Many consumers and real estate junkies are turning to the website Zillow and their proprietary home value estimate feature Zestimate to arm themselves with real estate market knowledge. Many Realtors face clients with a Zillow listing firmly clasped in their hand as they meet to discuss a possible transaction. So how does Zillow get their real estate information? How do they come up with the Zestimate? Understanding how Zillow works and their business plan can shed a new light on the use of Zillow in the home value process.
One hundred million homes nationwide have a Zestimate on the Zillow website. Zillow is a slick, well presented website that has brought Real Estate listing information to the consumer. The Zestimate is a feature of the website that gives an estimate of the value of a property. This information is used by some home owners to track the value of their home, and can impact decisions about selling. It is important to know that Zillow never claimed to provide this information as a substitute for a professional appraisal, and is now defending itself in a class action lawsuit in Illinois that the Zestimate is being viewed as an appraisal by the public. Zillow has always stated that the information provided is a “starting point” for determining value. Don’t forget that Zestimate rhymes with estimate.
So how does Zillow calculate the Zestimate? Zillow uses an algorithm that takes public record information to crunch the numbers. Public records include a recent sale of the subject property, tax records, permits pulled to renovate the property (change in square footage or number of rooms) and sales of other similar properties. The algorithm is not perfect, is being updated constantly. Zillow is offering a $1 million bonus to anyone who can offer the best solution to make it better.
Zestimate quick highlights:
- They do not use foreclosure properties to estimate value. Appraisers do the same as they do not represent market value.
- The more transactions on a property, the more accurate the Zestimate.
- The algorithm is a neutral unbiased model, so homeowner comments and updates are not always taken into consideration.
- Zestimates cannot be used to get a loan.
- The algorithm does not always understand nuances of a neighborhood or area. The size of the data area pulled to find the value of a home can be as large as an entire county, or intermingle newer/older construction phases in a subdivision.
- MLS does not syndicate information to non-members such as Zillow. Zillow uses a third party such as ListHub to get the listing information you see on their website. That can create a time lag with accuracy of the status of a listed property.
- Tax appraisal information used in the Zestimate algorithm may not be accurate, and can be off by a significant amount.
- Zillow accuracy is within 5% of the actual market sale value 54.4% of the time. They are within 10% of value 74.5% of the time, and within 20% of the value 86.9% of the time. The Phoenix market has better accuracy within 5% of value 67.3% of the time.
- More information is available on the Zillow website.
The top take-away is this: Zillow’s business plan is to sell ads on their website. A Realtor’s business plan is to sell Real Estate. There is no substitute for the “boots on the ground” work of a licensed Realtor. To find the market value of your property, contact a Realtor to have a comparative market analysis run on your home or hire a professional appraiser. If you want to know the latest up-to-date information on a listing, contact a local Realtor who subscribes to MLS. Realtors use MLS for a reason.
During the process of purchasing a home the residential purchase contract allows for the buyer to have a period after the terms of the contract has been accepted to go into the house to have the home inspected. In Arizona, it is normally 10 days, although it may be extended as an additional term of the contract. This is the only time that the buyer may “peek under the tent flap” and take a free look at the property. It is now that the buyer will use these inspections to determine if the condition and value of the property meet expectations set forth in the contract.
This inspection period may pass quickly, so management of the time and order of inspections is imperative. The first person to inspect should be a good reliable home inspector licensed to do this type of work. They will do a complete overview inspection of plumbing, electrical, structural, drainage, roof condition, mechanical and appliances. If qualified they can also inspect for termites and inspect pools and spas. One thing to be aware of: they cannot pull apart, cut open or dig down to inspect the home. For example: if there is evidence of a possible leak in a wall they are not allowed to cut open the wall to make sure. In addition to the general inspector, a termite inspector and a roof inspector need to follow up, or any additional inspections to follow up anything unusual found in the general inspection. These inspections are to confirm the condition of the property.
If the buyer is purchasing the home with cash, they may want an appraisal done to verify the price/value of the property. The lender for the buyer using financing will order an appraisal, but this appraisal is part of the loan process and doesn’t fall in the inspection timeline. The inspection period is the time for a cash buyer to go forward with an appraisal if needed to confirm the value of the property.
Once this information has been gathered by the buyer, the buyer decides which items found in the inspection are troubling enough to be brought to the seller’s attention, and to request the seller repair those items as a condition of going forward with the contract. This can be a delicate negotiation and both Realtors need to balance being an advocate for their clients and a mediator as well. Buyers need to realize that when they viewed the property before putting in their offer they likely built into the offer the age and general condition of the property, and the seller may have taken the condition and age into consideration when they priced the property in the first place. Sellers need to realize that an unknown expensive hidden repair (such as the condition of an air conditioner on the roof) now brought to their attention needs to be addressed. I have counseled buyer clients that a low-ball offer accepted by a seller will have little tolerance for repairs. On the other hand, a buyer’s offer close to asking will produce a buyer expecting repairs to bring the home value up to the offer price.
There are many different tools and considerations in setting the price of a home to sell. It is a fact that the seller or a real estate agent eager to obtain a listing may believe they get to set the price of a home for sale based on their needs. The truth is that the buyer gets to set the price. Anything for sale will only sell for what a buyer will pay, a seller will accept, and what a bank will loan.
To set the market price for a property agents will gather information about comparable properties in the neighborhood, evaluate the condition of the property, and consider the market conditions (supply and demand). When the lender sends an appraiser out to appraise the property, they do the same thing. Price is what you pay for a property.
How does the price impact the marketing? How does marketing a property impact the sale? Marketing needs to do two things. First, drive traffic to the property. Second, showcase the features that add value to a buyer. Once the buyer gets into the home to view the property, price and value take over. This is when the house “sells itself” or fails to deliver market value and sends the buyer to another property.
But what about value? What is the difference between value and price? If price is what you pay, value is what you get. Value is based on the buyer’s opinion of the functionality of the property. This is where the seller and the buyer may drift off the same page. What the seller values, the buyer may not. An example is a seller putting a new roof on the property last year. He thinks this has added value, while the buyer may view having a good roof as expected maintenance, and sees no additional value. The size of the lot can be another example of the seller finding value and the buyer maybe not so much. An appraiser will give $1 a square foot in value for a bigger lot, yet the buyer may be more interested in the views, location or how the home sits on the lot, not the additional square feet.
In a sellers market, when supply is low and demand is high prices will rise and value will contribute to that rise. When the buyer is paying a higher price, they will be willing to pay for value and expect it! In a buyer’s market, where supply is high and demand low, prices will decrease. Getting a great price trumps value for the buyer in this case.
Rio Verde welcomed Reigning Grace Ranch to the Box Bar Ranch as an intermediate home while their new 20 acre ranch was being prepared at 172nd and Rio Verde Drive this spring. Reigning Grace was started in 2009 by Christopher and Amanda Moore, and pairs at-risk youth with formerly abused horses to experience the life therapy both share with one another. 75% of the children in the program are in foster care or child protective services programs. Most of the horses have been rescued and rehabilitated from abusive and neglected backgrounds. Reigning Grace Ranch is a registered equine rescue in the state of Arizona.
What do at-risk kids and neglected horses have in common? Both have lost trust in those who had them in their care. How do you get that back? Reigning Grace pairs each child with a mentor and a horse. One of the first things that happens is the horse picks the child, not the other way around. Kids are placed in a circle, and the horse “goes to” the child that will be his for the 7 weeks of sessions. During the process the child along with their family learn the skills of a working horse ranch: Hard work, problem solving, leadership, self-esteem, responsibility, life skills, character development and the calming therapy of a horse.
It’s about time someone stood up for the issuer of tough love: the HOA. Lovers of the right to own property in a free society will screw up their faces at the mention of a Home Owner’s Association. Who needs someone telling you what 12 colors of dirt you can use to paint your house, and then charging you for the privilege? Maybe I want to paint my house purple, or never weed the yard, or leave my car in the driveway since I have exercised my right to exercise and my garage is a gym.
One of Home Owner’s Associations greatest values is they help the homeowner maintain the value of their property. A healthy HOA, with reasonable by-laws and competent leadership can add great value to your investment. Those home buyers who don’t want to be told what to do have the option to live in another area, and those who want a consistent experience should not fear the HOA.
Home ownership! You have found your dream home, and before you close the Title Company calls to ask you how you would like to take title. What? How can you know! If this is your first home, or your first in Arizona, this question may be puzzling. What are your choices? What can happen if you die? What about your heirs? What about estate taxes? What if you own a home with someone you are not married to? What if you and your neighbors want to “go in” to buy the vacant lot behind your houses to preserve your view and privacy? Taking title may have significant legal, estate planning, and tax consequences. You should seek legal and tax advice from qualified professionals.
Let’s get down to the fun stuff! After all this Eat-Eng, we need to burn off a few calories, and the Rio Grande offers lots of options if you like to hike, fish, golf or float the river.
Here are three hikes that start easy, and end up pretty tough: Continue reading
One can only play so much golf at 7:00 AM in the summer in the Verdes. The heat starts in May, and will end in October. The ideal strategy is to break up the summer heat stretch with a trip to a cooler climate in July or August. My favorite spot is Colorado. So I told everyone I was taking my dog on vacation, we loaded the car and headed to South Fork, Colorado.
South Fork is one of those “where the heck is that” small towns in the south central part of Colorado along the Rio Grande River. For those who are a little Colorado savvy, I tell everyone South Fork is over Wolf Creek Pass from Pagosa Springs, Colorado, or if that doesn’t ring a bell, about two hours from Durango, Colorado. All of these locations are a one day drive from the Phoenix/Scottsdale area. At 8000+ foot elevation, cool clear air, and crisp sleep-under-the-covers nights are awaiting the chronically overheated denizen of the desert. And her little dog Jay-Jay.
What activities await? I tell everyone I am going to visit my Chinese friends: Shop-Eng, Dine-Eng, Hike-Eng, and Fish-Eng. I am also blessed to have my good friends from Rio Verde here in the summer, so I have a sweet place to stay. If however, you need to take care of Sleep-Eng and Dine-Eng, let me make some recommendations: Continue reading
Happy Fourth of July! Out here in Arizona, I guess you could say everyday is some variation of a summer day. But the Fourth is a guaranteed hot one. Our summer days make us dream a little bit about our youth “up North”, wherever that is for you. Consistent 100 degree days greet us by the end of May, and do not leave until we are well into October. By time Fourth of July hits, we also start to deal with the Monsoon season. Humidity that was ridiculously low in the 3-7% range soars to the 40% range. Now I know, if you are back in the east or mid-west, 40% is a dry day. But it isn’t 108 degrees and no shade to be found along with the 40%. It’s hot baby!
So what can you do when it is that hot? The pool is an option, but even the water in the pool becomes swampy warm by July. I guess we will have to golf! Continue reading
Oh no, not a dry article about getting a loan. I promise to keep it short, and lay out the important changes to Truth in Lending Act and Real Estate Settlement Procedures Act. Yes, the government that brought you regulations to govern your purchase of light bulbs, the EPA and Obamacare has actually brought a new regulation that may actually be helpful! But it may take some getting used to.
There is evidence to support that borrowers who are not presented with clear and understandable information about their mortgage loans may not understand the risky business of taking out a home loan.
In leading up to the financial crisis, many consumers took on loans that they could not afford, and confusion about terms (when your adjustable rate mortgage adjusts sticker shock for example) piled on the risk. To add even more confusion, mortgage lenders would provide two different documents, the early Truth in Lending Statement and a Good Faith Estimate. At closing the title company provides a final Truth in Lending and HUD-1 Statement. Four different documents from two different agencies with overlapping information.
Starting August 1, 2015 here are a few of the changes: Continue reading