Technology has become more and more and more advanced, causing the rules of real estate to continually change. I can remember back to the day when Google Earth first came on to the scene. Realtors were freaking out because they could view Real Estate online and with the view from the sky. It was totally awesome and made us all feel like spies, kind of like James Bond.
Now, we have other technologies that have moved us into new dimensions. With the arrival of new technologies, comes new worlds that agents have to explore and adapt to.
A key piece of this is the online home valuation or estimate.
Made mainstream by sites such as Trulia, Zillow and Redfin, online valuations seek to provide the client with a pretty good idea of what their home is worth. This undeniable convenience is game-changing.
These sites are especially popular for homeowners who are beginning their home selling process. When one gets an idea to sell their property, often they just want to “check-out the market.” It is very common for people to want to learn about the market before deciding if it would be wise to either buy or sell.
These are unquestionably very popular and they are invaluable for finding out which homes are available for sale in your local area. Here is the problem, however, with these sites.
Algorithms determine the value of a home, based on price per square foot for an area.
Sounds simple, right? What is wrong with this?
Well, a lot actually.
Why They Are often In-correct
Reason 1: Automation is shortsighted.
It’s not like there are thousands of little drones equipped with Artificial Market Intelligence, peering down on properties, generating some sort of educated valuation. Automated systems generate an estimate on their own, with no oversight from people with market knowledge.
The computer-generated prediction isn’t resulting from any hard and fast data, other than patterns.
I am not intending to denigrate these automated services, but rather I just want to explain the facts for up-coming home buyers and sellers so that they are aware of the reality of how this works.
Auto-generated data isn’t the surest path to getting a proper estimate.
Some say that consulting these methods actually performs a disservice.
Advocates of this thinking say that skipping agents and going directly to online tools, will cause the inflation of valuations in their heads. Because this is their initial impression of the market, it can make clients feel misguided. This can also cause huge disappointments down the road when your Realtor tells you that your unrealistic fairy tale valuation is not realistic for your home.
Reason 2: Patterns can deceive.
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.
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. Your 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 neighbors 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 price per foot within a location and it’s put out by the computer.
You can not compare price per square foot of a house on the 500 block of Rexford with a house on the 900 block 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 website 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 miss gold mines.
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.