This is an update on a post written in 2016.
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 (aka Zestimate) of value. The reliability of these valuations does vary quite a bit; but some are improving. Three and a half years ago Zestimates were landing within 5% of the actual sale price about 80% of the time. Today Zillow's accuracy has improved to within 2% of the actual sales price, 80% of the time.
I'd like to think that Zillow improved their algorithms but alas, they're simply gaming the system, here's how. I recently listed a home well below the Zestimate as often happens when heading into fall/winter. Within a matter of days the subject property's Zestimate was reduced to match our list price. After 30 days we rolled out a significant price reduction and surprise, the value posted on Zillow dropped to match our price reduction. That's cheating in my book but it is a reminder that real estate is worth exactly the amount that a capable, well informed buyer is willing to pay.
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. One often encounters a similar scenario when valuing high-end homes. City views and golf course frontages are sometimes undervalued in an average price per square foot calculation.
• Improvements made with or without permits: Permitted home additions can add a lot of value, particularly if it doesn't look like an addition. Of course that's not always the case so there can be a big swing in terms of appeal. On the other hand, I’ve seen un-permitted 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. Lacking a direct feed from the multiple listing service, 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, landscaping and curb appeal can be big factors. So can the busy road behind or the poorly maintained rental next door. These are just a few of the many characteristics that affect desirability and value but won’t show up in an algorithm.
Many brokers despise the AVMs for their inaccuracies and the public’s propensity to think of their information as gospel. I think we all should consider AVMs a tool. Just one of many resources and elements that should be considered when buying or selling a home. I'm a previous subscriber to Zillow’s Premier Agent program and still check my numbers against theirs quite frequently. Their information can be enlightening.