Over the past decade, the growth and popularity of Automated Valuation Models (AVMs) have been remarkable. More than just a public web portal enabling a search for available homes, websites such as Zillow.com provide an estimate of value. The reliability of these valuations does vary quite a bit; in fact, Zillow openly discloses that their “Zestimate” arrives within 5% of the actual sale price less than 35% of the time. Zillow’s median error rate is 7.9% nationally, which could create a value swing of over $27,000 when evaluating a $350,000 home.
As an active broker, I find automated value information often leads to what I call “Selective Zestimatation” (okay I just made that up). That is, sellers tend to hang their hats on the AVM’s number when it’s high and buyers do the same when it’s low. With that in mind, I would like to discuss some of the factors, features, and characteristics that often have a dramatic effect on value but do not factor well into the typical AVM.
• Non-homogeneous neighborhoods: Think of a mature, desirable neighborhood in which the homes were built within a wide range of square footage over a 30-year time period. In this case modern upgrades, condition, and floor plan utility or lack thereof tend to drive values and this does not compute with the AVMs. I often find a similar scenario when valuing luxury homes. City views and golf course frontage simply don’t translate into an average price per square foot calculation.
• Improvements made with or without permits: I’ve seen fully permitted additions that looked, well, like an addition. I’ve seen unpermitted additions, perhaps a previously unfinished basement, that truly added to the appeal and utility of the home. The AVM’s are very reliant upon the accuracy of public records and limited to what’s been reported. Also consider that many kitchen and baths remodels do not get permitted.
• Speaking of public records: There is often a delay in the actual public reporting of recent home sales. In rapidly appreciating or declining markets, 30 days can make a big difference. In all market conditions, comparable homes under contract but not yet closed often provide the best indicator of value. The AVMs have no way of knowing which homes are “in escrow”.
• Previous MLS records and “claimed” properties: Most AVM websites do a great job of capturing active homes for sale. They then store that data for future use. It’s not uncommon to see a home that’s been “puffed” in terms of square footage by the listing agent, which then becomes part of the home’s AVM record (think a garage conversion for example). Zillow also allows homeowners to claim and edit their own home facts; what could go wrong with that?
• Physical Characteristics: Architectural style, the busy road behind, and that neighbor across the street that doesn’t own a lawn mower or paint brush. These are just a few of the many characteristics that affect desirability and value but won’t show up in an algorithm.
Many of the brokers I know despise the AVMs for their inaccuracies and the public’s propensity to think of their information as gospel. I think of AVMs as a tool and just one of many resources that should be considered when buying or selling a home. As a current subscriber to Zillow’s Premier Agent program I check my numbers against theirs quite frequently. Sometimes these guys get it right.