Underwriting concepts
Automated Valuation Model (AVM)
Algorithmic valuation produced from comparable-sales databases, used by lenders for low-LTV, low-ticket residential and semi-commercial cases.
Automated Valuation Model is an algorithmic property valuation generated from a database of comparable sales, listings and assessed property characteristics, without a physical inspection by a RICS surveyor. On UK commercial mortgages AVMs are increasingly used at low LTV on small-ticket residential investment, HMO and semi-commercial cases, but rarely on pure commercial property.
Where AVMs are accepted
AVMs are most common on:
- BTL and HMO investment loans below 65% LTV up to roughly 500,000 property value.
- Semi-commercial mortgages on shop-with-flat-above and similar small mixed-use properties, where the property is reasonably standard for the area.
- Owner-occupier purchases below 60% LTV on a small commercial unit in a well-traded segment (a small office, a high-street retail unit) where AVM coverage is dense.
AVMs are almost never accepted on:
- Commercial mortgages above 65 to 70% LTV.
- Property where the income is led by a single specialist tenant.
- Property with title issues or non-standard tenure.
- Investment loans on portfolios above roughly 1.5 million.
- Development and refurbishment lending.
Why lenders use them
Three reasons. Speed: an AVM produces a figure in minutes versus three weeks for a physical valuation. Cost: AVMs cost the lender 10 to 50 pounds versus 800 to 3,500 for a Red Book survey. Volume: lenders processing high volumes of small-ticket business can route the lowest-risk cases through AVM and reserve physical valuations for the higher-risk cases.
AVM confidence scores
Most AVM providers (Hometrack, e.surv, RPS) return a confidence score alongside the valuation. Lenders typically only accept AVMs where the confidence score sits above a threshold (often 4 or 5 out of 6). If the AVM confidence is too low, the lender falls back to a desktop valuation (a surveyor’s review of the AVM and supporting evidence, without an inspection) or to a full Red Book.
When borrowers should push for a physical valuation
In cases where the AVM is likely to undervalue. Recent material refurbishment that comparable sales do not reflect. Off-market or specialist property. Properties recently extended or converted. Any property where the AVM-derived value would cap the loan size below the borrower’s required amount.