Why online valuations don’t work

Aside from Zestimate types of values found on Zillow, virtually every real estate website nowadays has an “Enter Your Property Address For A Free Instant Valuation” form they’d like you to fill out. It’s an easy way for agents to also capture your name, phone number, email address, etc. at the same time. We don’t have any issues with that, as contact information is necessary when getting back to a homeowner with an answer. But here’s the problem. Virtually every one of those sites use an automated algorithm that takes recent sales in the neighborhood, looks at the sales price and square footage, performs a simple math equation to calculate the cost per square foot (sales price divided by square footage). They then take YOUR home’s square footage, and multiply it by that same cost-per-square-foot number.

What could go wrong? How about everything!

Watch what happens when you use an automated formula to calculate value. Let’s say your former neighbors around the corner recently sold their home. It’s 25 years older than yours, hasn’t been updated at all, and it’s not in the greatest shape. Unlike yours, that home doesn’t have a pool and spa, and the roof is in disrepair. The carpets need to be replaced and the kitchen has the old original appliances, along with Formica counters. But, it’s 2,000 square feet (which is identical to yours) and it sold for $750,000. That comes out to $375.00 per square foot (750,000 divided by 2,000). The online formula thinks it’s a good comp because it’s located in the same neighborhood, and has the same square footage as yours. However, your home is on a much larger lot, has the aforementioned pool and spa, along with an outdoor kitchen and BBQ. It’s 25 years newer, has a completely remodeled kitchen with upgraded appliances and granite counters, plus a 3-car garage and large workshop. Oh, both bathrooms were also fully remodeled too. If we use the automated online method of price per square foot (2,000 sf x $375/sf) that means YOUR house must also be worth $750,000 (exactly the same as theirs) right?

Of course that’s wrong!

That’s like saying every Honda Accord that has 88,000 miles on it is worth the same amount, even though one has leather upholstery, a sunroof, new tires, and is in pristine condition. The other one is 8 years older, has peeling paint, bald tires, and needs a new transmission. Even with identical mileage, their values are obviously going to be quite different. Things are definitely NOT created equal for cars when it comes to values, and the same thing holds true with houses! Much moreso given the amounts that different features command in terms of value!

Here’s what we do instead

There are simply no shortcuts when determining a home’s value. We MUST take a close look at recently closed sales in the vicinity that are most comparable to yours (hence, the word “comps” used to describe the homes we’re comparing your home against when calculating value). Ideally, they’ll be within one mile of your home, and closed within the last 4-6 months (listings don’t count). Square footage should be within 10% of your home’s size, and all major feature differences will need to be adjusted for.

Value adjustments

Obviously, no two houses are exactly alike, which means that comparing two houses to each other takes a little time and effort. One might have a remodeled interior, a full-length covered patio, and a pool and spa. Another one may have a home theater with built-in surround sound, a fireplace in the master bedroom, and plantation shutters. So we need to look at all the features and make adjustments between the two. If your home has a feature that theirs doesn’t, we add to your home’s value (and vice versa). But sometimes those adjustments aren’t quite what you think they’d be. Here’s a common example: Let’s say Seller (A) has a pool and spa that were put in 5 years ago at a cost of $55,000 dollars. It might be reasonable to think his property is then worth $55,000 more than a similar home without a pool, right? In reality, the pool might only have a market value of $25,000 depending on many factors. A pool in Palm Springs will usually command a greater value than an identical pool in Torrance because the demand is higher. In the desert, it’s almost expected that a home has a pool due to the heat. But in Torrance, most buyers don’t rate a pool as a necessity, so they’re not willing to spend as much for one. The value of ANY ITEM is always determined by what someone will actually pay for it, which is evidenced by surrounding sales and market norms. There are a myriad of adjustments that are taken into consideration. Things like 2-car garages versus 3-car garages, or an extra bedroom or bath. Or maybe a  walk-in closet and jetted tub in the master suite. The list goes on and on, and it’s why an online math valuation simply can’t EVER be as accurate as the kind we do. It’s also why it’s incredibly important for you to share with us all of the features that your home has, from top to bottom! Maybe invite us over and give us a tour so we can more accurately determine the highest value possible.

Is the final value absolute?

No. One perplexing thing about our industry is that if you ask 10 different agents what the value of your home is…we 100% guarantee that you’ll get 10 different answers! How is that possible? Knowledge of the market, experience, and education vary greatly between real estate agents. Some agents never even look at comps, and instead “go with their gut.” Big mistake. Others do the same math equation that online sites do, and their values will be just as inaccurate. As a result, we’ll all invariably come up with different answers. It’s best to have an experienced agent who’s familiar with the market, create a custom valuation report for you. We also just so happen to know a couple who fit the bill!

We approach it the same way as an appraiser

In nearly 98% of all home sales, buyers require a mortgage loan, and the lender will always require an appraisal to determine whether they’re lending more than the home is worth, or what percentage of the value the loan will be. Since that’s the case, we’d rather approach your home’s valuation the same way an appraiser does in order to help reduce any “surprises” when the actual appraisal comes in. And the appraiser does it the same way we described above. They’ll use comparable homes in the neighborhood, with close to the same square footage, and make price adjustments for the different features each one has when compared side by side. They usually settle on three comps to use, although they may have looked at many more.

Do you have to list at the estimated value?

No, you’re free to ask whatever price you want for your home. Just bear in mind that there may not be a buyer who’s willing to pay that amount, so it’s a bit of a balancing act. If we go back to the car analogy, just because a seller wants $38,000 for a 15-year old Ford F150 because it has a custom paint job…does NOT mean he’s going to find a buyer who will agree to pay that much. In addition, there are some agents who will intentionally give a higher estimate just to beat out their competition and get the listing. Then, two weeks later they’ll  recommend you reduce your price. We’d rather not do that. It’s always best to price your home accurately from the very beginning, and then keep an eye on any new sales to see if any adjustments need to be made along the way.

How long do CMA’s take to prepare?

Depending on how many requests we receive each week, we’ll typically have a full Comparative Market Analysis ready the same day. If we get super busy, we’ll still usually have it ready within 24 hours. All you have to do is give us a call and tell us about your home. We’re really easy to talk to, and we definitely don’t use any high-pressure sales tactics whatsoever! It’s just a simple conversation…and once we have the information we need, we’ll handle it from there!