Algorithm vs. Appraiser: Estimating a Home’s Value Is Complex. Here’s What Sellers Should Know.

What’s your house worth? To whom? When, and how?

FROM THE CHICAGO TRIBUNE: The moving parts that go into the estimated value of a house are legendary. Factors from the obvious (location, size and condition) to those only in the eye of the beholder — that the stained glass is just like grandma’s — play into the ultimate validation of value: the sale price. (Written by Joanne Cleaver).

 

As the 2019 home-selling season opens, sellers and buyers have more valuation tools than ever at the ready. But confusion is growing along with the number and type of tools. While automated valuation models (AVMs) are used often, real estate professionals agree that only an experienced, well-informed agent or appraiser can craft a compelling case to support a sale price that will be accepted by a lender.

AVMs are computer algorithms — i.e., formulas — that estimate the value of a house based on millions of pieces of data. AVMs draw information about recently sold houses similar to the house in question; price trends in that neighborhood; and other factors available from public sources, such as building permits. When a listing website offers to give you an instant estimate of your home’s value, it is offering data generated by an AVM.

AVMs sound coldly indifferent, but they do deliver different results depending on how they are designed, say executives at the companies that design and sell them. Different AVMs are designed to deliver different types of valuations. And therein lies confusion.

Consumers don’t realize that there’s an AVM for nearly any purpose, which explains why different algorithms serve up different results, said Ann Regan, an executive product manager with real estate analytic firm CoreLogic. “The scores presented to consumers are not the same version that is being used by lenders to make decisions,” she said. “The consumer-facing AVMs are designed for consumer marketing purposes.”

For instance, more accurate models used by lenders do not include outliers — properties that sold for extremely high or low prices and that consequently would skew the averages and the comparable sales for a particular house, like yours. But models used by consumer websites, such as brokers’ sites and national listing sites, scoop in as much “sold” data as possible when concocting a valuation, because then they can claim to include all available data. That’s true, said Regan, but it’s more accurate to weed out misleading data.

AVMs used by lenders send along “confidence scores” that indicate how firm the estimate is. That is a factor typically not included alongside consumer AVMs, she added.

Revving Up the Algorithms

AVMs are most relevant for cookie-cutter properties, such as condominiums in a building or similar houses in a subdivision. Such properties often are sufficiently similar that a homeowner might wonder if it’s a waste of money to get a real, live appraiser at all.

Several key federal regulators now agree. In November, the Federal Deposit Insurance Corp. (FDIC) and two other agencies proposed that AVMs be used instead of on-the-ground appraisals for some types of houses. If approved, lenders for some types of houses with sales prices of $400,000 or less would accept a computer validation of the sale price instead of the current standard, which is an appraisal completed by a human. There is an exception: The rule would not apply to loans for houses that would be federally insured, such as through the Veterans Administration, Fannie Mae, Freddie Mac or the Federal Housing Administration.

That’s a big loophole, considering that just Fannie Mae and Freddie Mac together own or insure at least 46 percent of residential mortgages.

Still, that AVMs would be officially accepted at all has sent a shiver down the collective spine of property appraisers.

Professional eye

Homeowners are often distracted by valuations that bob up and down with monthly market trends. But when it’s time to actually put the house on the market, they drill down to the factors that actually determine reasonable asking prices. “Once they are selling, people look at the facts about the market,” said Salahuddin. “Once they are serious about selling, they’re in a different frame of mind.”

AVMs against humanity

The AVM-as-hobby is largely due to Zillow, the Seattle-based real estate listing supersite that came about because its founders were annoyed by how hard it was to dig up publicly available property sale data.

Zillow has injected more transparency into its value estimates. Now, house hunters can click on “Zestimate history and details,” which appears below the value estimate. Clicking reveals the logic behind an estimate: the comparable properties, tax assessments and recently sold properties that the company’s model used to arrive at the value estimate.

And, it’s important to bear in mind that the Zestimate is more a range of likely values than a single bull’s-eye, explained Emilly Heffter, director of communications, reputation management, for Zillow and its chief Zestimate wrangler.

“It’s a starting point; it’s not an appraisal, “ she said. “It’s a computer, and we haven’t been in your home. We haven’t seen your new kitchen.”

Not yet. In its never-ending mission to quantify every aspect of homeownership, Zillow now includes estimates of the impact of nearby highways, air quality and other environmental factors in its valuations. Soon, it will be “adding new technology that looks at the photos of a home and can see what types of counters you have,” she said.

Any listing is only as accurate as the agent completing the listing form for her local multiple listing service. An error in the property description — for instance, mislabeling a fireplace as gas when it is woodburning, or “accidentally” counting a closet-free room as a bedroom — can touch off a cascade of misinformation as the error affects automated valuations. After all, square footage doesn’t tell anything about layout, which determines how well the space is organized. 

Written by Joanne Cleaver for the Chicago Tribune

READ THE FULL PIECE: https://www.chicagotribune.com/classified/realestate/ct-re-property-valuation-0113-story.html