With the click of a mouse, homeowners today can obtain instant quotes on the value of their most significant asset: their homes. Banks, insurance companies, real estate brokerages and even media companies offer computer generated property valuations using formulaic software based on publicly available metrics such as square footage, number of rooms, bedrooms, bathrooms and recorded neighborhood sales. These computer-generated estimates, however, lack elementary inspections, critical market perspective and professional intuition, so they fall grossly short of the mark.
Perhaps the first to provide automated estimates, Zillow introduced "Zestimates" in 2006. In New York City’s predominantly vertically stacked housing market, error margins ran so high Zestimates were unusable. Today Zillow boasts an average 5% error rate across the country. In parts of California, the difference between home value estimates and actual sales has been reported to be as high as 32%. This year, a lawsuit was brought against Zillow when an attorney in Illinois claimed that an inaccurately low estimate deterred potential buyers.
In late May, Zillow announced a contest to build a better mousetrap or an improved algorithm that would narrow their margin of error. Zillow will award an eye-popping, attention grabbing $1M prize to the individual or team that best advances the capabilities of the Zestimate software. After a first qualifying round, the top 100 teams will compete for the $1M prize, with awards of $100K and $50K going to 2nd and 3rd place winners.
So, is it possible to estimate the value of a home without looking at it?
The phrase “high tech, high touch” was coined by educator John Naisbitt in the early 80’s when he was considering technological advances in education. Looking for a balance between technology and humanness, he promoted the benefits of embracing technology while preserving human elements. The same “high tech, high touch” operating system underscores best practices in the current business of real estate. Setting a price for a home has everything to do with data, economics and personal experience. Determining a property’s worth requires a mix of high tech applications, a keen understanding of the economic climate, and seasoned human intuition.
This week I added a WHAT'S MY HOME WORTH button to my website for buyers and sellers looking to determine the value of their real estate assets. Over the years, I've fine tuned pricing strategies combining an ever sharpening "high tech” approach with a more traditional hands-on “high touch" evaluation. To arrive at an asking price, I begin with a close review of collected data from comparable homes. I do a comparative market analysis for recently closed sales (last 6 months), properties currently in contract (last 3 months) and properties for sale (available inventory). I consider condition, time on the market and number and extent of price changes. I benefit from my peer network of professional agents to gain access to unpublished contract prices, and also to derive deeper contextual insights that might have influenced decision making: was an owner pressed to sell because of a court order? Was money needed to pay taxes? Were there multiple offers, etc?
Each property is unique, so there's no substitute for physical inspection of a unit. Not even 3D videos or live streaming can replace the boots-on-the-ground experience of walking through a property. You need to be actually not virtually present in order to assess the quality and age of a renovation; or the “wow factor” of a view; or make allowances for odors emanating from other apartments or the sounds of nearby construction. We can assign monetary values to certain factors that influence the price of a home such as a wood burning fireplace and a powder room, or amenities such as a garage, individual storage or children's playroom. Similarly we can provide detractors to handicaps such as low ceilings or summer work rules or policies that prohibit pets or the installation of washer/dryers.
Additionally, economic environment impacts pricing. Is the mood one of bursting bubbles, irrational exuberance or froth? Which way
is the stock market swinging? Are banks tightening or loosening lending standards? Are interest rates rising or falling? Are absorption rates based on a shortage or a surplus of inventory? When the market is heading downward, it is more difficult to price a property. When the market is moving up, restraint is essential because the tendency is to overprice and expect that the market will likely
We can thank technology for revolutionizing the way information is gathered, stored, updated and retrieved. With faster access to more accurate information, transparency is achieved and time is saved. However, computer driven instant estimates will remain unreliable barometers of home values for the foreseeable future if they fail to interface with experienced real estate professionals. The next tech evolution is sure to encompass some form of artificial intelligence, and we will all have to adapt. In the end, however, regardless of algorithms and appraisals, we can agree it is the buyer who determines the value of a property: a home is worth what a buyer is willing to pay.