Buy-to-let 101: Automated valuation models

In the current housing market, timing can make or break a deal.

Brokers have to act with real urgency to support their landlord clients, and it is only right that lenders match them for pace.

Automated valuation models (AVMs) undoubtedly have their place in speeding up the loan process, particularly for standard properties.

Firstly, what is an AVM?

Put simply, an AVM is a valuation that combines mathematical or statistical modelling with databases of existing properties and transactions to calculate property and rental values.

AVMs are most effective when there are similar properties nearby that can be used as the basis for comparable evidence. A property on a housing estate or a street of terraced houses is the ideal for this type of valuation.

For an AVM to be accurate, recent physical valuations of existing homes must be available.

What are the benefits?

In January 2024, Landbay became the first dedicated buy-to-let lender to integrate AVMs to significantly speed up offer times. Before our whole of market launch, we ran an extensive pilot. This found that AVMs speed up the time to offer and are on average three times faster than a standard application.

During the pilot, in some cases we could issue an offer within 24 hours from the decision in principle (DIP). 

We also found that using an AVM helps applicants save on average £500 as they do not have to pay valuation fees. In our trial, one client saved nearly £4,000 in valuation fees on their portfolio.

What about the drawbacks?

However, AVMs become more challenging for valuations of unusual or complex properties. This is because comparables are hard to come by when properties are not standard. For example, an AVM is unlikely to be accurate for a large, detached house or a multi-unit freehold block (MUFB). For this reason, our AVMs are available for standard properties only, on a range of 5-year fixed-rate products, with a maximum property value of £750,000 at 70% loan-to-value (LTV).

AVMs also do not function well when there is a gap in valuation data. This problem is neatly illustrated by what happened during the pandemic. Many lenders turned to AVMs simply because they could not carry out physical valuations during lockdowns. But gaps in data meant AVMs were trying to calculate a valuation based on older, historical data and could not be used to provide accurate outputs with regards to current market conditions.

The current picture

Since the pandemic, physical valuations are available once more, providing recent real-world data. In addition, AVM technology has moved on apace in terms of speed and more sophisticated data sets.

AVMs can now draw upon property data such as the number of bedrooms in a property, whether it has more than one kitchen, and whether it is next to or above a commercial property.

It is clear that AVMs are not a magic cure-all and there will always be a place for physical valuations. But what is certain is that, where and when the circumstances are right, AVMs offer the simplicity and speed that is standard in today’s world.

Our clients expect quick decisions in other areas of their lives, particularly in the retail sector. They want products suited to their needs, available day and night, at their convenience.

The AVM, used wisely, is a great way of providing a service that meets these expectations. It brings confidence and certainty to lenders, brokers and their customers.

Rob Stanton is sales and distribution director at Landbay