Standard on Automated
`Valuation Models (AVMs)
`
`Approved September, 2003
`
`International Association of Assessing Officers
`
`The assessment standards set forth herein represent a consensus in the assessing profession and have been adopted
`by the Executive Board of the International Association of Assessing Officers. The objective of these standards is to
`provide a systematic means by which concerned assessing officers can improve and standardize the operation of their
`offices. The standards presented here are advisory in nature and the use of, or compliance with, such standards is
`purely voluntary. If any portion of these standards is found to be in conflict with the Uniform Standards of
`Professional Appraisal Practice (USPAP) or state laws, USPAP and state laws shall govern.
`
` 1
`
`MICROSTRATEGY 1019
`Microstrategy, Inc. v. Zillow, Inc.
`IPR2013-00034
`
`

`
`Acknowledgments
`The AVM Standard was reviewed and completed through the dedicated efforts of an Ad Hoc committee
`comprising Alan S. Dornfest, AAS, Chair, Larry J. Clark, CAE, Robert J. Gloudemans, Michael W. Ireland,
`CAE, Patrick M. O’Connor, and William M. Wadsworth. The Committee worked closely with Nancy C.
`Tomberlin, who was chair of the Technical Standards Committee at that time.
`
`Special thanks and appreciation also go to the many individuals who served as reviewers for this standard:
`
`Richard Almy
`Richard A. Borst
`Man Cho
`John S. Cirincione
`Robert C. Denne
`Brian G. Guerin
`M. Steven Kane
`Josephine Lim
`
`Mark R. Linne, CAE
`Wayne D. Llewellyn, CAE
`Ian W. McClung
`John F. Ryan, CAE
`Ronald J. Schultz
`Russ Thimgan
`James F. Todora, CAE
`Robert Walker
`
`Published by
`
`International Association of Assessing Officers
`130 East Randolph
`Suite 850
`Chicago, IL 60601-6217
`312/819-6100
`Fax: 312/819-6149
`http://www.iaao.org
`
`ISBN 0-88329-180-0
`
`Copyright © 2003 by the International Association of Assessing Officers
`
`All rights reserved.
`
`No part of this publication may be reproduced in any form, in an electronic retrieval system or otherwise, without the prior written
`permission of the publisher. However, assessors wishing to use this standard for educating legislators and policymakers may photocopy
`it for limited distribution.
`
`Printed in the United States of America.
`
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`
`

`
`Contents
`
`1. Scope............................................................................................................................................5
`2. Introduction .................................................................................................................................5
`2.1. Definition and Purpose of an AVM ....................................................................................5
`2.1.1 Definition .................................................................................................................5
`2.1.2 Purpose ....................................................................................................................5
`2.1.3 Applicability .............................................................................................................5
`2.1.4 Distinction from Traditional Valuation Applications ..............................................5
`2.2 Purpose and Use of AVMs ..................................................................................................6
`2.2.1 General ....................................................................................................................6
`2.2.2 Analysis of Impaired Properties ..............................................................................6
`2.3 Steps in AVM Development and Application ......................................................................6
`2.3.1 Property Identification .............................................................................................6
`2.3.2 Assumptions .............................................................................................................6
`2.3.3 Data Management and Quality Analysis .................................................................6
`2.3.4 Model Specification..................................................................................................7
`2.3.5 Model Calibration ....................................................................................................7
`2.3.6 Model Testing and Quality Assurance ....................................................................7
`2.3.7 Model Application and Value Review .......................................................................7
`2.3.8 Stratification ............................................................................................................7
`2.3.9 Value Defense ..........................................................................................................8
`3. Specification of AVM Models .......................................................................................................8
`3.1 Data Quality Assurance .....................................................................................................8
`3.2 Model Specification Methods ............................................................................................9
`3.2.1 Cost Approach ..........................................................................................................9
`3.2.2 Sales Comparison Approach ....................................................................................9
`3.2.2.1 Comparable Sales Method .............................................................................9
`3.2.2.2 Direct Market Method ...................................................................................9
`3.2.3 Income Approach ....................................................................................................10
`3.3 Stratification ...................................................................................................................10
`3.4 Location ............................................................................................................................10
`4. Calibration Techniques ............................................................................................................. 11
`4.1 Calibration Using Multiple Regression Analysis (MRA) .............................................. 11
`4.1.1 MRA Assumptions ................................................................................................ 11
`4.1.2 Diagnostic Measures of Goodness-of-Fit...............................................................12
`4.1.3 MRA Software, Options and Techniques ...............................................................12
`4.1.4 MRA Strengths ......................................................................................................12
`4.1.5 MRA Weaknesses ..................................................................................................12
`4.2 Calibrating Using Adaptive Estimation Procedure (AEP) ..............................................12
`4.2.1 AEP Model Structure .............................................................................................13
`4.2.2 Variable Control in AEP .........................................................................................13
`4.2.3 Results and Goodness-of-Fit Measures .................................................................13
`4.2.4 AEP Advantages ......................................................................................................14
`4.2.5 AEP Disadvantages .................................................................................................14
`4.3 Artificial Neural Networks ..............................................................................................14
`4.3.1 The Artificial Neuron ............................................................................................14
`4.3.2 Strengths of Neural Networks ..............................................................................14
`4.3.3 Weakness of Neural Networks..............................................................................14
`4.4 Time Series Analysis......................................................................................................15
`4.5 Tax Assessed Value Model ..............................................................................................15
`4.6 Calibration Summary .....................................................................................................16
`5. Residential AVMs ......................................................................................................................16
`5.1 Detached Single-Family ..................................................................................................16
`5.1.1 Cost Models............................................................................................................16
`5.1.2 Comparable Sales Models ......................................................................................17
`5.1.3 Direct Market Models ...........................................................................................17
`5.2 Attached Residential Property (Condominiums, Townhouses, Zero-Lot-Lines) ...........17
`5.3 Two- to Four-Family Residential Property .....................................................................18
`5.4 Manufactured Housing ...................................................................................................18
`5.5 Time Series Models for Residential Property ...............................................................18
`5.6 Summary and Conclusions for Using Residential AVMs ...............................................19
`
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`6. Commercial and Industrial AVMs ............................................................................................. 19
`6. Commercial and Industrial AVMs .............................................................................................19
`6.1 Commercial and Industrial Model Specification ............................................................19
`6.1 Commercial and Industrial Model Specification
`19
`6.1.1 Property Use ..........................................................................................................19
`6.1.1 Property Use ............................................................ 19
`6.1.2 Location .................................................................... 19
`6.1.2 Location..................................................................................................................19
`6.1.3 Physical Characteristics and Site Influences .......................................................20
`6.1.3 Physical Characteristics and Site Influences
`..........20
`6.1.4 Income Data ..............................................................20
`6.1.4 Income Data............................................................................................................20
`6.2 Development of the Model(s) ...........................................................................................20
`6.2 Development ofthe Model(s) ........
`..........20
`6.2.1 Cost Models .........................
`..........21
`6.2.1 Cost Models............................................................................................................21
`6.2.2 Sales Comparison Models .....................................................................................21
`6.2.2 Sales Comparison Models ..
`..........21
`6.2.3 Income Models ..........................
`..........21
`6.2.3 Income Models .......................................................................................................21
`6.2.3.1 Modeling Gross Income ...............................................................................21
`6.2.3.1 Modeling Gross Income .............
`..........21
`6.2.3.2 Vacancy and Collection Losses ...................................................................21
`6.2.3.2 Vacancy and Collection Losses .
`.......... 21
`6.2.3.3 Modeling Expenses ......................................................................................21
`6.2.3.3 Modeling Expenses ....................
`.......... 21
`6.2.3.4 Direct Capitalization ...................................................................................21
`6.2.3.4 Direct Capitalization ......
`.......... 21
`6.2.3.5 Gross Income Multiplier .............................................................................22
`6.2.3.5 Gross Income Multiplier
`22
`6.2.3.6 Property Taxes .............................................................................................22
`6.2.3.6 Property Taxes .................
`22
`6.3 Quality Assurance ..........................................................................................................22
`6.3 Quality Assurance .......................................................................................................... 22
`7. Land Models .............................................................................................................................. 22
`7. Land Models ..............................................................................................................................22
`7.1 Land Valuation Model Specification ...............................................................................22
`7.1 Land Valuation Model Specification ..
`.......... 22
`7.1.1 Property Use ..........................................................................................................22
`7.1.1 Property Use
`.......... 22
`7.1.2 Location .................................................................... 22
`7.1.2 Location..................................................................................................................22
`7.1.3 Physical Characteristics and Site Influences .......................................................23
`7.1.3 Physical Characteristics and Site Influences
`.......... 23
`7.2 Land Data Collection ..............................................
`.......... 23
`7.2 Land Data Collection ......................................................................................................23
`7.3 Development of the Model(s) ...........................................................................................23
`7.3 Development ofthe Model(s) .................................................... 23
`7.3.1 Land Valuation Modeling by Sales Comparison ....................................................23
`7.3.1 Land Valuation Modeling by Sales Comparison
`.......... 23
`7.3.2 Land Valuation Modeling by Income ......................................................................24
`7.3.2 Land Valuation Modeling by Income ...................................................................... 24
`8. Automated Valuation Model Testing and Quality Assurance ...................................................24
`8. Automated Valuation Model Testing and Quality Assurance ................................................... 24
`8.1 Data Quality Assurance ...................................................................................................24
`8.1 Data Quality Assurance ..................................................
`24
`24
`8.2 Data Representativeness ..................................................................................................24
`8.2 Data Representativeness ...............
`24
`8.3 Model Diagnostics............................................................................................................24
`8.3 Model Diagnostics .......
`8.4 Sales Ratio Analysis ........................................................................................................25
`8.4 Sales Ratio Analysis ............................
`...25
`8.4.1 Measures of Appraisal Level .................................................................................25
`8.4.1 Measures ofAppraisal Level
`25
`8.4.2 Measures of Variability .........................................................................................25
`8.4.2 Measures ofVariability ............
`25
`8.4.2.1 Coefficient of Dispersion .............................................................................25
`8.4.2.1 Coefficient of Dispersion
`.......... 25
`8.4.2.2 Coefficient ofVariation ......
`.......... 25
`8.4.2.2 Coefficient of Variation ...............................................................................25
`8.4.3 Measures of Reliability..........................................................................................25
`8.4.3 Measures of Reliability .............
`.......... 25
`8.4.4 Vertical Inequities .................................................................................................27
`8.4.4 Vertical Inequities ................................................................................................. 27
`8.4.5 Guidelines for Evaluation of Quality .....................................................................27
`8.4.5 Guidelines for Evaluation of Quality ..................................................................... 27
`8.4.6 Importance of Sample Size ....................................................................................27
`8.4.6 Importance of Sample Size ..................
`27
`8.5 Property Identification .....................................................................................................28
`8.5 Property Identification .....................
`.......... 28
`8.6 Outliers ............................................................................................................................29
`8.6 Outliers ............................................................................................................................29
`8.7 Holdout Samples...............................................................................................................29
`8.7 Holdout Samples ............................................................................................................... 29
`8.8 Value Reconciliation .....................
`...29
`8.8 Value Reconciliation ........................................................................................................29
`8.9 Appraiser Assisted AVMs ................................................................................................30
`8.9 Appraiser Assisted AVMs .............
`30
`8.10 Frequency of Updates .....................................................................................................30
`8.10 Frequency ofUpdates ..................
`.......... 30
`9. AVM Reports..............................................................................................................................30
`9. AVM Reports ...........................................
`30
`9.1 Types of Reports ...............................................................................................................30
`9.1 Types of Reports ...................................
`...30
`9.1.1 Documentation Report ...........................................................................................30
`9.1.1 Documentation Report ..............
`30
`9.1.2 Restricted Use Report ............................................................................................30
`9.1.2 Restricted Use Report ................
`...30
`9.1.3 CAMA or AAAVM Report ......................................................................................30
`9.1.3 CAMA orAAAVM Report ..........
`30
`9.2 Uses ofAVM ..................................................................................................................... 31
`9.2 Uses of AVM .....................................................................................................................31
`9.2.1 Real Estate Lenders ............................................................................................... 31
`9.2.1 Real Estate Lenders ...............................................................................................31
`9.2.2 Real Estate Professional .....
`.......... 31
`9.2.2 Real Estate Professional ........................................................................................31
`9.2.3 Government .........................
`..........31
`9.2.3 Government ............................................................................................................31
`9.2.4 General Public ....................
`..........31
`9.2.4 General Public .......................................................................................................31
`Glossary ........................................................................................................................................31
`Glossary ........................................................................................................................................ 31
`References .................................................................................................................................... 35
`References ....................................................................................................................................35
`Additional Suggested Readings ....................................................................................................35
`Additional Suggested Readings .................................................................................................... 35
`
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`

`
`Standard on Automated Valuation Models (AVMs)
`
`1. SCOPE
`This standard is intended to provide guidance for both
`public sector CAMA and private sector AVM systems.
`This standard provides recommendations and guidelines
`on the design, preparation, interpretation, and use of
`automated valuation models (AVMs) for the appraisal of
`property. The standard presents market analysis based
`appraisal applications and aspects of such models. The
`principles addressed in this standard are considered
`applicable to all appraisals of real property, which are
`designed to estimate market value.
`
`The standard does not address appraisal of personal
`property, such as machinery and equipment, and AVMs
`are not considered applicable for appraisal of highly
`specialized or unique property.
`
`As presented in this standard, the development of an AVM
`conforms to USPAP Standard 6 (Appraisal Foundation
`2003, 46–56). The appraiser using AVM output should
`follow USPAP standards that relate to their assignment.
`
`2. INTRODUCTION
`2.1 Definition and Purpose of an AVM
`2.1.1 Definition
`An automated valuation model (AVM) is a mathemati-
`cally based computer software program that produces
`an estimate of market value based on market analysis of
`location, market conditions, and real estate characteris-
`tics from information that was previously and separately
`collected. The distinguishing feature of an AVM is that
`it is an estimate of market value produced through
`mathematical modeling. Credibility of an AVM is depen-
`dent on the data used and the skills of the modeler
`producing the AVM.
`2.1.2 Purpose
`The purpose of an AVM is to provide a credible, reliable,
`and cost-effective estimate of market value as of a given
`point in time. Market value is the most probable price (in
`terms of money) that a property should bring in a
`competitive and open market under the conditions req-
`uisite to a fair sale—the buyer and seller each acting
`prudently and knowledgeably, and assuming the price is
`not affected by undue stimulus. AVM values reviewed
`for reliability, and generated in compliance with USPAP
`Standard 6 are considered appraisals.
`
`AVMs are developed and used by both the public and
`private sector. Assessment officials use AVMs to pro-
`duce estimates of value as of a common date for
`purposes of property assessment and taxation. Private
`sector appraisers and their clients use AVMs to estimate
`the value of a subject property at a given point in time for
`a wide variety of purposes.
`2.1.3 Applicability
`AVMs are applicable to any type of property for which
`adequate market information and property data are
`available in the relevant market area. The relevant market
`area is the area that would be considered by potential
`purchasers. For residential properties, this is typically all
`or a portion of a metropolitan area, one or more towns
`in a geographic area, or a given rural or recreational area.
`The market area for larger multi-family, commercial,
`and industrial properties can be regional or even national
`in scope, depending on the relevant investors and market
`participants.
`
`The development of an AVM is an exercise in the
`application of mass appraisal principles and techniques,
`in which data are analyzed for a sample of properties to
`develop a model that can be applied to similar properties
`of the same type in the same market area. These may be
`either individual properties of interest or all properties
`that meet the requirements of the model.
`
`Although the same underlying principles are applicable to all
`AVMs, the specific formulation and calibration techniques
`will vary with the purpose of the AVM, type of property,
`available data, and experience and preferences of the
`market analyst. Sections 3 and 4 discuss the general
`principles of model specification and calibration. Section 5
`addresses residential AVMs. Section 6 focuses on com-
`mercial and industrial AVMs and section 7 focuses on
`AVMs developed for vacant or improved land.
`2.1.4 Distinction from Traditional Valuation
`Applications
`Although AVM development requires skilled analysis and
`attention to quality assurance, AVMs are characterized by
`the use and application of statistical and mathematical
`techniques. This distinguishes them from traditional ap-
`praisal methods in which an appraiser physically inspects
`properties and relies more on experience and judgment to
`analyze real estate data and develop an estimate of market
`value. Provided that the analysis is sound and consistent
`
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`
`STANDARD ON AUTOMATED VALUATION MODELS (AVMS)—2003
`
`with accepted appraisal theory, an advantage to AVMs is the
`objectivity and efficiency of the resulting value estimates.
`Of course, sound judgment is required in model develop-
`ment and an appraiser should review the values produced
`by the model.
`2.2 Purpose and Use of AVMs
`2.2.1 General
`AVMs are used to provide estimates of market value for
`a variety of public and private sector purposes. AVM
`estimates reflect a given time period and should be
`calibrated to produce market values as of a specific date.
`Although past market trends can be projected over a
`short time horizon, the credibility of appraisal estimates
`increasingly suffers as the projection is lengthened.
`
`AVMs have the advantage of objectivity and consis-
`tency, reduced cost, and faster delivery time. It is
`important, however, that the AVM follow sound
`statistical and mathematical modeling practices and
`be tested for accuracy and uniformity before applica-
`tion. Section 8 discusses the important area of model
`testing and quality assurance and section 9 focuses on
`reporting of results.
`2.2.2 Analysis of Impaired Properties
`Properties subject to significant defects or that are
`affected by atypical circumstances impairing market
`value, including superadequacy or functional obsoles-
`cence, cannot be accurately modeled with an AVM. An
`appraiser may choose to apply the AVM to the property,
`but the defect or unique circumstance should be noted
`and a special adjustment made to compensate for the
`defect or special circumstance.
`2.3 Steps in AVM Development and
`Application
`The remaining portion of this section outlines the steps
`to take in development of an AVM. The following
`sections of this standard provide clarification and details
`concerning these steps and their application to particular
`property types.
`2.3.1 Property Identification
`The first step in any appraisal problem is to identify
`the property to be appraised. In developed econo-
`mies, identification is normally straightforward, as
`maps, ownership records, property addresses, and
`legal descriptions will identify the property and
`owner. The appraisal assignment will usually require
`identifying physical characteristics and property
`rights to be valued as of the appraisal date. When
`applying an AVM to a particular property, improve-
`ments and renovations made before this date should
`be included in the appraisal; those made subsequent
`to the appraisal date should not.
`
`The bundle of rights to be appraised generally in-
`cludes the fee simple interest or full bundle of rights
`inherent in ownership of property. Nevertheless, the
`market analyst should make clear what rights are
`assumed and any limitations to full use or restrictions
`to transfer of the property.
`2.3.2 Assumptions
`The AVM supporting documentation should state all
`assumptions, special limiting conditions, extraordinary
`assumptions, and hypothetical conditions. A key as-
`sumption in many AVM applications concerns the
`assumed use of the property. Most real estate databases
`contain the actual use of property as of the inspection
`date. In some property tax systems, current use is
`stipulated as the basis for valuation. However, compa-
`rable market sales reflect the concept of highest and best
`(most probable) use. Market analysts and users of
`AVMs need to be aware of these subtleties.
`
`Another key assumption relates to whether or not the fee
`simple bundle of rights is being appraised. This is
`generally the case for residential properties, but many
`commercial appraisals are made to estimate only the
`leased fee or leasehold interest when there is an existing
`lease (or leases) on the property.
`
`Government appraisal agencies are responsible for collect-
`ing and maintaining property databases, although they often
`contract with private vendors for this purpose. Commer-
`cial AVM providers generally use data maintained by a
`government agency or third party service. In all cases, it is
`imperative that AVM market analysts test the reliability of
`the data and clearly state assumptions concerning its
`accuracy. If data important to value estimation are missing
`or the statistical process has shown the data to be inconsis-
`tent or unreliable, the AVM provider has a responsibility to
`not provide a potentially misleading value estimate to the
`intended user.
`2.3.3 Data Management and Quality Analysis
`The reliability of any appraisal depends on accurate data.
`Appraisal data fall into two general categories: property
`data and market data. Property data relate to location,
`land characteristics, and building features. Market data
`include sales, income, and cost information. Asking
`prices and independent appraisals can sometimes be
`used to supplement sparse sales data.
`
`Computerized statistical tools used to develop AVMs
`afford the opportunity to screen data for missing or out-
`of-range occurrences and inconsistencies; examples
`include homes with more than two fireplaces or a bi-
`level home with no listed lower level living area.
`
`Geographic information systems (GIS) can also help in
`data reviews. GIS software is used to maintain comput-
`erized maps and provide geographic representations of
`property attributes and features. It can be used to
`
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`STANDARD ON AUTOMATED VALUATION MODELS (AVMS)—2003
`
`highlight properties with impossible, unlikely, or incon-
`sistent data. For example, properties coded as being
`waterfront can be color-coded, displayed on a map, and
`reviewed for accuracy.
`
`Only valid, open market sale and income data should be
`used in model development. (As mentioned, asking
`prices and independent appraisals can sometimes also be
`used to bolster sample sizes.)
`
`Since the reliability of an AVM is dependent on the data
`from which it is generated, the integrity of the database
`should be monitored on a systematic and ongoing basis.
`2.3.4 Model Specification
`Model specification is the important process of determining
`the format (model structure) of the AVM. The market
`analyst must determine the type of model to be employed
`and specify the variables to be used in the model.
`
`AVMs that employ property features, often character-
`ized as “hedonic” models, can be categorized as additive,
`multiplicative, or hybrid models (see Section 3 on
`Specification of AVM Models). Market analysts must
`also determine the variables to be included in hedonic
`AVMs. These can represent property characteristics
`(e.g., square feet of living area and building age),
`location information, demographic data (e.g., income
`levels or school quality), or variables derived from
`property characteristics (e.g., the square root of lot size
`or living area multiplied by a quality index). The objective
`is always to include property features important in value
`determination and to capture actual market relation-
`ships. Skilled analysis is required to adequately specify
`an effective model structure.
`
`Some models that are referred to as AVMs have only a
`time component; in other words, they merely