The Trouble with Free Online Home Valuation

January 2, 2009 at 10:40 pm | Posted in Uncategorized | 1 Comment
Tags: appraisal fees, data, foreclosure, Trustees Deed Upon Sale

Everyone is cost conscious nowadays.  And with the Internet, I myself do my best to find whatever data I can for free.  As an Appraiser, I pay a little extra so that my software identifies floodmaps for the homes I appraise (I can get it for free online if I really wanted to).  I pay for a sketching program so that I can quickly draw the floorplans of homes I inspect.  It then integrates with my appraisal software automatically (I could do this for free using any art program).  Onc I’ve put all my comparable sales in my report, I click a button and the software quickly gives me attractive maps of where the subject home is and where the comparables are (I could do this for free using an online mapping service).

Outside of appraising and on a personal level, I always want to get stuff for free and many people are the same way- people download music rather than drive to the store, you can call an 800 “information” phone number which sure beats paying a quarter each time you’re looking something up.  And there are tremendous tools which allow us to learn more about finance- whether it be stocks, commodities or yes, real estate.

But there are products (websites in particular) that will tell you how much your house is worth- for free.  Now as a person who makes a living by doing just that, of course I can see this as the competition and in some ways it is.  If you as a homeowner think your house is worth $500,000 and one of these sites says it’s worth $350,000 then you’d probably be angry and try to find a more credible opinion (Appraiser) to tell you that you’re right.  But if the tables are turned and one of these websites says $500,000 and an Appraiser says $350,000, then you now have an individual Appraiser to be upset with whether you are justified or not.

Now don’t get me wrong, I’ll be the first to point out that there are a lot of bad Appraisers out there- ones who have tarnished the image of the industry and who have been a part of the problem that has led to our housing crisis.  But I’d say there are more good Appraisers who have been lumped in with the bad ones.  And once someone in the mass media (financial reporting shows, politicians) generalizes about an industry, well that could be the kiss of death.

But getting back to the point of this entry- these free online home valuation tools, here’s what I’d like to discuss:

The most popular of these sites came available several years ago during the very steep climb in real estate prices.  What they do is pull data from county records within a certain proximity of your home and which sold within the past year.  This is some very basic appraisal theory in itself, and when there are a lot of sales- especially homes that are similar size, age and style to yours, then perhaps it can be a pretty accurate gauge.

But when the market was rising so rapidly, the service was actually a little behind on the true value of homes.  You’d have a house sell for $200,000 and then 2 weeks later the same exact model would sell for $210,000, and then another would sell for $225,000 only a few weeks after that.  So these models sort of learned to project out values based on the rate of appreciation that was going on.  And when I say “learned” I mean that someone programmed this into the results- based on whatever multiplier “they” decided was appropriate.  Hopefully they at least pulled their data from a reputable and unbiased source such as Case-Schiller or the National Association of Realtors.

The inherent problem was when our real estate markets started to peak and decline in 2006 and 2007.  That’s right, it’s been declining for two full years now despite what the mass media is telling everyone every night.  So as the market stopped going up, how were values determined by these sorts of websites?  Human Appraisers could see recent sales of homes say in the $350-$355k range but then there might be 3 current listings of the same home for $335k.  So what’s the true value of the house?  And how were these websites determining value?  This is a rhetorical question, because the market has now gone beyond decline…

Today, we are in such a declining market that in many areas it’s sort of a “catch the falling knife” mentality.  Just when I personally see prices so low that it looks like a great entry point, it goes lower, and lower.  So I supposed that logically, these websites can adjust their models to project out based on recent sales and whatever the decreasing percentage might be- but have they?

The newest monkey wrench in their estimates is still related to what they find in county records and it’s the Trustees Deed Upon Sale.  With all these foreclosures, homes are being “bought” by the mortgagee- so if your loan was through ABC Bank and you got foreclosed upon because you missed payments, then ABC Bank would officially be on the deed of your home.  But at least in Arizona, the bank would actually record a transaction dollar amount on what’s called a Trustees Deed Upon Sale- and this dollar amount was a privately negotiated amount with no relevance to the original loan amount and oftentimes, no relationship to current market value.  So now these “sales” prices are recorded in county records and then pulled by those free websites as sales.

Well first off, any human Appraiser who uses one of these transactions to help detemine market value of another property is flat out negligent and technically committing a fraud.  Now that I’ve libelled a certain type of individual, I will take that one step further and say that I have seen these automated valuation websites doing the same exact thing- is that good for you as a homeowner to believe your home is worth something based on faulty data?

Here’s an example of a home I just appraised.  The home is about 2900 square feet and is located in a neighborhood called San Tan Ranch- in Gilbert, Arizona.  You go to one of these sites and type in the address, and the estimate is that the home is worth $274,000.  By using the lending standards that Appraisers must adhere to, I search for similar properties that sold in the last 90 days as well as active listings of similar homes.  Once my analysis is complete- I have located a slightly larger home that sold for $249,000, one that sold for $240,000 and one that sold for $242,000.  I then find three listings of the same model for $225,000, $215,000 and $189,900.

So based on that simple data alone, do you believe that the house is worth $274,000?  Even if you’re not an Appraiser, you can easily see that it’s worth at the very most $249,000- that’s $24,000 LESS than their estimate- that’s a car, that’s an annual salary for a college graduate, that’s just flat out wrong.  So how did they come up with $274,000?  Now what if I told you that the subject house had no pool and one of the sale I used had a pool?  And one of those sites backed up to a busy street.  I’ll tell you right now that those sites do NOT take those sort of factors into consideration.

Well, first off what they did was use two sales from July and June of 2008- that’s 6 months ago. And even then, one of those sales was for $266,000- hardly $274,000.  And are they saying that home values haven’t declined in the past 6 months?  According to the National Association of Realtors, in the zip code of the property, home values have declined by 24% from Q3 2007 to Q3 2008.  On top of those two sales that they used, they had about 5 very recent sales for over $300,000- great.  But they are from totally different neighborhoods and they are  brand new homes on larger lots, and they’re one story homes (subject is 2).  Sure they’re closeby, but not really appropriate sales.  And then there were two recent sales that were of the aforementioned “Trustees Deed Upon Sale Variety” so not sales at all.  And as I mentioned earlier, I found 3 listings between $189,000 and $225,000.  Don’t those listings have any bearing on the value?  If a potential buyer in today’s market sees 3 sales for under $250,000 and 3 listings for under $225,000, then why in the world would they pay $274,000 for a similar home?  It just doesn’t make sense.

So in today’s market of cutting costs, technology still hasn’t eliminated the necessity of an Appraiser in providing accurate estimates of value- plus, you actually have recourse if you feel that the appraisal was bad.  What sort of recourse do you get with a free valuation from the internet?  I hate to sound cliche, but you get what you pay for.

Visit our website at www.advantageappraisalsllc.com, and if that doesn’t roll off the tongue, just try www.appraiserdude.com. Give me a call at 480-544-1217 if you have any questions. I look forward to working with you.

Sincerely,

George

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