AVM- Automated Real Estate Valuation – What’s behind Zillow, Trulia and Their “Estimates”

Let’s start by stating the obvious: Zillow, Trulia and similar sites are not Realtor sites per se. They are Internet sites and have no Realtors working for them. They don’t need to; it’s not what they do. They have Marketing, IT, Sales and other professionals working for them and use proprietary algorithms that sift through county tax records, compile statistics and then propose “estimates of value” which, in my opinion, are the least valuable of the service they offer consumers. Interesting tidbits of information but little more.

Studying tax records or the average price per square foot of homes you may consider comparable is possibly good for determining a down-and-dirty range that a home might sell within, but even that’s prone to faulty analysis. In my opinion, it’s data without context.

Consider this fact: Zillow states that in my market (Chapel Hill – Durham – Raleigh) its “Zestimate” is within 20% of the actual sales price four out of five times. So on a $250,000 house Zillow is within $50,000 of the actual sales price only 80% of the time. The other 20% of the time they miss by more than this. I wonder how long they’d last in a place like Vegas with that record?

Without having personally seen each home that’s sold and only studying the numbers these online estimating programs fail to account for countless differences. For example: the lots. In every neighborhood not all lots are equal; some are more desirable or larger or offer some special feature. These algorithms also fail to consider the quality and condition of a home’s features: flooring type, kitchen updates, overall functionality, room sizes, whether the roof is old or new (and what kind it is), heating and air conditioning equipment, and so on. The algorithms don’t care if the bedroom is 9×11 or 15×14. A four bedroom, 2.5 bath home is the same in these “estimates.” (Though total square footage is given weight as are agent or owner inputted information which may or may not be totally accurate) There’s a long list of very important items that impact overall value missing when only studying average sales price per square foot or using tax record data.

Consider that it typically takes me several days when I’m asked to list a home to prepare a market analysis for the home. A lot of work that goes into making certain I use the right comps and adjust for differences, in much the same way an appraiser would.

My office brings in appraisers every year to talk with us about the values they use when making adjustments. Active Realtors have seen many of the homes we use in comps or we know exactly who we can speak with to get the detailed information we need to honestly compare two or more homes. The difference between a great Realtor and an average Realtor is always experience. Knowledge of the market, the products we offer and how to prepare a realistic, useful market analysis is critical.

Market analysis is also important when I’m wearing my Buyer Broker hat. I take time to do a good deal of analysis so that I can show my buyer clients what the true market value of a particular property may be. In the past couple of years I’ve negotiated between 0-20% of the over 50 homes I’ve sold. The lower the discount the better the listing agent and owner did of pricing the property correctly. There’s no reason to overprice a home (though a significant majority always are). Overpricing always works against the seller. Of the 50 plus sales I mentioned earlier the average discount was between 4-7%.

Trulia, Zillow and other similar sites do have lots to offer: great trending analysis, forums where the public can interact with real agents and get questions answered both specific and general in nature. They provide easy access to lots of great information, though like everything else, there are limitations and that’s why ultimately home buyers and sellers are better off working with an experienced local Realtor who can offer the most accurate analysis possible.

If you’re curious as to how to find a great Realtor, check out this link, How to Choose a Realtor.

Related articles

• The Truth About Zillow’s Zestimate (eastnashvillerealestateagent.com)
• Are Zillow Zestimate’s Really THAT Accurate? (gatorrealtors.wordpress.com)
• Home Buying- How to Get Started (nchomesbylarryt.wordpress.com)
• Is Zillow Continuing to Mislead Real Estate Consumers About What Homes Are For Sale? (johnmurphyreports.com)