Question: Homes in our area are quickly selling and we’re thinking of putting our place on the market. Does it make any sense to value our property on the basis of online price estimates?
Answer: During the past few years, more and more transactions have become digitized, organized and analyzed. The result is that electronic valuations have increasing credibility. Fannie Mae says it has 29 million valuations in hand while Freddie Mac uses historical data and public records to value property. In each case borrowers have the right to insist on an appraisal.
There are also online valuations. These systems establish property valuations by looking at local transactions and various records to establish a rough sale price. They are not intended to replace appraisals or appraisers.
Zillow, as one example, says that its “Zestimate is not an appraisal and you won’t be able to use it in place of an appraisal, though you can certainly share it with real estate professionals. It is a computer-generated estimate of the worth of a house today, given the available data. Zillow does not offer the Zestimate as the basis of any specific real-estate-related financial transaction. Our data sources may be incomplete or incorrect; also, we have not physically inspected a specific home. Remember, the Zestimate is a starting point and does not consider all the market intricacies that can determine the actual price a house will sell for.”
Our estimation, says Realtor.com, “is calculated based on tax assessment records, recent sale prices of comparable properties, and other factors.”
So we have a lot of data coupled with some very smart computer programs which provide a sense of individual property values. One might expect that such systems would generate fairly similar valuations but that’s not always the case.
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Online Price Estimates
I looked up the value for one property and the results on different systems included estimates of $301,777; 300,247; $247,000; $246,200 and $241,000. The average among the price estimates was $267,445. The difference between the high and low valuations was $60,777.
So which valuation should we use? If I’m a buyer I very much like the $241,000 price. That seems highly accurate to me…. Of course, if I’m a seller, I have no doubt that the $301,777 valuation is entirely correct.
The Realities
First, different automated valuation models (AVMs) produce different results, sometimes significantly different.
Second, it’s equally possible that several appraisers looking at the same property might also come up with different valuations.
Third, part of the valuation process is art and not science.
Fourth, an electronic valuation system works from many data points but does not physically see inside the property. How well a home is “staged” to attract human interest may have little or no value for an automated program.
Fifth, online price estimates are getting better. In 2017 Zillow reported that “we have driven the median error rate from 14 percent down to around 5 percent today, thanks to investments in technology and cloud computing; our ever-expanding living database of all homes; and, of course, the tireless work of our ever-growing Zestimate team. In a recent benchmark study of 2016 transactions listed for sale on Zillow (a set of homes on which we observe higher accuracy than overall), the Zestimate error was 3.5 percent, pretty close to the 2.5 percent error rate of the actual listing price itself.”
Sixth, some properties lend themselves to automated modeling. If you have a development with 1,000 townhouses it follows that the Model A units will cluster around a given price point while the larger Model B units will have different pricing.
Seventh, some properties may be difficult if not impossible to value with data and software alone. An area where homes were built in the 1880s and all have different designs and sizes does not lend itself to automated valuations.
Eight, some of the data may be wrong. One valuation program shows our house in a neighborhood we’ve never heard of. The legal description for our property and our local Facebook group have a very different view.
Most people likely understand that online valuations to date are largely approximations and not designed to replace appraisals or broker price opinions (BPOs). While AVMs may have value in a general sense, the sale price of a home is enormously important to buyers, sellers, brokers and tax authorities. Everyone benefits when the numbers are as close to accurate as possible.
Toward that end it makes sense to look at several online valuations and then speak with real estate brokers regarding local pricing trends. If online estimates seem too low, then sellers might want to get a pre-sale appraisal to justify asking prices. Be aware, however, that an appraisal is an independent estimate of value, the appraiser is not trying to hit a particular number.
