Are online value estimates harmful?

Reader Question: There is substantial information available on the web, the library, magazines, and newspapers regarding home values. I find it challenging as to what to believe, or not believe, as the sources of the information can be vague, conflicting, or just wrong. My question is, can you amplify as to why you believe online estimates are harmful?

Monty’s Answer: Evaluating homes is a popular topic. From Freddie Mac, Zillow, Redfin, and many others provide online evaluations to their customers. Many people write about home evaluation. I do not recall choosing the word harmful, but there are circumstances where the name fits with online evaluations.

Why online estimates are harmful

While the companies offering online evaluations are working to improve their products, the information most of them provide is misleading. Here are some examples:

Price Per Square Foot (PSF).  When PSF is calculated based on the offering price of the home’s “total interior livable area,” included is any below-grade finished space. The cost of the below-grade finish (basement) is considerably less than the at/above-grade cost to complete. The below-grade area has zero expense for a foundation, floor joists, roof, exterior siding, and more than the at/above-grade construction requires. It is misleading to state that a home has 3,500 square feet of livable area for $120 PSF when 1,000 square feet of that space is sub-grade. The calculation of PSF should be on 2500 square feet at/or above-grade. Modifying the calculation will drive the PSF cost higher. Why does this matter, one may ask? A home seller or buyer unaware of the cost savings to finish below-grade space is comparing homes that are not comparable. When some of the comparables have unfinished below-grade space, those PSF costs will be higher than the comparable that includes the lower level space in the cost PSF. It is harmful not to disclose this subtle, yet significant, difference as it could cause a seller to sell for less or a buyer to overpay.

Algorithms. Many brilliant people believe that artificial intelligence will learn to perform appraisals. As a logic friend once said, “real estate valuation is part technology (algorithms), and part art form (human input).” Only time will tell, but it will be a long time in the future to be able to replace a well-trained human that physically inspects the home. Some home buyers and sellers give credence to online valuations. I believe it is a perilous decision to do so, and in some cases, harmful.

Real estate agents are using them. I hear from agents complaining about other agents using online estimates. I also hear reference to online value estimates in questions that consumers pose about their situation. There are several logical reasons for agents to do this. It is a way for the agent to layoff liability if the home does not sell or sells to quickly. It is easier and saves time compared to having to do the work themselves. And finally, some younger agents grasp online valuation because they are inexperienced. I believe it is harmful for agents to endorse programs that do not fully disclose the PSF cost difference.