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.

Contingent upon the seller…

Contingencies within a Purchase and Sales Agreement in the state of New Hampshire are common. When the realtor working with a buyer assists in making an offer on a home, he or she will include appropriate protective contingencies based upon a buyer’s circumstances and needs. Inspection and financing contingencies are among the most common, followed by requests for seller concessions. Appraisal contingencies are often included as well – either within the P&S or, in the case of FHA and VA loans, on an amendatory or escape clause form.

Sometimes sellers will include a contingency that makes a purchase agreement subject to something specific, such as the seller finding suitable housing. This is not all that uncommon as sellers want to know they will have a place to live by the time they close on the sale of their home and hand the keys over to the buyers. However, once in a while a seller will throw a curveball at buyers and ask for something a little less typical.

An example might be the seller requesting access to the home for a number of days following the closing to complete their move out of the home. Another possibility is they may ask to remain in the home for a longer period of time as a kind of short-term lease arrangement. It is important for buyers and sellers to understand that some of the less common contingencies come with risks that must be carefully weighed before a decision is made. Buyers and sellers should discuss the implications of an unusual or uncommon contingency within a legally binding purchase contract before they sign it.

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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

 

Home financing and other burning rings of fire

If you are embarking on the process of purchasing your first home, or already have a home and are buying another, then you are acutely aware that getting financing is a challenging, confusing, and sometimes frustrating process. As you reach the end stage you may find yourself waiting with baited breath for the lender to provide your agent with the loan commitment letter stating you have made it through underwriting. Until that time you might find yourself living in a semi-constant state of fear and uncertainty about whether or not the wizard behind the curtain – also known as the underwriter – will grant you the power to become a Homeowner.

Just know that you are not alone. Many have gone through the same thing and lived to tell about it. You can too.

underwriter

 

 

Translated: Same owner for 30 years

In the real estate business, realtors learn how to read between the lines with listing descriptions written by other agents. We learn not to put too much stock in the pictures accompanying the description because they may or may not accurately represent the home. We know the only way to find out what a home has to offer is to stand inside it.

However, this is not generally true for those not in the business. Phrases in the listing description that make experienced agents cringe may appear to new buyers to mean something positive and encouraging.  Over time buyers figure it out though – especially when they see enough homes that are really promising on paper, but turn out to be far less so in person.

A phrase that gets many new-to-the-search buyers excited over a house is this one: “Same owner for 30 years!” You can go ahead and plug in a different number of years, like 25 or 40, because the implications are usually the same. To eager first time home buyers this phrase is interpreted to mean the home has not changed hands very often and so the owners must have really enjoyed living there, or they think that because the owner has had it so long they know nearly everything there is to know about it. This is in sharp contrast to homes buyers encounter where the owner is someone that flips previously bank-owned properties and then claims they know little about the property’s history. This claim is often true when it comes to foreclosure purchases, but that does not help buyers trying to gather as much information as possible before purchasing a home. This can make the alternative of a home owned by the same person since the Dawn of Time a much more comforting prospect.

Don’t get me wrong… There is definitely value in owning a home for many decades and potentially getting to the point where there is no longer a mortgage. And some very long-term owners do update their homes consistently. Unfortunately, that is not terribly likely to be the case when agents and buyers come across this particular description because if it were there would be no need to emphasize the long-term ownership part. In that case the description would have phrases like, “nothing to do but move in!” or “this home is so much more than move-in ready!”

To an experienced agent “same owner for 30 years” usually means something very specific. It means that upon stepping in the front door you will feel as though you’ve been transported back in time many decades. It is the closest thing to time travel most people will ever experience, and you really do have to see it to fully appreciate the startling impact such an experience has on people. It is both shocking and fascinating in ways that are difficult to articulate.

But here’s the thing… Provided that a home has a solid foundation and the major systems are working properly, the biggest objections buyers have about these homes is that they are “cosmetically challenged”. This is a bigger hurdle than one might think. I have seen buyers pass on such homes that are priced well and have significant potential because the prospect of updating the home seems daunting. I have also seen these kinds of homes sell for considerably lower than they should when considering market conditions at the time. The problem is that it is hard to visualize a room with different flooring, wall colors, and furniture. For some, it is nearly impossible.

For example, here is what I would envision an older home with this description to look like, where the only major updates to the home – in decades – have mainly consisted of light bulb changes and a new appliance here and there (maybe):

outdatedhouse

It is hard to decide what room is the worst, but I’m going to go with the living room. You can’t see it in the picture, but the walls in the living room consist of wood paneling. Admit it. You’d pass on this house. Many other people would as well because it’s a lost cause, right?

Perhaps not.

To illustrate my point I went ahead and made some basic changes to the flooring, walls, and furniture. The updates I made are basic because realistically someone purchasing their first home is unlikely to have a large chunk of money set aside to completely renovate a home. Any short-term updates buyers make to the home will likely need to be within a smaller budget. Regardless, simple changes make a difference:

updatedhouse

The above is the exact same house. I just removed the wood paneling in the living room as well as the wallpaper in the other rooms. I also removed the wall-to-wall black and white tile in the master bathroom. I changed all of the flooring and added hardwood in the dining room. Fairly small and neutral changes made a difference in the appearance of this home.

The lesson here to buyers is this: Before you cross a house off your list, try to visualize whether it would look more appealing with some cosmetic changes. If other aspects of the home are in reasonable condition and you find yourself thinking you would have bought the house if only it didn’t have wallpaper from the 60s or 70s, and unfortunate paint colors, then really challenge yourself to try to see beyond those things. If you still cannot see any promise in the home after doing this then passing it up makes more sense.

The lesson to sellers is this: Cosmetic changes and updates may mean the difference between actually selling your home versus not selling at all; or getting fair market value for your home versus getting offers for $20,000 under asking price. Nothing can make the world a darker place for a seller faster than a low ball offer, and sometimes that scenario can be avoided.

Relative terms: Open concept

Today’s relative real estate term is “open concept”. Often when real estate agents, buyers, or sellers refer to a home as having an open concept floor plan they mean that specific rooms, such as the kitchen, dining room, or living room are not separated by walls. Sometimes home owners will have part or all of a wall removed in an existing house to create the feel of an open, or at least partially open, floor plan.

However, people do not always share the same understanding of what an open concept floor plan truly entails. For this reason, communication between buyers, sellers, and agents is critically important as demonstrated in the image below:

openconceptfinished