[SOLD!] Are Online Home Price Estimates Reliable?
When buying or selling a home, it’s natural to seek independent opinions of the property’s value. Historically, buyers and sellers relied on real estate agents, “the neighborhood professionals” who have years of experience with local markets. But today, online real estate price estimators are considered by many to be more objective and honest than the appraisals of realtors. But who is right? Read on to learn why computerized home valuations are not always on the mark...
The thinking is that a realtor has a conflict of interest. He or she wants to close a deal and earn a commission, and that generally means persuading a buyer to bid more and a seller to ask less. It’s just common sense that a disinterested party will come up with a fairer market valuation. But "disinterested" does not always mean "fully informed."
Zillow has become “the Google of real estate” by promoting that rationale. Founded in 2006, the company received 73 million online queries in December, 2015. The site allows users to enter an address or zip code to retrieve listings of homes that are on the market with asking prices. It also provides “Zestimates” of the market value of listed homes and surrounding homes that are not on the market. Key details are included, such as square footage, lot size, number of bedrooms and baths, photos, taxes, school district, etc.
Sellers and shoppers rely heavily on Zestimates, and that makes life difficult for realtors. Zestimates “are the bane of my existence,” said an anonymous realtor the industry blog ActiveRain. People tend to take Zestimates as gospel, and argue with the realtor’s valuation of a property. Such disputes are killing a lot of deals, say some realtors.
Zestimates “are a good starting point,” according to Zillow CEO Spencer Racoff. He admits to the LA Times that Zestimates have a nationwide “median error rate” of 8%. On a home worth $500,000, that’s a $40,000 disparity! If that’s the median error, then half of Zestimates are off by more and half are off by less.
The median Zestimate error rate gets much worse as we look at local markets. In Manhattan, it’s 19.9%. In San Francisco, it’s over 11% - an error of more than $110,000 on a $1 million home. In some rural California counties, Zestimates are off by as much as 26%. In Somerset County, MD, it’s an astounding 42%! Sounds like a “good starting point” for an unproductive negotiation, to me.
A Real Estate Distortion Field?
Apple is so good at marketing their products that some people have joked that they use a "reality distortion field" to persuade consumers that there is no alternative to their brand. In similar fashion, the popularity of Zillow may be creating a real estate distortion field.
Realtors all over the country have done their own studies comparing Zestimates to actual sale prices. One realtor found Zillow underestimated the final selling price up to 70% of the time, by as much as $70,000. In 25% of sales, the Zestimate was lower than the contract price. (So 5% of the time, Zillow got it right.) In another ZIP code, Zestimates were off 100% of the time, by as much as $190,000.
On the flip side, Zillow's home price estimates seem to reflect reality pretty well in my town. That could be because it's an active real estate market, so there's a lot of current data (actual sales prices) on which to base estimates. If you want to estimate what a home is worth right now, you need to look at recent sales of comparable nearby homes. That is what realtors do every day.
Zillow does provide an interactive map which shows nearby homes that are sold, or listed for sale. But it's very difficult for a computer program to understand which of those homes are truly comparable to yours, or the one in which you are interested. Matching up homes with similar square footage, number of bedrooms, etc., may not take into account the fact that one home had a recent kitchen remodel, a new roof, or other important factors in determining the value. The moral is that Zillow estimates should be just one factor in determining the value of a home.
There are other online real estate price estimators, including Eppraisal, Trulia, and Redfin. They all rely on data pulled from local government records, which are notoriously outdated, incomplete, and inaccurate. But they must use other factors as well, because if you query each one of them, you'll get three different estimates for a given property. The good news is that most of them allow you to login, claim your home, and update the details if they're not correct.
Have you checked the estimated value of your home using one or more of these tools? Your thoughts on this topic are welcome. Post your comment or question below...
This article was posted by Bob Rankin on 11 Mar 2016
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Article information: AskBobRankin -- [SOLD!] Are Online Home Price Estimates Reliable? (Posted: 11 Mar 2016)
Copyright © 2005 - Bob Rankin - All Rights Reserved