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.

What to do when…

Sometimes real estate agents find themselves in troubling situations that fall outside of the proverbial training box. While realtors are typically schooled on activities like completing a purchase and sales agreement, and writing contingency clauses that read as if lawyers wrote them, training does not always cover real world challenges that include, but are not limited to: prying open a rusty lock box, figuring out before entering a home if the seller is still inside, quickly determining which key out of ten opens the first of four units in a multi-family house in sub-zero temperatures, or handling arguments that erupt between buyers. In these situations an agent has to think on their feet, and essentially just wing it.

argument

Uncomfortable home disclosure questions

In New Hampshire, sellers typically fill out a standard disclosure form. For the most part the items covered are predictable, such as the age of a home’s roof or the estimated annual heating costs. However, there are a few somewhat unexpected questions on the disclosure form that catch sellers off guard. For instance, one asks simply, “Do you have knowledge of methamphetamine production ever occurring on the property?” The seller has the option of checking either “yes” or “no”, and if “yes” they are prompted to explain. While I have never yet seen a disclosure form with the box checked “yes”, it has obviously been an issue before since it made its way onto one of many pages that make up the property/seller disclosure form.

meth-lab

Here, not here

Technology makes it difficult for people to remain fully present in any given moment, giving all of their attention to those in their immediate presence. Still, in the world of real estate buyers try to select an agent that not only knows what they are doing (or seem to at least), but also one that gives them their full attention while showing them properties, writing up offers, or otherwise conversing with them.

pokemon_done

Tenant occupied

There comes a time (or two-hundred) in the life of every listing agent when they are asked to list a home, condo, or townhouse that is occupied by a tenant paying rent to live there. Many that rent a property owned by a person, versus an investor or management company, know that at some point the owner may choose to sell and they will have to move out once the lease concludes or upon receiving proper notice; however, once in a while an agent encounters a tenant that appears to have no intention of moving out. Ever. And this can contribute to a variety of complications and challenges when it comes to completing a sale of the property

On the purchase side of the equation, a buyer and their agent may be mindful of certain red flags that hint to potential purchase difficulties regarding these situations down the road. They should not ignore them, but rather they should address them directly if a buyer is interested in such a place.

tenants

That awkward question

Realtors are advised to ask buyers if they are currently working with an agent before pursuing them as a client. This can help to avoid the kind of conflict that comes with learning that the buyer a realtor thought was working with them exclusively is really playing the field and going on showings with other agents – probably without having any negative or deceitful intent (some might, but I choose to believe that is not typically the case), but because they are learning the process as they go and rely on an agent to guide and educate them.

If a buyer discloses this information outright, upon being asked, then I would think most agents would be respectful of their candor, and thankful for it as well. If a realtor asks a buyer if they are working with another agent and the buyer says “yes” then the realtor (should) know to back off and politely advise the buyer to work through the agent they have chosen, unless they decide it is not working out and both parties agree to part ways. However, if the buyer says “no” when in truth they are working with one or more other agents it can cause interpersonal, ethical, and perhaps even legal problems down the line.

That said, the responsibility to ask the question falls on the agent in terms of broaching the topic. Asking the question, and receiving an answer, provides the agent with the information needed to determine how to handle the situation, because many buyers simply do not know how the process works, or what problems some actions could cause down the line, and so they may not proactively offer the information as they do not know it is important. Most buyers are likely not trying to hide it at all; they just do not know it is critical for the agent to have that knowledge.

While asking the question during the first interaction may feel awkward or uncomfortable, it is essential, and gives the agent an opportunity to offer the buyer an explanation as to why they asked the question to help them better understand the complicated mechanics of home sales. This may also open the door to further discussions about the buying process and the buyer’s needs if it turns out the buyer is not working with another agent.

On the realtor side of the equation, it helps agents preserve relationships with other agents in the industry by respecting existing agency relationships other agents may have with one or more buyers. This is important because many agents encounter ones they have worked with before on numerous occasions – especially in smaller markets like Litchfield or Merrimack, New Hampshire – where specific agents do a lot of business in those towns. Negotiating with an agent that feels another agent has been unethical or has behaved in an unpleasant, or dishonest, manner in the past becomes exceptionally difficult and can impede a sale, or make one much harder than it has to be due to hostility or distrust among the agents. This is always best to avoid so that negotiations are focused on the best interests of the clients and not the agents.

not exclusive

And then…

not exclusive part 2