclosure is unlikely to result in regret if the mortgage has been securitized and the originator gets paid to service the loans in the package. In property tax assessment, by contrast, there are contesting interests and a quasi-legal dispute resolution process. The assessor, arguably, wants assessments as high as defensibly possible. The taxpayers, clearly, want their assessments low. Disputes are normally adjudicated in assessment appeal. The county assessor is frequently an elected office. The contest of interests tends to refine the accuracy of the valuation results.