By Jeffrey S. Detwiler, President & COO, The Long & Foster Companies
Happy homeowners know the true value of their home: it’s priceless. But then the day comes when it’s time to consider selling or, if you’re a renter, when you decide to become one of those happy homeowners. In either scenario, understanding the true value of a property can be confusing and yet essential to a successful real estate transaction.
Whether you are a buyer or a seller, the only price that really matters is the price both sides agree on and ink on their real estate contract. Homeowners hope their property sells for a nice profit or they receive a better offer than their neighbors, but realistic sellers realize a variety of factors play into the market value of their residence.
Online Estimates Aren’t Always Accurate
Both sides of real estate transactions typically turn to the Internet to get an idea of the going rate for homes in their community. Online, buyers and sellers use Automated Valuation Models (AVMs), such as Zillow’s Zestimates, to learn home price estimates that are based on data analytics. Consumers find it easy to enter an address and then check out the expected price. While glancing at an AVM-generated price can be a starting point for a buyer or a seller, it’s important to understand that these estimates are just that: estimates.
On its website, Zillow notes that its AVMs have a national median error rate of a little more than 8 percent. In some communities, higher median error rates of up to 10 to almost 12 percent are reported, and other sources have noted error rates as high as 32 percent when comparing the AVM and the actual sales price of a home. An 8 percent disparity between an AVM and a sales price can mean a difference of $40,000 on a $500,000 home. The cost differential could be as much as $100,000 or more when the error rate or the home price is higher.
A Realtor in Charlottesville, Va., who studied the accuracy of Zestimates in that market, found the values were overestimated in 17 of the 21 homes that sold in one month; two of those homes sold for 61 percent less than their estimated price. Researchers have found errors that could favor a buyer or a seller in AVMs: sometimes the estimated price is too high and sometimes the price is too low. Either way, relying on an AVM as a basis for pricing a property or negotiating a transaction can be misleading.
Why Estimates Can Be Dangerous
Misleading estimates can cause problems for both buyers and sellers. Buyers may see a property they love that appears to be in their price range, but then discover that the AVM is woefully low. Now those buyers are in the unenviable position of attempting to convince the sellers to unfairly reduce their price or simply moving on to a second- or third-tier property choice. For sellers, relying on an inaccurate AVM can cause one of two problems. If the estimate is too low, the homeowners could shortchange themselves and reduce their profit. If the estimate is too high, the sellers could come into the market with an overpriced property that lingers on the market and either doesn’t sell at all or eventually sells for an even lower price.
Local Market Expertise is Essential to an Accurate Property Valuation
Even Zillow’s CEO suggests that estimates are best viewed as a starting place for looking into property values. There’s no substitute for the professional opinion of a Realtor when it comes to evaluating fair market value. Unlike computer software, an experienced agent knows that sale prices depend on both the scientific analysis of recent sales for similar properties, as well as the creative analysis of the neighborhood’s features, local buyer preferences and market conditions that influence prices. A Realtor has the ability to visit a home and be able to compare its features and current condition to nearby homes.
Additionally, a knowledgeable real estate agent will be able to compare a home not only to recent sales and homes that are currently on the market, but also to homes that have been taken off the market. An AVM can generate a price based on the number of bedrooms and bathrooms, but only a qualified Realtor can know buyer expectations for a particular area. While there’s always a place for data analysis, experience with local buyers and sellers cannot be replicated with software. Property values fluctuate constantly, so an agent with in-depth knowledge of a local area, including its traffic patterns, retail development, school systems and popular amenities, can understand how those factors can influence a home price.
If you’ve made the decision to buy or sell a home, Long & Foster Real Estate can help you accurately evaluate the fair market value of your own home and other properties in your community. The company offers multiple divisions that can help you find, finance and insure your home. Representatives of Prosperity Home Mortgage are available in most Long & Foster offices in the Mid-Atlantic region to assist prospective buyers with financing. In addition, Long & Foster agents have a range of contractors they can recommend to provide service to buyers and sellers before and after they buy a home.
About the author
Jeffrey S. Detwiler is president and chief operating officer of The Long & Foster Companies, parent company to Long & Foster Real Estate, the No. 1 family-owned real estate company in the United States, and Prosperity Home Mortgage, LLC, a full-service mortgage banker. From extensive, neighborhood-level market information to Long & Foster’s core services companies, providing mortgage, settlement, insurance and property management services in a streamlined manner, Long & Foster offers the services necessary to make today’s real estate transactions manageable for owners and investors.
- Zillow.com, Zestimate: How Accurate is the Zestimate, updated on June 3, 2015
- The Real Deal: New York Real Estate News, Erroneous Zestimates
- Realtor.com, How Much is Your Home Really Worth?
*The information contained in this article is not intended to be and does not constitute financial or investment advice.