The Do’s and Don’ts of Home Valuation
How much is my house worth?
Its an easy question to ask that many tech companies today would have you believe its followed by an easy answer. Unfortunately, nothing could be further from the truth. There’s an easy way to get an answer to that question and then there is the right way.
In an article from Inman News on 8/2/18, The National Assoc of Realtors (NAR) general counsel, Katie Johnson took aim at Zillow’s estimated home values, Zestimates, saying they create “consumer confusion” in regard to property values. “Consumers largely do not understand the wide margin of error in Zestimates and this can create conflicts when pricing a home for sale or for a buyer determining what price to offer,” Johnson wrote.
Beware the AVM! The real estate tech companies (Zillow, Redfin, Trulia, Homes.com, etc.) rely heavily on algorithms built to determine home values to give the consumer an entertaining and easy user experience. They call these algorithms Automated Valuation Models or “AVMs” for short. It’s easy. You just type in the property address and up pops a value. The problem is these websites don’t tell you about the potential for very high margins of error associated with these AVMs.
Finding an AVM with a 35%+ margin of error is commonplace these days. Imagine a Realtor being off by 35% and telling you that your $1M home is worth only $650K. Or conversely imagine a Realtor telling you your $1M home is worth $1,350,000. That Realtor would not be in business very long. But more importantly, both scenarios are horrible for the consumer. And this is one of the reasons the Federal Government (DOJ and FTC) is stepping in – to try to help alleviate the confusion and mitigate the dissemination of inaccurate information.
So how does this happen? The bottom line is that there is still not a reliable technology solution to determining a nuanced, subjective answer. For the most part, the AVMs consider the public data readily available;
- The size of the home
- Bedroom / Bathroom count
- Lot size
- Location
- The year built
And then they compare these datapoints to other nearby sales.
In theory this sounds reasonable. The problem is there are several other critical data points that they don’t and CAN’T take in to consideration like;
- Condition
- Views
- Traffic Counts
- Landscaping
- Topography
- External influences (i.e. overhead power lines, freeway noise, etc.)
These are all very critical components in determining a defendable value opinion. Leaving any of these out, like the AVMs do, frequently results in huge margins of error, confusion and frustration for the consumer.
So, what is the right way to get an accurate value on your house?
It’s simple. Hire a professional, full-time Realtor. But make sure you hire the right one because, unless they’ve had formal training in appraisal, most Realtors don’t know how to do this either. Next time a Realtor gives you a value opinion on your home, ask him, “Based on what?” or “How did you come up with that value?” If he says, “I ran the comps” or some version of that statement, fun for the hills! That is not a satisfactory answer nor is it one that will benefit you when he is negotiating on your behalf. If he doesn’t have a spreadsheet showing you his calculations and adjustments, find another Realtor. How can anyone effectively negotiate the sale price of a home without real data to substantiate and defend their value opinion? You can’t. The right way is not a quick and easy way. The right way is;
- time-consuming
- requires lots of research
- requires a good working knowledge of construction techniques and costs
- requires an in-depth understanding of local market nuances
- requires the ability to mathematically calculate appropriate adjustments
- requires experienced, good judgment on how much to make in each adjustment
- requires consideration of intangibles that every property possesses
This work is difficult and time-consuming but has proven repeatedly to be an invaluable tool in establishing pricing credibility and ultimately in negotiating the best sale price on your behalf. A good Realtor will frequently pay for himself by offsetting the cost of his commission in the form of savings during negotiations when using the methods described below.
I know at our office we take a 4-step approach in determining our value opinion. We consider all the following data before determining our final value opinion;
- AVMs
- Case Shiller Index values
- Desktop Appraisal
- Field Appraisal
AVM. I know, I just told you about all the horrible reasons to not trust the AVM values. And yes, I meant it. But we do look at all the AVMs just to set our outer parameters.
Case-Shiller. The Case-Shiller Index is the premier housing index that tracks home values in America and has proven to be predictably accurate. We built a custom formula using the Case-Shiller Index values to determine the current market value of a property in San Diego County.
Desktop Appraisal. Again, we composed a very extensive spreadsheet to help us tabulate and analyze the available market data to help determine your home’s current market value. Detailed research is conducted (via phone, public records, title company data, MLS and on line) on each comparable sale chosen and appropriate adjustments are then calculated to determine adjusted values and ultimately the fair market value.
Field Appraisal. Despite all the work done during the desktop appraisal process, there are inevitably characteristics of a every property that do not come to light until you visit them personally. We drive by each property to make sure we have a clear understanding of all circumstances that may be affecting the value of the home. Power lines, steep topography, view quality, traffic counts, etc. are all things that can be witnessed but not always obvious on the computer.
Once all four steps have been completed a final value opinion is established. This process in lengthy and take at least 6-10 hours of work. It’s not quick, it’s not easy, but its highly effective. So, unless your Realtor knows how to arm himself with this kind of research and data, you might want to keep looking for one that has this skill set.
You can get a 10-minute opinion and be subject to a huge margin of error or get a 6 hour opinion from a veteran Realtor and rest assured you’ll have a clear understanding of the most accurate value and are armed with the knowledge and data to support that value opinion.
Warning: If you are searching for a Realtor to help you list and sell your property, don’t be fooled by a common sales tactic of Realtor telling you, “Oh yeah, I can sell your house for a much higher price than that last guy told you!” Sounds good but that just locks you in to a listing agreement with an unscrupulous agent. Then when your house doesn’t sell at the price he suggested he uses the excuse, “Yeah, well market conditions have changed and of course there is nothing I can do about that. You should probably consider lowering the list price.” No matter how nice they say it or how big a smile is on their face, make him show you the data – and not the data that can be printed from any MLS in just a few minutes!
