In the old days, if a homeowner really wanted to find out how much their property was worth in the current market, they called an appraiser. Our customers understood that a licenced and qualified appraiser is trained, experienced, knowledgeable, and unbiased in his or her own marketplace.
In the past few years, the Information Age has flooded us with data; lots of data. Big data is a part of our everyday life from Facebook to Google. It has also infiltrated the housing market too and affects buyers, sellers, and home owners on a grand scale. But, will big data put the appraiser out of business?
Part of the boom in the availability of data has led to companies such as Trulia and Zillow who claim they can “Zestimate” a home’s value instantaneously. But can your potential customers trust such value? Let’s see.
Though Zillow (and other similar companies) keep their algorithms proprietary, they do give us enough information that we can get a pretty good idea as to where the data comes from. For example, according to Zillow’s own website, “we use public and user-provided data for house attributes, and some areas report more data than others” (https://www.zillow.com/zestimate/#acc). As an appraiser for over two decades, I see a blaring problem here. Very few areas have accurate public information for size, quality, condition, and other important features of houses. As you know, these are features that can dramatically affect an accurate value. This is especially true in non-disclosure states where I work such as Idaho, Wyoming, and Utah. As for user-provided data? This is information coming from places like the home owner themselves. Nothing bias there. If Zillow depends on good data to provide good estimates, the phrase “garbage in – garbage out” comes to mind.
Yet, Zillow claims “ Zestimates are usually accurate to within 10 percent in most American metro areas” (https://www.datanami.com/2015/08/12/inside-the-zestimate-data-science-at-zillow/). This sounds like quite an achievement, but it comes with a caveat; accurate according to who or accurate according to what? What metric are the folks at Zillow using to assess their accuracy? Of course, they does not say.
So, what is a Zestimate? No one really knows. By its own admission, “It is not an appraisal. It is a starting point in determining a home’s value” (https://www.zillow.com/zestimate/#acc). Remember, “The Zestimate is created by an automated software process, designed by statisticians, and there is no ability for humans to manually alter the Zestimate for a specific property” (https://www.zillow.com/zestimate/#acc). In other words, it is a computer program, plain and simple. Now as you know, I am a huge fan of and advocate for the good that computers can do for our productivity. However, my experience as a real estate appraiser has left me skeptical that they can know all that is important to know in the valuation process and/or that they can accurately determine a home’s value without the expertise of a local valuation professional such as an appraiser.
In fact, let’s put it to the test. For purposes of this article, I randomly pulled three appraisals that I, or my office, have completed in the past few weeks. These are all full, USPAP compliant appraisals for lending or private purposes. Here are the results:
Property #1: $215,000 Appraised Value. $241,192 Zestimate. Difference of 11%.
Property #2: $1,300,000 Appraised Value. $1,123,005 Zestimate. Difference of 14%.
Property #3: $100,000 Appraised Value. $167,288 Zestimate. Difference of 40%.
Of course, Zillow acknowledges that “the Zestimate’s accuracy depends on location and availability of data in an area. Some counties have deeply detailed information on homes such as number of bedrooms, bathrooms and square footage and others do not. The more data available, the more accurate the Zestimate value” (ibid). Let’s not forget that the founder of Zillow, Spencer Rasscoff‘s own home was sold for 40% less than his company’s Zestimate. Oops!
So, will Zestimates put the appraiser out of business? I am not holding my breath. In the old days, if a homeowner really wanted to find out how much their property was worth in the current market, they called an appraiser. It appears that the more things change, the more they stay the same.
For more information on this subject, please download and listen to The Appraiser Coach Podcast Episode: 407 Here Come the Zestimates