7 things an automated or non-appraiser valuation won't tell you and a real life illustration of how inaccurate these values actually are and the consequences of relying on them:
Lenders and brokers using Automated Valuation Models (AVMs) and homeowners using "free online home values" to determine the value of a property need to know what those results aren't telling them.
- Whether the house is really there. A computer can't so much as drive by a house to see if it's actually located where it's supposed to be, has four walls and a roof, and really is a four bedroom split level and not a one bedroom shack.
- Whether unique features of a property might add to or detract from market value. So a computer returns an estimated value of $150,000. Did it account for the sewage treatment station next door? The railroad tracks nearby with trains that blow their whistles every night? The school district? The desirability of its tree-lined street versus the next street over?
- How long ago the property was assessed. Many AVMs and free online services rely on public assessment records. In many states, for example, assessments may only be required every three years — the value may be nearly three years old in that case. Some states mandate that an assessed value not increase beyond a certain percentage, even if sales activity indicates the property has appreciated far more. When you use an AVM or free online service, you risk a lower value than reality.
- What makes the comparables comparable. A computer might compare your subject property to another property with similar square footage sold three months ago a quarter of a mile away. Even if that "comparable" property is in a different, less desirable school district, fronts a four-lane, 55 M.P.H. street, and is flood-prone. Or even if the property was sold under duress, such as in a divorce situation, or not at arm's length, such as to a family member. A computer simply does not know all the adjustments that might need to be made to a "comparable" property's sales price.
- Whether a market is declining. Automated valuations use data from recent, nearby sales. If those sales were completed at the peak of a local housing market, the computer will think the trend is going up. Even if a professional appraiser knows that the overall neighborhood is beginning to experience a downturn. As a lender, don't get stuck with a property that's been overvalued by a computer.
- Whether there is a conflict of interest. Free online home values are often farmed out to real estate agents in your area, who use the service to get your listing when you decide to sell. The best way to do that is to impress you with their confidence that they can get a higher price for your property. If they tell you your property is "worth" the high end of what they believe they can sell it for, the theory goes, you're more likely to sign a listing agreement. With most things, it's best to "under promise and over deliver" — but the opposite is true when you use a free online home value service.
- What qualifications, designations, experience and education the preparer of the value has. When you work with an appraiser, you can be confident we're highly qualified, ethical and prepared to complete your assignment professionally and with good judgment. Most of the time, you don't know the qualifications of whoever is behind those free online values, and they couldn't compare to an appraiser's if you did. And if you're relying on an automated valuation, you're cheating yourself out of an appraiser's education, experience and expertise.
AVM USERS BEWARE:
The following is a sample of 20 consecutive sales in the Lexington Market that occurred on the same day and reported in the local MLS. They were not cherry picked! They were the first 20 reported closed sales for that day. The first column is the actual sale price of the property and assumed to be equal to market value are least approximately equal to market value. The second and third columns show the estimated values as indicated by two leading providers of AVM's on the internet (I wont mention their names). What is very interesting from these results is NOT that the majority failed to accurately predict value within a reasonable range of error, but that the resulting values from the two providers are so very different from each other despite both using "sophisticated" regression analysis programs to predict these values. This is what many lenders are advocating as a better method of valuation. Put yourself in the seller's shoes of Sale 1 and you used AVM2 to set your asking price. You would have lost around $33,000. If you were the seller of Sale 20 and you relied on say an average of AVM1 and AVM2 you would have lost $250,000. The simple fact is AVM's don't work very well and will never work very well as the real estate market is an imperfect market.