How Do I Estimate My Home's Value?

by Karina Gafford



While I’ve found that online algorithms, known as Automated Valuation Models (AVM), have undervalued my home in South Carolina, many have found the complete opposite: These AVM’s yield higher home values than a real estate agent provides upon appraisal for a possible sale. Now, if a computer tells you that your home should be priced at $250,000, but your real estate agent tells you that there’s simply no way that it could sell above $225,000 based on market comparables in the neighborhood, who are you most likely to listen to?
 
It’s oh so tempting to go with the computer’s opinion. After all, aren’t computers objective? How could their calculations possibly be wrong?
After consulting veterans of the home appraisal, mortgage, and real estate industries, however, we found that unfortunately, the computer algorithms that offer home valuations are not yet sufficiently capable of managing the many variables that go into determining a price point for the sale of a home. The only homes for which the algorithms do seem to prove relatively accurate, the experts explained, are "cookie cutter" style homes that have had the good fortune of a stable market in their area for at least three years. Even still, upgrades and lot locations can skew the numbers.
 
Yael Ishakis of the daily mortgage news blog the Ishakis Finance Report explained that even the location of a house in relation to a particular building, such as a school or house of worship can result in vastly different appraisal values. One of the greatest discrepancies he mentioned in terms of valuation changes for location was train tracks. He said, "If the house was…on the wrong side of the train tracks, the computer doesn’t know…I have seen $100,000 differences with a train tracks involved." Ouch! $100,000 is a lot of money to lose out on in a home sale just because you picked the wrong side of the tracks. Perhaps next time consider buying a home on the side closest to the station entrance.
 
Many home sellers don’t like hearing this news, though. I wouldn’t want to hear that my home is worth 10-percent less (or $100,000 less!) than I thought it could sell for. Would you? 

Most don’t. In fact, an entire TV series is devoted to dealing with this conflict between real estate agents and home sellers. Now in its sixth season on HGTV, Real Estate Intervention premieres weekly on Wednesday afternoons to highlight homeowners who must learn the sometimes hard reality of the market appropriate price points for their home for sale.
 
With over half a billion dollars in home sales, Sissy Lappin, author of real estate selling guide Simple and Sold, explains that overpricing is often a major point of discord between sellers and real estate agents. When a homeowner lists a home at a price point above what the market will typically bear, Lappin explains, she explains that this puts the seller at a competitive disadvantage, particularly when a neighbor with a similarly sized home lists at a price point commensurate with the market.
 
However, once a homeowner in a neighborhood lists at a high price, it can often cause additional home sellers to try to list their home at a higher rate, but as Lappin explains, the individual who tries to list far above market value will simply have their home on the market for much longer. In the meantime, they are losing out on the opportunity cost of freeing up their available credit to purchase a new home, or for military families who try to sell during a PCS, it means holding onto a home and continuing to pay for both mortgage and maintenance while paying for a home at a new duty station. Military families don’t have the luxury of remaining in a home while trying to sell it. Laying the cold facts bare, Lappin explains that "Homes that are overpriced typically cost the seller an addition 5 to 9 percent, and the loss could be even more if holding costs are high."
 
So, How Do The Numbers Work?
Good question. It’s irritating to look at the computer algorithms only to realize that they have serious limitations. Some of the sites featuring AVMs even self-report a margin of error on home valuations is as high as 20-percent. How can they be so wrong? AVM’s are purely limited to data; they have no idea how much your particular market will pay extra for the beautiful upgrade of hand scraped Amish wood that covers your entire first floor.
 
Casey Fleming, author of The Loan Guide: How to Get the Best Possible Mortgage, is a veteran of the mortgage and home appraisal industries with 35 years of experience. He broke down the premises upon which the AVM’s work for Military By Owner. He explained that the exact algorithms are secret, but there is a general formula understood for them. First, he said, they apply the average per-square-foot selling price of the neighborhood to each property. "Then they look at historical data on the subject property…plus the last known sale price…and then home value trends in the area." From this data, the AVM’s then extrapolate a current value for the property in question.
 
Fleming then broke down each of the limitations of the AVMs:
 
1.     Lack of Market Data: The algorithms require certain data, such as historical data and last known sale price, but this may not be available online for the AVM’s to pull from. In some cases, the public records are available online, but the AVM’s do not have access to these records when computing their formulations. This happened with one of my own homes. Further, the homes do not include any information pertaining to inspections which could reveal problems such as fire damage, water damage, general neglect, or termite damage that would detrimentally affect the value of the home.
 
2.     Over-reliance on Square Footage: According to the "Principle of Diminishing Utility," Fleming explained, smaller homes in a neighborhood typically "sell for more per square foot than a larger home." AVMs adjust slightly in recognition of this data, but not sufficiently; therefore, smaller homes in neighborhoods are often undervalued on AVMs while larger homes are overvalued.
 
3.     Delayed Information: Finally, the information uploaded into AVMs regarding comparable sales is often delayed. If you sold your home today, that information may not be available online for several months. If your market is depreciating rapidly, and you are trying to sell a home at a price based on comparable properties that your AVM results are showing, those homes may actually have sold four months ago, and your home’s value may have since depreciated. On the contrary, if you have a home in a market with rapidly rising prices, or seasonally adjusting prices, such as homes in an area surrounding a military installation that experiences high summer moves, then your home may be undervalued according to AVM comparables. If you are in such a situation, and you are pulling your AVM numbers in April and comparing them to homes that sold in December and January, then it’s likely that a real estate agent will be able to better guide you to a higher price point for your home sale.
 
At the end of the day, your home is only worth what someone will pay for it. To get a general range estimate, it’s fine to consult the available AVM’s online, but it’s a good idea to consult someone with considerable experience selling homes in your area to get a full market analysis of your property’s value. If you disagree with your real estate agent, then it’s perfectly fine to request a second opinion from another agent, or to ask for additional market comparables of homes in your area that recently sold.