On Properazzi the other day, Alistair Helm penned an article: MAKING SENSE OF ONLINE PROPERTY VALUATION MODELS. Have a read. In it, he attempts to give insight into how they work, along with their value to consumers compared to registered valuers and real estate agents.
I’ve always enjoyed Alistairs analytical thinking. I respect his ability to objectively look at the data. Followed by his willingness to state his findings – regardless of who may not wish to hear them. It’s for this reason I encourage you to follow him.
I sense however with this piece he has departed from that winning formula. Maybe because he has no real data to go off? Maybe there are other reasons? Who knows? But I felt the need to balance the discussion…
Agreed. Out of all the options, Registered Valuers should arguably be the most reliable. Over and above their training, qualifications and professional indemnity, they are at arm’s length. They can, and are expected to, state their findings without regard to how the client may react (or wish those findings to be). Doctoring the valuation for their own gain, or to pander to a client’s wishes would be considered serious breaches of their professional ethics.
However, it’s important for consumers to understand that a valuers word is not gospel.
It is not an exact science. The value of real estate is influenced by so many variables. The economy, interest rates, availability of money, supply & demand factors, the price and number of competing properties for sale at the time… the list goes on. But the single biggest variable (impossible to gain data on and therefore impossible to predict) is the uniquely human element of emotion. One man’s dump is another’s castle. Ultimately “value” is an opinion.
Engage 3 different Valuers on the same property and you’ll get 3 different figures. You’d expect them to be reasonably close. In my early days of studying Valuation, the expected accuracy rate was +/- 5%. Which I’m sure is still the expected standard. Yet in reality, I’ve seen them vary wildly. Regardless of the expected accuracy, to my knowledge, there’s no data to support or prove that this is the case. Valuers are not required to measure their accuracy. Comparing their estimates with what properties actually sell for. So ultimately we don’t know, on average, how accurate or inaccurate a Valuers stated opinions is.
There are also serious flaws in using a logical process to determine what is largely influenced by emotion. In other words, as arm’s length and objective as they may be, their findings are still subject to personal bias & opinions.
They largely rely on historical data (what sold 1- 6 months ago) which is disconnected from the reality of the current market. Buyers do not dwell on what something sold for last month. They look at, compare and connect with what they can buy today.
Further, Valuers have very little data to work from. They know what a property down the road sold for. But other than basic details like floor area, land size, age etc, they have no data on its individual characteristics. Why did it sell for more than the similar property next door? Was it the BBQ area? The privacy? The decor? What exactly was it that connected with that particular buyer? And even if we could identify what the X-factor was, there is no way of accurately determining what that X-factor is worth (to that individual buyer at that point in time). Even if that data could be accurately measured, it cannot necessarily be applied to every property with a BBQ area.
Consider a recent case study, with two (on paper) identical apartments, in the same complex, selling $130k apart (by different agents) within 2 months. The only observable difference was the quality of the view. Does that mean a better view is worth $130k? Or was it that the first apartment was undersold? Or was it some other unknown factor? Let’s say it could be determined that the ‘better view’ was solely responsible for the $130k premium – can $130k, therefore, be added to every property with a ‘better view’? No. Because every view is different and every view is worth different amounts to each individual buyer.
So even for a highly qualified & professional valuer, along with arm’s length analysis of data, it becomes very much a matter of gut feel. This ‘gut feel’ is the valuers Achilles Heel. As well as having to rely on historical and patchy data, they’re nowhere near as active in the market as real estate salespeople.
2. REAL ESTATE SALESPEOPLE
Unlike Valuers, Salespeople are active in the current market on a daily basis. Not only giving them access to the most up to date statistics (what sold yesterday), but also a much better insight as to the local market dynamics. What’s in hot demand? What’s not? What the competing properties on the market are like?… etc.
Most importantly, they are more in touch with the buyers’ emotions – giving real estate agents a big advantage when it comes to the all-important ‘gut feel’.
However, they have two big failings:
- Other than some very basic training in how to prepare a Market Appraisal, I’d wager that 99% of salespeople lack the deep valuation knowledge, qualifications and analytical skills of a Registered Valuer. Making ‘gut feel’ the only string to their bow.
- They are not impartial (at ‘Arms length’). Simply because they are emotionally involved. Ultimately, their job, their livelihood is NOT to accurately value property. It’s to win the listing. If they don’t win the listing, then they can’t collect a commission for helping the client sell it. Therefore, their survival is strongly linked to the home-owner finding their ‘quote’ favourable.
It’s important for consumers to be aware of this fundamental difference.
In essence, a Registered Valuation is an impartial, qualified and professional OPINION of current market value. While a free market appraisal is a ‘sales pitch’ to win your listing.
To suggest that consumers can expect an accuracy rate of +/- 5% from salespeople is an unsubstantiated and therefore misleading figure, plucked from thin air.
Please show us the data. The proof. Show us the industry register of every Salesperson’s up front ‘quote’ compared to the actual sale price. Then let’s talk accuracy. You see just like Registered Valuers, salespeople are also not required to keep such figures. Making it impossible for anyone to know, let alone state, their true reliability.
3. ONLINE VALUATION.
Although impartial (not emotionally involved), undoubtedly their strongest card is data analysis. Those supposedly complicated algorithms crunching the numbers. Which of course is also their major flaw. As pointed out in this article:
“How can an algorithm possibly know the quality of your property’s presentation, the local market dynamics, not to mention the emotional appeal (the X-factor) a buyer may (or may not) feel for your property? It can’t.”
They lack, and always will, that sixth sense – the gut feel. They can’t possibly crank the numbers on the value of a view, the feeling of privacy, or that of the current competition. Because those numbers do not exist.
The one thing however that sets online estimates apart is that we can measure their accuracy. The numbers are transparently published for all to see. So we can, if we choose, definitively state how close to the mark they are in our local market. Which is exactly what I did for the same article mentioned above.
I analysed the last 50 residential sales here in Timaru, comparing what they actually sold for with the online estimate for those properties (From popular free valuation site www.homes.co.nz).
The results were terrible.
Only 2 of the 50 were correct. Some were close but varied from a whopping 26% Undervalued to 21 % Overvalued. In dollar terms, the worst case was wrong by $90,000. Based on those results, (in my market) computer-generated estimates are correct only 4% of the time and have an accuracy of around plus or minus 25%. That’s $25k high or low for every $100k of your properties actual true market value.
Leading consumers to believe that these Automated Valuation Models can be relied upon, worries me.
Let’s stop with all the agenda filled propaganda our industry spouts. The truth is, when it comes to accurately estimating the market value of a property, nobody knows for sure.
Valuers: are paid to give a professional and arm’s length opinion. Their accuracy rate? Who knows?
Salespeople: are there to pitch for your listing. Their accuracy rate? Your guess is as good as mine.
Online Estimates: are not worth the pixels on your screen. Their accuracy rate? NOT GOOD. Although they are great ‘click bait’ for consumers. Which, let’s be transparent, is the real reason they exist. Once the portals have consumers eyeballs, they then have leverage to attract and convince their real target market (and source of income) – the real estate industry. “Look we have the most consumers eyes – you’d better pay us to access them.”
My conclusion and advice to consumers would be:
- Open your eyes. Be aware. If it’s free – it’s bait. You’d be wise to treat it as such.
- For an arms length professional opinion – engage a registered valuer.
- When it comes to real estate agents, take their appraisal with a grain of salt. More importantly, talk to them about how they will help you keep the most from your sale. This has nothing to do with their quote. It’s about avoiding costly mistakes that rob your equity. It’s about getting the process of selling right. Having a proven and documented approach. It’s about strategy, smart marketing & skilled negotiating to ensure you get the absolute best price possible. While at the same time working efficiently to minimise your selling costs. “Smart sellers understand there is a big difference between an agent telling you a high price, and actually achieving it.”
- Online estimates? Other than ‘click bait’ is just an interesting (but potentially misleading) thing to do on a Sunday evening. Please ignore them (along with your Rateable Value) – although we all know you’ll take a peek.
A final note regarding AVM’s.
Along with Rateable Values, they are adding another layer of confusion in the marketplace.
If the portals are not careful, by focusing on click bait and supposedly good information for buyers – they may very well alienate their true clients – the home-sellers. As an agent, it annoys the hell out of me (& many of my clients) how the portals (without permission from our client) display their wildly inaccurate “Estimated Value” alongside our clients’ property advertisement (that the clients or agent are paying for). Often conflicting with the asking price.
And what about “No price marketing”. The property owners have chosen to use a strategy that does not transparently display a price. Yet there is the AVM for all to see. Kind of defeats the purpose don’t you think?
Now sure, the portals have their disclaimer “It’s just a guide” but we all know many un-informed consumers ignore the disclaimer & read the AVM as gospel.
Anyway – enough of a rant for today. Would be interested in your thoughts on all this.