11/18/2015

How Much Can You Rely on Automated Home Value Widgets?

Have you looked for a new car lately?  If you're like me, you checked out everything you could find on the internet before you ever went to a dealership for a test drive. 

The websites have interior and exterior 360 degree photos, closeups, zoom capability, video, and even the actual car price, which we equate with value. That's something we love, knowing the price, not the one we have to haggle over. You get everything on the internet except the new car smell--minus one more thing, the actual driving experience.

It's the same with house listings, there's so much available information on numerous sites, and the photos often make them look so attractive that you might think you want that one .  But unlike a car, a house price reflects many more "moving parts", condition, location, upgrades, additions, deferred maintenance, permits or lack thereof, remodel, the immediate surroundings, earthquake zones, flood zones, and much more.  And like buying a car, you really have to be there to see for yourself. The asking price could be very different from value when all is said and done with negotiations and the appraisal.

So what does this mean for AVMs (automated valuation models) such as Zillow and its "Zestimates", and other valuation widgets found on many home search sites?  It means that they are tools, rather general tools, but like driving the car and seeing the house, you have to be there. AVMs can't judge the condition of the house, or know how many prior water damage claims were submitted on it, or check the unpermitted rooms, or see if there are title defects which will prevent mortgage financing.  Zillow values are calculated on public records (strictly data oriented) and user submitted data points (selective pool of information).  By the time a given property is negotiated through buyer/seller agreements, the value may be off by as much as 30% from a Zillow estimate.   Zillow's CEO recently sold his house:
     To see a Zestimate at work, consider the fact that in July of this year Zillow Group CEO Spencer Rascoff listed his four-bedroom home in Seattle, Washington, for $1.295 million. At the time, the Zillow Zestimate valued the home at about $1.39 million. That’s over 7% higher than the list price, but within the Zillow median margin of error.
     Gordon Stephenson, the listing agent for Rascoff, told industry publication Inman that Zillow probably overestimated the value of Rascoff’s home because “its algorithm might not have accounted for the home’s unique floor plan.”  Christian Science Monitor, November 14, 2015.
When an appraiser performs his/her job during escrow, an AVM is not a part of the process. When a Realtor helps a seller or buyer established listing or offer price, knowledge of appraisal parameters may be used along with knowledge of recent sales and individualized comparisons to other properties. 
Algorithms and weights assigned to data can be educational up to a point, depending on what properties get caught in the AVM's net, but when a buyer sees multiple houses combined with knowledge of area sales, the reasons for the final result become known. 
So automated robotic prices are fun to look at and may help educate on overall price range for a given area, but they are not a substitute for a complete home price determination.

See the complete Christian Science Monitor article.

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