The Zestimate Part II

zestimate_noAs a realtor in Southern New Hampshire I get a lot of questions from buyers and sellers about the Zillow.com “Zestimate”. The most common questions include: How accurate is the Zestimate? Why is the Zestimate lower than the seller’s asking price? Why is the Zestimate higher than the seller’s asking price? Why is the Zestimate so intent on preventing me from selling my home?

The simplest answer to those questions is that the Zestimate is flawed. It is only accurate, or close to accurate, when the comparison properties it uses to price a particular home are 1) good comparisons, 2) recently sold comparisons, and 3) comparisons with a reasonably accurate Zestimate. You see, all too often the Zestimate of a home is based on already existing Zestimates of other homes that it has determined are good comparisons. For the system to work, those Zestimates have to be right. It is a problem when the comparisons used to estimate a home’s value are based on other estimated values that do not really reflect true activity in a housing market.

Last May I wrote about some of these issues and said I was going to track some Zestimates for homes on the market to determine how closely they mirrored the home’s sale price later on. As an initial example, I used one of my own listings to show what most realtors already know: the Zestimate is more of a nuisance than a helpful resource. Zillow’s automated home value estimate is not exactly the gold standard for determining a property’s worth. Moreover, these estimated values have the potential to impact a buyer’s perception of a home’s market value.

Why is this a problem? Well, if the Zestimate is lower than the asking price then a buyer might interpret it as confirmation the seller/s (and/or the seller’s real estate agent) priced the property too high. That’s not outside of the realm of possibility, right? Sometimes sellers and realtors do over price homes, and it is not always done intentionally either. Depending on the market and variables influencing it at the time, a price determined by a thorough market analysis may or may not reflect what a buyer is willing to pay for the home.

The Zestimate being low is an understandable problem, but what happens when it is too high? If the Zestimate is much higher than the asking price it may prompt buyers to ask what is so wrong with this house that the seller has discounted it so significantly. Realistically, the home may be priced appropriately when compared to recently sold comparison properties, but how would a buyer know this without being told? How would they know the Zestimate is potentially false without seeing evidence showing this? The sad fact is they wouldn’t. It is troubling for buyers when they are faced with a Zestimate that varies considerably from the asking price – especially when there is no clear explanation as to why.

When I wrote about this topic before, I used 1 Grove Court in Litchfield, NH as an example. I selected it mainly because of how large the gap was between the asking price at the time and the Zestimate. At the time my original post on this topic was written, the asking price was $460,000. The Zestimate, however, was $387,805. That is a big difference.

The above Zestimate was based on two specific properties: 47 Garden Drive and 2 Garden Drive. I described these properties in detail previously to demonstrate the reasons why they were not good comparisons. One glaring problem with these two comparisons is that when they were used for comparison purposes by Zillow they were still on the market. Many real estate agents use active and pending listings to evaluate a home’s worth, but it is important realtors use recently sold comparisons in a market analysis to show what buyers have paid for similar homes in the market. If a comparison property is still active it is helpful in terms of indicating what buyers probably won’t pay for the home, but it does not show how much lower the seller would need to price their home to sell it.

Getting back to the property I used as an example, 1 Grove ultimately sold for $455,000. According to the buyers’ lender, the home appraised at that value. The Zestimate was wrong and not just by a little. It was off by $67,195.

Even though the home sold for much higher, the Zestimate can’t or won’t admit when it is wrong. It does not seem to be coded in a way that takes real market activity pertaining to the property into account. I say “seem” because perhaps it does and it just does not attach enough weight to make a difference in the Zestimate after the property sale is complete. For instance, as I am writing this Zillow reports that 1 Grove is worth less than the final selling price of $455,000. However, I should point out that instead of the original $387,805, the Zestimate has increased ever so slightly and currently values the house at $389,889. That could change though. Tomorrow it might suggest the value is more or less. The bottom line is that it’s wrong today. 

Putting aside the home on Grove Court, what about the properties Zillow used as comparisons for that home when it was on the market in May? What became of those properties? Did they sell for as much, or even near, the same price as 1 Grove?

Let’s take a look at that.

47 Garden was the first comparison included in Zillow’s estimate. When I wrote last about the Zestimate this home was being sold by the owner. The owner eventually got a realtor and then the home sold for $330,000. The current Zestimate values the home at $347,906 (as of the time of this writing). If accurate, this home has increased in value substantially in just a matter of months. Such a massive improvement does not seem likely, does it?

Then we have the other comparison Zillow used for Grove Court: 2 Garden. This property sold shortly after my original post about the Zestimate. The actual closing price in June of 2016 was $290,533. Right now the Zestimate considers the value to be $337,500. Does it matter though if buyers will not really pay that much for the home? Apparently not. 

Since it does not seem as though the Zestimate is going anywhere soon, realtors and sellers have to find ways to overcome the estimated values that are not in line with the market. One way of addressing the issue is to have accurate comparison sales ready to show buyers and/or their agents why the selling price is different than the Zestimate. It also helps to have currently active and pending comparisons to illustrate what is happening in the market at a particular moment in time. Another means of breaking down this barrier is for sellers to claim the property through Zillow as their own and update the description and features. This action comes with a warning though: it may or may not help to bring the Zestimate in line with the price the owner is asking. It may increase or decrease the value, depending on how accurate the description of the property was before the changes. And that value is still based on other Zestimates.

Ultimately we are all at the mercy of Zillow and it’s seemingly arbitrary selection of properties it deems as comparable, and so it helps to understand how the Zestimate works, and doesn’t work.

Real estate agent in some top ten most stressful job lists

I want to write about a misconception people who are not in the real estate business often have about the nature of the role of realtor or real estate agent. I can count on both hands a minimum of two dozen times when a person has expressed to me how lucky I am to have a job that is so easy and flexible. These assumptions used to baffle me, but after pondering this notion for some time I now realize why this career path appears this way to those working in other professions.

Before I present some realities about working as a real estate agent, I want to say that despite the information I am about to share I feel this career is right for me because it satisfies my need to help others in a meaningful way. For instance, I help buyers find the home they want – within the confines of their budget and at the best value possible. I find working with buyers enjoyable because I know that if I do my job right, barring any problems or issues I cannot detect and an inspector does not detect that do cause the deal to fall through for reasons beyond the agent’s control, then I get this sense of satisfaction that I have helped them reach a major milestone in their life – whether they are first time home buyers, second time home buyers, or have purchased many homes. I also love working with Veterans and have done so many times. It is a somewhat different process and so I know that with the experience I have, I can help active and inactive military personnel navigate the process much better than agents that do not.

I enjoy sellers because I treat the relationship like a partnership and so when obstacles arise we work together to resolve them, and I do everything on my end (that is legally and ethically within my power) to do to help them. But perhaps most importantly, I listen to their concerns, ideas, and input instead of forcing a decision upon them.

Reaching the closing table and finalizing a purchase and/or sale marks the end of an often emotional, stressful, exciting, and sometimes unpredictable time span that may last a month or much longer, depending on the circumstances and myriad factors. This is true for the buyers, sellers, and the agents. There is a great deal of stress and uncertainty involved and this can bring out the worst in any person at times. Understanding this can become the key to making it all the way to the end.

That said, I had a friend say to me one day “Hey, I came across this article that said being a real estate agent is one of the most stressful jobs a person can have? Is that true?” I thought about it for a moment, and the ups and downs I have been through in my career – particularly the first year which was especially difficult – and I responded something to the effect that while it can at times become tremendously stressful, it can be at times exceptionally satisfying and rewarding.

I am speaking only for myself, of course, but based on what other agents have told me I know that many in the business remain in it despite the stress, but I believe there are categories of reasons as to why agents remain in the business (especially successful ones), such as: the incredible feeling service-oriented agents get when they get the the closing table, the money (not everyone is in it for the money, because you must spend a lot of money to remain licensed and busy with clients, but for some agents it is all about the bottom line), or the rush they get from winning listings, negotiating contracts successfully, getting paid, and potentially becoming known among one or more communities as a prominent agent.

Getting back to the belief some have that the job is among the top ten stressful jobs (and not all web sources share this opinion), I thought to myself that while I do know the job can at times be very stressful, it is not really fair to compare it to jobs like law enforcement, corrections, those working for fire departments, and many others where people actually put their lives on the line for others or shape the lives of other people, such as teachers and professors – to name a few. Not even close. Those jobs are beyond stressful and they are also absolutely critical, and so I  had to spend some time thinking about how and why the career of real estate agent has made the top ten list on so many different sites. After much thought, I did come up with some answers and realizations about the job that do support a high ranking. Perhaps not in the top ten, but top twenty for sure.

Many people that do not work in real estate, or have not been involved in a transaction for a period of time, do not know how much is involved in the process. Putting a home on the market and selling it is the obvious goal in the mind of sellers. Finding, negotiating, and purchasing the right home for one or more people’s specific needs is the primary goal of the buyer/s. However, there are other sub-processes and happenings that may bring about much anxiety and stress on the part of all parties (of which there are many, including: the buyer/s, the seller/s, the agent or agents, the title or attorney company, a lender if needed, an appraiser if applicable, and an inspector – to name the most commonly included parties, as well as the inclusion of the friends and family members of buyers or sellers that like to view the property and give input). All of the moving parts that are either visible to all parties, and invisible to some, must all come together in just the right way for a closing on a home to occur. Unfortunately, with that many people involved there are plenty of opportunities for challenges and difficulties to arise, but this does not mean the purchase or sale will not make it to closing. Quite the opposite if one is working with a good agent and communication is clear and frequent. Even when agents are 110% on top of their game there are some factors they cannot see or control, or can see but have little to no ability to resolve.

Regardless, in difficult situations I push forward anyway and no matter how bleak a situation seems with regard to a problem with a purchase or sale I think hard about any and all possible solutions. I am an out of the box thinker – a person that does not really believe it when other say something is impossible or a lost cause. I am a persistent person, with an instinct for advocating strongly on behalf of those I am working with. The majority of the time these efforts pay off and the purchase or sale is completed. Once in a while, though not often, a problem or obstacle arises I cannot remedy due to reasons beyond my control (underwriters not approving financing near the end, etc.).

When I sit at a closing table after one of the kinds of sales that have proven very difficult, and realize that despite everything that has happened and I have managed to work with all the parties to keep it all together, allowing  my clients to make it all the way to the end, it serves as a reminder that the stress was (and remains) worth it. This belief is further etched into my brain when a buyer or seller expresses their gratitude or finds themselves compelled to write a nice review about me online, say thank you, or even give my name to others as a referral.

The above are signs to me that I am in the right career. They tell me I am doing my job right, or at minimum to the absolute best of my ability. I have even had agents  on the other side of a difficult deal give or send me thank you cards because they know how hard the fight can be on either side and while they are technically on the opposing side of the sale, the reality is we all have the same goal and that is to get to closing with those involved and leave them feeling as good about it as possible, despite trauma that may have occurred from obstacles, delays, or challenges, experienced during the process.

But is this job extremely stressful? Yes. To back up the claim, I will provide just a few of the sites I came across after I dispel a few (but not all) myths about work in real estate. These are ones I have personally encountered and stand out in my mind as I am writing this.

Myth 1: Real estate is all about “business”and it is not “personal”.

False. Buying or selling a house is stressful, but necessary because people need and want a place to live. People may say it is “business, not personal”, but nothing could be further from the truth. When a person or couple go through the process of buying a home they are looking for a safe haven that matches their needs to the degree possible given location, financial status, and other factors. Sometimes it is a single buyer looking for a place of their own to own and build equity. Other times it is a couple or a family looking for a place to call “home”. The bottom line is the purchase or sale of a home is directed correlated with person or families needs, goals, and dreams.

The process is personal for sellers too. These are people that have likely lived in and made memories in the home they are selling: both good and bad. Some have had and raised their children in the home they are selling, while others bought it with that plan in mind. This is one of many reasons why sellers may be inclined to sometimes price their home too high. They are factoring in sentimental value – that while does not justify a price point that is exceptionally above its market value – it must be understood and respectfully acknowledged by agents and buyers, or else the sellers are very unlikely to change their stance on the value if an offer is made in a manner that offends the seller/s. Some of these homes do not sell, but when parties remain respectful it is more likely that a seller will come down in price, within reason.

Myth 2: All purchases and sales should be smooth and without obstacles if an agent is competent and professional.

False. This is only true if the agent demonstrates signs of incompetence, and/or the obstacles are stemming from sources they may have some degree of control over. It is also false if such an agent is not taking the needs of their client/s seriously, and really listening to what it is they need. Not being responsive, without explanation, is another sign the agent is contributing to the sale falling apart, or persistent problems throughout because it may mean they are not paying attention to deadlines, acting proactively, or working hard to find solutions to issues that arise. However, if the opposite is true and there are many obstacles, but it is evident the agent is working diligently on a buyer or seller’s behalf, then one must understand it is a complex process. Anything can and does happen.

Myth: The job is flexible.

False. This is a common misconception I hear all the time. Agents that treat their work like a business and a career, versus a hobby, are always “on” and ready to work. These agents spend years trying to find a  work/life balance and still work hard enough to earn a reasonable amount of money.

As discussed in another blog post, commissions are structured in such a way that the check given to the agent as closing does not reflect their net income due to reasons such as: broker commission splits (depending on how the company handles that), possible franchise fees, self employment tax, no retirement plan through the broker, no health insurance unless the realtor buys it on their own or has a spouse with one through their own job, referral fees to other brokers or agents that gave the agent the client, costs spent to market properties or assist buyers with showings, and the list goes on. If a buyer calls an agent at 7pm at night and the agent chooses to answer the phone, the buyer might say “There is a house that just came and I want to see it tomorrow morning if possible because I don’t want to risk losing it to another buyer”. Agents each have their own way of handling these situations, but needless to say there are consequences and implications associated with whatever way the agent chooses to respond, or not respond. There is not always a right or wrong response either. Sometimes it has to be considered on a case-by-case basis.

Myth: Few, if any at all, purchases or sales are without some bumps in the road.

The business of selling homes is unpredictable and there are specific milestones that may be especially hard to get beyond. Communication between agents and clients is essential from the beginning. Agents must prepare their clients in a realistic fashion – not in an effort to scare them off, but in an effort to reduce the stress the client feels if they do encounter a bump or ten in the road.

If an agent is going into a listing appointment promising to sell quickly, promising to sell at a higher than market value price, and promising a painless transaction then they may win the listing, but the odds the process will play out that way are extremely low and they know this if they are experienced. Instead, I personally prepare buyers and sellers ahead of time about what they may expect. I do not do it in a way that frightens them, but rather establishes appropriate expectations right from the start. This is helpful because if a problem does arise, the buyer or seller may still experience stress, but they are not caught completely off guard. I also encourage my clients to ask questions, give input, or express concerns as they come up so they do not fester as many are easily addressed. I cannot emphasize this enough: communication is key.

Myth: I have had people say to me on occasion, “You are so lucky to have such an easy job! All you have to do is show houses or put them on websites and they just sell”.

Let me respond clearly on this one.

No.

The showings are relatively easy, though an agent needs to carefully manage time, coordinate multiple showings (and if you have four or five in a row this can be a challenge and a half to make all the appointments on time), be on the look out for problems or red flags at a home showing, research the property and its history ahead of time, and other work that would double the word count of this article f I listed it all. However, showings are enjoyable to me and I love seeing homes so I agree with the idea that this is one of the easier parts of the job. It is the negotiations, getting a house under agreement, getting past inspection, getting past appraisal, getting lenders that are reliable and return calls (some are reliable and some are not; just like real estate agents and other human beings in general), getting the loan commitment letter on time, meeting all deadlines on time, talking people off the ledge when something happens and they panic, and getting the final numbers for the buyers and sellers within the legally required time frame (or it causes a delay in the closing) that can be the hardest parts of the job.

Please know that there are other common and varied causes of stress to agents including: entering homes or coming into contact constantly with strangers that could potentially harm, rob, or murder an agent, the experience of frequent rejection that happens a lot during an agent’s earlier years in the business (it is the nature of the business since it is exceptionally competitive profession and agents have to learn to let the rejection go and move on), not knowing when the next pay check is coming in since a home has to close for an agent to get paid, regardless of the fact the agent still has bills to pay (and dues, insurance, taxes, fees, gasoline, and marketing expenses), and helping clients through the emotional roller coaster of making such a major change and transition in their life.

There are more, but for now I will leave you with links to websites that include the role of real estate agent/realtor as among the top ten most stressful jobs. Some give additional insight into the realities of this job and why it can cause such stress.

Realtor Magazine’s “Top 10 Most Stressful Jobs”

Forbes’ 2011 list of “What are the Most Stressful Occupations”

Realty Times reasons “Why Real Estate Agent is on the top ten list of most stressful jobs”

HSH’s article “Real estate agent: The job can be a killer”

Active Rain’s “10 Most Stressful Job” and it has a slideshow for those just looking to get the gist of the list.

Value is subjective

Realtors and sellers don’t always agree on what adds or detracts from a home’s market value. Reaching an understanding can prove challenging at times.

graves

Appraised value versus assessed value

Two real estate terms people sometimes think have the same meaning – that are used in different ways and determined using separate methods – are appraised value and assessed value.

Very basic definitions are as follows:

Appraised value is determined by an appraiser, at a specific point in time in the market, and accounts for external and internal characteristics of a house, the land it sits on, and any other structures on the property. This consists of a detailed analysis of a specific home when compared to other similar homes, close in proximity, that have sold in the recent past. It is intended to reflect, as accurately as possible, a property’s current market value.

Assessed value typically pertains to property taxation. This value is unlikely to be as detailed as an appraisal in that it may not include all internal or external characteristics of a house and land in its valuation. Because assessments are only conducted on a periodic basis that may span one-to-several years, it may not reflect recent changes in the housing market.