Online Home Prices Can Be Unreliable

By Michael Edlen
Special to the Palisades News

With online sites such as Zillow and Realtor.com using an algorithm heavily weighted by the size of a house, and comparison with homes sold within a certain distance away, it is seductively easy to get an estimate of value of any home in the country in just a few seconds.

The automated valuation models (AVMs) rely on data gathered from various sources and often produce surprisingly inaccurate numbers.

For example, a local homeowner asked me to reconcile several estimates of value they had gotten online, which ranged from $3 to $7 million. Whether or not to put their home on the market depended on the value they might expect to receive. They had assumed Zillow was the most reliable because of its popularity, and it had estimated $5 million.

Yet Realtor.com suggested a value of $3 million and Redfin estimated nearly $7 million. While a variance of perhaps six to eight percent might be acceptable, I have often seen variances between AVMs here ranging from 10 to 30 percent—even on the same day! It was ironic that when the CEO of Zil- low sold his own Seattle home, it was for 40 percent less than the Z-estimate Zillow had online. Zillow’s Chief Analytics Officer cited the property’s irregular shape and location on a busy road as partly responsible for the inaccuracy.

Zillow’s senior economist added that this example shows “the classic luxury homes problem.” She noted that Zillow and other AVMs cannot take into account “non-quantifiable facts” such as layout design or lighting and that these facts can have much more of an effect on the values of luxury homes than less expensive properties.

People need to understand the limitations of online systems, especially in areas such as Pacific Palisades where there is such a diversity of homes even in the same block. Some of the other things an AVM cannot take into consideration that might significantly impact value estimates are:

  1. Is there actually a house on the lot, and its condition?
  2. What is the size and usability of the property; is it flat or on a hill?
  3. Is the actual square footage known, and if it has been added onto?
  4. Is it on or near a high-trafficked street, or on a quiet cul-de-sac?
  5. Does it have special features such as panoramic views versus an unsightly neigh- boring property? For example, we sold a view home on a hilltop for $1 million more than a nearly identical house, which was only about 200 feet below it on a lower street.

In most areas of the country, the AVM modelsmightbeadequateforaroughidea of theoretical market value. In areas where average prices are well over $2 million, though, the most accurate way to value property is to have an experienced local real estate agent put together a Comparative Market Analysis (CMA).

If you are a seller, and an agent simply bases their evaluation on price per square foot, it could be a sign that you might be working with someone who might not get you top dollar.

If you are a buyer, that agent might lead you to paying too much in some cases, or to losing the house to another buyer if you are undervaluing the property. An agent who is an expert in that area may be able to analyze as an appraiser would, and include judgments about the value of other features as well as current market conditions. In an area like Pacific Palisades where homes average price is over $3 million, this could gain a seller or save a buyer as much as $200,000 to $600,000.

(Editor’s note: We asked Edlen about the homeowner at the beginning of the story. “I estimated $4 million, taking into consideration all comparable listings on market that had already sold,” Edlen said. “The homeowners would only have sold if they could expect more than $5 million, so it was not put up for sale.” He also cited another situation last fall, when one of the AVMs estimated a Huntington Palisades home was worth $4.5 million. The owner felt it was worth far more. “It didn’t take me more than two minutes to conclude he was absolutely right; it was worth more than $7 millon because he had more than twice the lot size as comparable sales.”)

Michael Edlen has evaluated more than 3,000 Pacific Palisades properties. Call (310) 230-7373 or email Michael@Michaeledlen.com.

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