According to the National Association of Realtors, the median price of an existing home sold in April was $414,000. Of course, home prices vary from state to state, city to city and even neighborhood to neighborhood — sometimes, similar homes on the same block sell for very different prices. So if you’re thinking about buying or selling a home, how do you know if you’re paying a reasonable amount for the purchase, or listing your property at the right price?
Getting to that elusive number sometimes seems to be as much black magic as science.
Online resources seem to make this an easy question to answer: All the leading real estate websites show property values on millions of homes across the country. But how accurate are these prices? And how can a typical homebuyer or seller know for sure?
Changing the game: AVMs and the birth of the Zestimate
Zillow launched the Zestimate in 2006, dramatically changing the landscape for consumers who wanted to know what their home was worth, or what they might expect to pay for a property they were interested in. Prior to this, consumers relied almost exclusively on real estate agents to determine home prices. And while Zillow wasn’t the first company to offer online home valuations, it was the first to offer them for free, instantly and on a national scale.
According to Zillow’s website, a Zestimate is an estimate of a home’s market value that “incorporates public, MLS and user-submitted data into Zillow’s proprietary formula.” It also takes into account “home facts, location and market trends.”
AVMs tend to be most accurate in markets where home styles are similar, and where there’s a sufficient number of comparable recent home sales to analyze.
At its core, a Zestimate is what the real estate and mortgage industries refer to as an automated valuation model, or AVM. These are complex software algorithms that factor in recent home sale prices, square footage, number of bedrooms and bathrooms, property age and other variables to determine an approximate value. AVMs tend to be most accurate in markets where home styles are similar, where there’s a sufficient number of comparable home sales to analyze and where those sales are relatively recent.
Zillow touts having Zestimates for 1.7 million homes that have been listed for sale, and another 115.7 million homes that are not. The company notes that its price estimates tend to be more accurate for listed properties, with a much smaller margin of error for active listings — just 1.94 percent, compared to 7.06 percent for off-market homes. Its data shows that the Zestimate is within 10 percent of the sale price 94.8 percent of the time for listed homes, and 62.41 percent of the time for those that are not.
Algorithms vs. agents
Real estate professionals have long cautioned consumers not to put all of their faith in the accuracy of AVMs. “Zestimates and other online tools are great to get a baseline or be in the ballpark,” says Hilary Saunders, co-founder and chief broker officer at the brokerage Side. “What they lack, and what gives the real estate professional the advantage, is taking into account the desirability of a particular street or neighborhood; upgrades that demand a higher sale price, like an outdoor living area; or the cost to paint over that lovely peach color that the seller just loved.”
Unique properties, homes in markets without many recent sales and homes in sparsely populated areas are often a challenge for online valuation tools. The Zestimate famously failed to accurately predict the price of former Zillow CEO Spencer Rascoff’s home in 2016, with an estimate 40 percent higher than the actual sale price. The miss was largely due to the unusually shaped lot on which the home was built — something an algorithm might not take into account.
Agents have the advantage when it comes to nuanced details like the desirability of a location, the added value of upgrades, or the local knowledge that a particular neighborhood “smells to high heaven when the landfill aroma wafts over them.”
Wendy Hooper Ross, an independent real estate broker in Southern California, cautions that “an online estimating tool typically cannot know the more nuanced details, like how two identical homes in the same subdivision may differ in terms of condition, views and road noise.”
Ross cites examples from her area that could have a significant impact on property values: “In Laguna Beach, for example, north-facing hillside homes have different soil stability than south-facing homes. And swanky, gated Covenant Hills in Ladera Ranch smells to high heaven during Santa Ana wind events, when the landfill aroma wafts over them. It may seem silly, but all of these are things we need to think about when advising clients on value.”
Most agents will provide a complimentary comparative market analysis (CMA) to clients as part of their overall service offering. These look at the most recent comparable sales and/or listings and adjust them to best match the subject property, arriving at a likely current value. Ross notes that well-crafted CMAs take into account a variety of factors, including home size, lot size, age, condition, functional utility, noise and other nuisance impacts, view and room count.
It’s easy to see why an agent-crafted CMA would be more accurate than an online AVM. But they’re also subjective, based on that agent’s skills and knowledge. Ross warns that agents “have wildly varying degrees of education in formal home-valuation practices, and are often not trained on industry standards for valuation.” In addition, says Saunders, some unscrupulous agents might “pander to a seller’s unfounded expectations and say whatever number the seller wants to hear in order to secure a listing.” Consumers should consider asking the agent for samples of other CMAs they’ve prepared, so they can see how close those values were to the final transaction price.
Appraisals are still the gold standard
In terms of accuracy, AVMs and CMAs are no substitute for a formal home appraisal. An appraisal is a professional assessment of a property’s market value at a specific point in time, conducted by a licensed or certified appraiser. It reflects an expert opinion of what a typical buyer would be willing to pay for the property in its current condition.
Zillow’s own website even cautions consumers that the Zestimate “is not an appraisal and can’t be used in place of an appraisal.”
A high-quality appraisal reflects not only technical expertise but also local market knowledge and the sound professional judgment of an experienced appraiser.
— Luke Tomaszewski
eValuation Zone
According to Luke Tomaszewski, CEO of the appraisal-management company eValuation Zone, appraisals tend to be the most accurate and reliable method of estimating a home’s value because valuation is the appraiser’s core focus and area of expertise. “A human appraiser’s ability to interpret local market nuances and adjust for unique property characteristics [is] crucial,” he says. “A high-quality appraisal reflects not only technical expertise but also local market knowledge and the sound professional judgment of an experienced appraiser.”
Appraisals are generally required by lenders for transactions with a mortgage. However, for non-lending purposes — such as establishing a listing price, settling an estate or during divorce proceedings — a homeowner can order an appraisal independently. Costs vary by region and complexity, but most residential appraisals range from $400 to $700.
So… What’s your home really worth?
Ultimately, the true value of a property is determined by what a buyer is willing to pay, what a seller is willing to accept and what a lender is willing to finance. Getting to that elusive number sometimes seems to be as much black magic as science. But with the copious amount of free online data about current listings, recent sales and home prices, sellers can at least get an idea about the value of their own home — and buyers can get an idea for how much to offer on a home. The number can then be fine-tuned by real estate professionals and appraisers. The bottom line is that while online tools aren’t a bad place to start, it’s not a good idea to rely on them exclusively in determining a home’s value.
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