Online Valuations…How Accurate Are They?

In a recent meeting with a seller I was explaining marketing strategies and how we take a Value-Driven Approach to selling homes. How we increase the value of their home by finding hidden ways to extract additional profits from their home when I got the “question.” “Eric, this sounds great, but we were looking on Zillow and our Zestimate said $X, why do you think it will sell for $Y?”
I’m thinking… “Oh no, now I have to go down this road.”

I explain to the seller that Zillow has algorithms that they extract from public data and, from this, they formulate their Zestimate. This is the same inferior method that the other agents use to derive their pricing strategies. By taking an archaic approach they don’t look at the specifics of each home: the upgrades, room sizes and flow to the home, ways to increase value. One of my pet peeves is the pricing strategy that is based off of ‘comps.’ This is an inferior strategy. I believe that each home is its own entity and should be treated as such.

When I see homeowners pull up these Zestimates or some other online pricing guideline I explain how these are not always the most accurate values. Similar to the Tax Assessment Value, these are ‘rough’ estimates and should not be used as gospel.

Zillow admits Inaccuracy in Zestimates

Ironically, the week after this conversation with my client, the LA Times ran an article by Kenneth Harney titled “Inaccurate Zillow ‘Zestimates’ a source of conflict over home prices.” I would suggest that you google the article and read it for yourself. It is fascinating that this nationwide company who touts home values with their Zestimates and runs nationwide ads in prime time admitted in this article that their values are “a good starting point.”

I’m going to take some snippets from this article and elaborate. This article was written after “CBS This Morning” co-host Norah O’Donnell interviewed Zillow CEO Spencer Rascoff about the accuracy of automated property value estimates (Zestimates). She touched on one of the most sensitive perception gaps in American real estate.

The key word in the prior paragraph is: automated. It’s my experience that anything automated when it comes to something as unique and specific as a home is a dangerous way to assign a value. I’d stop short of saying it’s malpractice if a Real Estate Agent used Zestimates as a pricing strategy, but I would suggest looking elsewhere to someone that could provide solutions to increasing your home’s value instead of relying on an “automated” approach that uses algorithms of possible inaccurate data.

“Shoppers, sellers, and buyers routinely quote Zestimates to realty agents – and to one another – as gauges of market values. If a house for sale has a Zestimate of $350,000, a buyer might challenge the sellers’ list price of $425,000. Or a seller might demand to know from potential listing brokers why they say a property should sell for just $595,000 when Zillow has it at $685,000.” [From Article]

The article continues.

Consumers often take Zestimates as ‘Gospel.’ …. Back to the question posed by O’Donell: Are Zestimates accurate? And if they are off the mark, how far off? Zillow CEO Rascoff answered … nationwide Zestimates have a “median error rate” of about 8%.

Don’t leave $32,000 on the Table!

I find the stats by O’Donell somewhat surprising. Wow, an 8% median error rate nationwide, which can be a HUGE amount of money. Some neighborhood and counties have much higher inaccuracy rates. Someset County, Md’s error rate is 42%! I think that a monkey throwing darts at a dart board could get within 42% of the value.

But let’s just assume that your home’s Zestimate is 8% off. Most of the homes in Frederick County fall somewhere between $300k and $500k. So I’ll split that difference and use $400,000 as my example. If your Zestimate is low and you bring in an agent that takes a Price-Driven Approach to selling your home, they might very well use the Zestimate and local ‘comps’ to help you price your home. This approach could lead you to under valuing your home by $32,000!!!!

This is why when we meet with sellers, I NEVER come with a presentation that delves into market statistics, neighborhood sales, and some inferior pricing estimation. We sit down and discuss strategies to increase the Value on your home. This Value-Driven Approach was adapted to real estate after studying Warren Buffet and his investment strategies. When Warren Buffett invests in companies, he could care less about prior history, he looks to see if there are hidden ways to increase the value of the company that others have overlooked. That is he is the most successful investor of all time. He looks at companies differently than other investors. He is not worried about price, he is concerned with value.

Looking at homes differently is known as The Warren Buffett Approach to Sell Real Estate.

My advice is to use these online ‘valuation’ tolls carefully and don’t believe them as gospel. If you would like an accurate assessment of your home’s value, find someone locally who know the intricacies of the local market. Even as a local professional, I hesitate to leave my area of expertise. I was recently showing homes to a buyer locally who wanted to see a home in Baltimore County. And I quickly told them, that it would be disservice to them to try and work an area that I was unfamiliar with. So I found an agent that knows that area well, and referred them to that agent. They ultimately came back to my area and have a contract on a home, but trying to serve a client out of one’s area of expertise is, in my opinion, just bad business.

If you would like a personalized prescription about how to extract hidden profits from your home, go to www.ClientProfitSecrets.com and request an analysis.

Rascoff himself admitted, “Look at them [Zestimates] as no more than starting points in pricing discussions with real authorities on local real estate values – experienced agents and appraisers. Zestimates are hardly gospel – often far from it.”

That’s the best piece of advice in the entire article.

Find an expert that can help you with your largest investment. Don’t trust an ‘automated’ valuation; instead trust a professional with intricate knowledge of local real estate.

Thanks for reading, I’m taking suggestions for next months ‘Story from the Street.’ If you have a question or topic you want answered, email me at Eric@ClientProfitSecrets.com