Paycheck Chronicles

Those Real Estate Valuation Websites

If you've ever bought or sold a house, or are even just real estate curious, you've probably taken advantage of the free, online real estate valuation services offered by companies like Zillow and Trulia.  I find them both to be very useful tools, but you must be completely aware of the limitations and the way that they come up with their estimated values.

For purposes of example, I'm going to use a semi-random address is Virginia Beach, Virginia.  The house is listed on both Zillow and Trulia.  The house is a three bedroom, two bath ranch of about 1200 square feet.  It has a one car garage and an average sized yard.  It is in an excellent school district.  (I'd send my kids there, and I think I'm sort of picky.)

Both valuation companies use public tax records for much of their information.  Therefore, it isn't surprising that they both list the same details for the house:  three bedrooms, two baths, and 1204 square feet.  However, they list a fairly different estimated value:  Zillow says it's Zestimate is $208,000, and the Trulia Estimate is $184,000.  That's a pretty sizable difference, about 10%.  What's up with that?

To understand, you have to ask how they are calculating these estimates.  From the Zillow website, they calculate the Zestimate this way:

We use proprietary automated valuation models that apply advanced algorithms to analyze our data to identify relationships within a specific geographic area, between this home-related data and actual sales prices. Home characteristics, such as square footage, location or the number of bathrooms, are given different weights according to their influence on home sale prices in each specific geography over a specific period of time, resulting in a set of valuation rules, or models that are applied to generate each home's Zestimate. Specifically, some of the data we use in this algorithm include:

Physical attributes:    Location, lot size, square footage, number of bedrooms and bathrooms and many other details. Tax assessments:     Property tax information, actual property taxes paid, exceptions to tax assessments and other information provided in the tax assessors' records. Prior and current transactions:     Actual sale prices over time of the home itself and comparable recent sales of nearby homes

Currently, we have data on 110 million homes and Zestimates and Rent Zestimates on approximately 100 million U.S. homes.*

Trulia explains their Trulia Estimates this way:
A Trulia Estimate is just that: an estimate of a home's worth. Our estimates use a ton of info, including recent sales of similar homes and home facts like number of bedrooms and bathrooms, square footage, and more to provide insight into what a home is worth. You can help us improve our accuracy by telling us what you think of your home’s Estimate, and by claiming your home and updating its facts.
In my opinion, that doesn't help much.  Honestly, the only way to know how much a house is worth is to see what someone is willing to pay for it, and that isn't a very realistic because it only tells you how much a house is worth to that particular purchaser/renter.  So you are back to trying guess estimate a home's value.

At this point, you need two things:  to know more information about the house, and to have someone who knows that specific market well.

The specifics of the house are obviously important.  There should be a large difference in value between our sample house if it still has all the 20 year old, builder grade stuff like windows, kitchen, bathroom, etc., and the same house that has just been completely redone.  More importantly, you need to know if there are any glaring defects in the house, like a cracked foundation or termite damage.

The specific market details are important as well.  If you are an outsider, you have little way of knowing if there is a possible school redistricting, or an expressway coming through three lots over, or a soon-to-be imposed ban on new construction.  All these things can affect home values in a very small area, and they are the type of things that a market expert can explain.  In most cases, that expert is going to be a real estate agent, though occasionally you can find a few non-professionals or professional investors who keep up with area information.  Unless you happen to know one of those folks, you are probably better off going with a real estate agent.

Real estate valuation websites can be useful tools, as they help consolidate a wide range of information regarding properties, taxes, and sales.  However, they are just one tool in a large bag of real estate tools.


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