Occasionally, I will hear or read comments from homebuyers, homeowners, sellers and real estate professionals, about the value and use of online housing calculators that provide estimates of property value.
Earlier this week, I came across an interesting article in the Yahoo Finance section titled, “The Fuzzy Math of Home Values,” which delved deeply into this topic.
The article was written by Alyssa Abkowitz, of Wall Street Journal’s SmartMoney. In one case vignette, Abkowitz showcased the dilemma of a Greater Sacramento homeowner. The homeowner had invested hard work to turn his 6,500 square foot home near Folsom Lake, into an ultimate party pad. The home boasted a custom wine cellar, game room and a home theater. There was a wood-burning pizza oven, and searing station outside. A pool overlooked the lapping waters of Folsom Lake. BUT as the homeowner was finishing up on his home improvements, and delved into refinancing the $750,000 mortgage, and became startled when according to one popular real estate website, the home value had dropped over $200,000 during a recent seven-month stretch.
The SmartMoney article went on to say, "Another on-line real estate estimating website valued the home at a mere $640,500. Adding confusion to the picture – a real-life appraiser had valued the house at $1.5 million."
According to SmartMoney Magazine, the calculations behind online estimates are adding confusion to an already tricky housing market.
As increasing numbers of consumers grope for information in this difficult housing arena, they often frequent websites which provide home-evaluation data to help ascertain value.
A personal friend in Boise, Idaho, shared with me that she is getting ready to market her home this coming spring. She has visited sites like Zillow, Homes.com, and Realtor.com hoping to obtain an approximate value for her dwelling. She lives in an area of mobile homes placed on city lots. The vacinity abuts a new development of custom homes selling in the $500,000 range. She states, the guestimator websites frequently place values on the neighborhood mobile homes, with the custom stick home evaluations - and the neighborhood custom homes at mobile home values.
Yet another of my out-of-state friends is currently marketing their home with fair market list price, but each and every consumer, who visits the listing on-line, is seeing a zestimate, approximately $75,000 below their list price.
According to the SmartMoney article, the on-line companies, which provide their valuation estimators, rely on the use of algorithms. Because these algorithms often change, the values of homes often change. According to the SmartMoney article, "this summer Zillow made adjustments that affected all of the 100 million homes in its database, and some home value quotes swung by hundreds of thousands of dollars in as little as a month."
The SmartMoney article also addressed a special Louisville, Kentucky home, "which according to legend, acted as inspiration for Daisy’s home in The Great Gatsby, and quadrupled in value over 30 days. While according to Zillow, a Brooklyn, N.Y. townhouse currently listed for $5 million, was valued at a jaw-dropping $31 million in the middle of the real estate crash."
According to the SmartMoney article, "The former owners of the “Gatsby house,” watched Zillow put a $331,000 value on the house in May. In July it had climbed to $1.5 million. Zillow claimed the lower estimate reflected errors in its statistical model." The sellers had to fend off a stream of lowball offers before they ultimately sold their dwelling this autumn.
Zillow, Trulia, Homes.com and all their competitors make clear their numbers are only guesstimates. They present disclaimers about information and material consumers garner from their websites. However, homeowners don’t always pay attention to the disclaimers.
In the majority of the past 30 years I've been in this business, home evaluation has been an appraiser's job. Some evaluation can come from the process of a CMA (Comparitive Market Analysis) performed by real estate professionals. The process involves gathering data on recently sold properties in the vicinity, and comparing them with the home being evaluated or appraised. Size, condition and characteristics, are components considered. Unique qualities and added amenities, such as a swimming pool can add value. Although the evaluation-appraisal process can be as much art as science, it is usually performed with an on-site visit to the subject property. A component of the process that isn't performed by on-line guestimators.
The SmartMoney article written by Alyssa Abkowitz is really an in-depth piece that goes more deeply into the process of home appraisal and the use of on-line calculators. I recommend consumers and real estate pros read it in its entirety. It can be accessed via: “The Fuzzy Math of Home Values.”