As technology becomes more advanced, the rules of real estate continue to change. I remember back in the day when Google Earth first became a thing. Agents were freaking out because they could look up properties and see them from the sky. It was the coolest thing and made us all feel like we were undercover spies, like James Bond.
Today, we have other innovations that have propelled us into new territories. With the advent of new technology comes new ways that agents have to adapt, or improve.
One of these key pieces of technology is the online home estimate or valuation.
Made popular by sites such as Zillow, Redfin, and Trulia, online estimates seek to provide the real estate client with what their home is worth. The convenience is undeniable, but the same can’t be said about the accuracy.
These sites became popular for homeowners who are just beginning their home sale process. Someone gets an idea to sell their house, and they just want to “check the market.” After the 2008 market collapse, it’s not uncommon for people to want to know how the market is doing before seeing if it would be wise to buy or sell.
There is no question that these are very popular sites and they are very good for searching for homes that are available for sale in your local neighborhood. Here is the problem, however, with these sites.
All of these websites have an algorithm and they determine the value of your home based on price per square foot in the area. Sounds simple enough, right? What could be wrong with this?
Well, a lot actually.
Why They Aren’t Always Correct
Reason 1: It’s Automated
The data is uniform and isn’t actually based on a carefully put-together appraisal based on anything “tangible.”
It’s not as if there are thousands of little drones all equipped with Artificial Market Intelligence sweeping through each property and generating some sort of educated estimate. Automated systems are responsible for generating a predictive estimate all on their own without any oversight from humans with market knowledge.
Keep in mind, this computer-generated software isn’t looking for future movements. So anything that is going on off market in your area isn’t going to be covered.
The computer’s prediction isn’t focused on any hard and fast data, other than patterns.
Again, this article isn’t intended to denigrate these easy-to-use services, I just wanted to lay out the facts for future home buyers and sellers who may be reading this so that they are aware of the how these systems work.
A real estate agent is always going to be the best bet for clients who want to know the ins and outs of the market in question.
Automated data and generalized findings aren’t the surest paths to getting a proper estimate.
Some would argue that consulting these services actually does you a disservice.
Proponents of this thinking claim that by skipping agents and going straight to online estimate tools, clients may have inflated numbers in their heads. Since this is their first impression of the market, it can leave clients feeling misguided. This can also set you up for huge disappointments down the road when your agent tells you that you aren’t going to be getting an unrealistic fairy tale price for your home.
Reason 2: They Look for Patterns
These services rely heavily on computer algorithms that have been pre-programmed to scour data and look for patterns.
Operating a system of predictions based on patterns seems like it would be a good idea, and in theory, it seems very sophisticated, at least on the surface.
However, one of the major things to consider is that real estate isn’t just a system of patterns and fluctuations.
It isn’t as cut and dry as certain aspects of the financial world.
There are obviously patterns and predictable fluctuations, but these happen based on aspects of the market that typically aren’t perceptible to a computer program.
When you consider that the value a house has changed over time, computers who are looking for patterns may be able to make sense of data, but they are relatively poor judges of which data is most important in the sale of real estate.
In order to be able to truly read a pattern, you need to have years of experience with markets and have some knowledge of predictable trends that occur throughout time. Without this background information, it can be really hard to understand what is going to happen--even for a computer.
Here’s why.
Let’s say your home is a gorgeous brand new colonial mansion with all the finest finishes and all the most modern conveniences. Imagine your home is going for close to $2,000 a square foot and you have 5000 square feet. You at 10 mil now. Let’s say your neighbor has 5000 square feet as well, however, their house is a dump. The computer does not know your neighbor's house is disgusting. So it’s going to possibly calculate the value there as well at 2000 dollars per square foot (especially if most of the houses in the neighborhood are gorgeous and going for this price) and then guess what… now that homeowner thinks he has a 10 million dollar palace when in reality it may be a 5 million dollar tear down at best!
Here’s where it gets even more complicated.
All of these websites take one ZIP Code and average out the price per square foot for the entire ZIP Code. This is what confuses buyers and sellers on the valuation of their homes, and one of the reasons you must be extra careful using online sites such as these.
These websites are not run off of comparable sales that have been examined by the human eye. They are simply priced per foot within a location and it’s put out by the computer.
You can not compare the price per square foot of a house on the 500 blocks of Rexford with a house on the 900 blocks of Alpine just because they share the same zip code! That’s how these websites work.
They take a zip code and they take an average. Forget about what I said above where a neighbor's house is worth 2000 dollars a square foot and another neighbor thinks his house is worth that as well because it’s on the same block… we haven’t even gotten that specific because these websites may be calculating every house in the entire 90210 zip code at 1500 dollars a foot for example just because that’s the average price between south of Wilshire and north of Sunset which is absolutely ridiculous. It’s taking the average price per foot of homes from 3 million to 100 million dollars.
Reason 3: They Can’t Account for Unique Property Values
A computer-generated system also won’t know that your house has emotional value. And sometimes, you as the home buyer or seller won’t know this either.
It always surprises me when a client believes that just because their house has the same number of beds and baths as the house next door, that they will be worth the exact same price.
Even if you live in the same neighborhood, houses can have widely different qualities that make the price of the home differ substantially.
When using the computer’s algorithm, it can’t input a price adjustment for special amenities, or spectacular features.
Online estimate leader, Zillow even explains this on their website where they state:
“ We do not know about home values and remodels unless they have been reported to the local tax assessor, so those values are not used in Zestimate calculations.”
Other factors such as your gorgeous skyline view, for example, will not play a factor in determining the estimated price.
Getting a great estimate is as simple as picking up the phone and calling a real estate agent.
I like these websites, for searching for homes that are available. However, I recommend being careful because they are usually incorrect when determining the value of the home.
The Fate of the Agent and Online Estimators
I honestly don’t believe that these types of online services were meant to detract from an agent’s job. In fact, I think it actually does the opposite.
Zillow CEO, Spencer Rascoff, had this to say, “you need a real estate agent, regardless of whether you’re a buyer or a seller. It’s an infrequent, emotional, complex transaction. Having a great person at your side can be really valuable.”
From a practical standpoint, these tools help visitors to come to a website, and it is a very attractive idea.
However, once they do a little playing around and realize that the numbers are way off they will want to consult a professional as CEO Spencer Rascoff suggests.
