Appraisal Archives - Teton Realty Blog

Good real estate agents need to have a variety of unique skill sets and be prepared to wear many hats. Professionalism amongst our customers and peers, a skill set with respect to marketing is important, an understanding of technology is key, a general understanding of construction, home maintenance, familiarity with their area of service including government entities, code, zoning – the list goes on. One often overlooked skill is understanding the basics of appraisal (though we are not appraisers) and valuation when it comes to market data, how it conforms with the local area and it’s nuances, different valuation methods and tying it all together with absorption data and recent sales.

Most real estate agents use a comparable sales method of valuation. Basically, we look at recent sale data (that usually only real estate agents in the area have access to), and form an opinion of value based on that data. However, it runs deeper than that. Not only do we need to find the most appropriate data, but we need to make adjustments based on unique attributes of the property we are valuing. In addition, we need to look at market conditions, including absorption.

Absorption is usually calculated by looking at the number of sales in a specific time period as well as the current supply. As real estate agents, we generally measure absorption by the number of months’ supply of inventory in that particular sector of the local real estate market. We then have to look at trends to understand if the amount of supply is likely to increase, or decrease in the coming months as we begin marketing your property. It’s easy to get caught up in markets. Most recently, we saw unprecedented demand and historically low supply. We need to take this into consideration when we value property, and it’s hard to convey this information to the public. Sellers want the highest price possible. The public needs to understand that it is our job to obtain this. We have a professional duty to do so for those we represent. This is why it’s so difficult to explain changing market conditions, particularly when things are slowing. As an example, we might look at comparable sales from the past 6 months, which were historically high. Not only do we need to make adjustments for the specifics of the property we are valuing, but we also need to take into consideration the changing market conditions and the increasing supply as mentioned above.

Now, let’s take a deeper dive into absorption as it relates to valuation. If we had one month’s worth of supply (a very low number) 5 months ago, four months’ of supply today and the market conditions are indicating we may have even more in a few months’ time, we also need to manage expectations on timing. Essentially, if we absolutely nailed a valuation and properly account for changing market conditions to the best of our ability with predictions and market indicators, the home should sell at the then calculated absorption time. In other words, if on the date of sale the current absorption is about 6 months’ worth of supply, and you were on the market for 6 months, everything tied together properly. Do we want to take offers in advance of that? If it’s the right offer, absolutely. If things take longer what’s going on? Well that’s an indication that the property may be overpriced. The challenge with this? Teton Valley is very seasonal in terms of its peak sale seasons. If we wait 6 months to learn that a listing is overpriced or agree to list at a higher number because our client asks us to do so, we spent quite a bit of time on the market with conditions that are indicating a slowdown. These are the risks of pricing without basis, or based on ill advice. To summarize, it is always in a Seller’s best interest to find a professional in the marketplace (any marketplace), that understands all of the aforementioned nuances to the real estate industry. A great marketing agent that doesn’t understand local trends is not necessarily a great agent at all. In addition, it’s easy to get caught up in crazy markets, and it’s even easier to enter into a phase of denial when hoping to capitalize on your investment, which should be everyone’s goal. Take your real estate broker’s advice if they have a clear understanding of the market if it is in fact your intent to sell at the highest price.

Alright, this has been coming for a while. The good old Zestimate.

For those of you that are not entangled in the real estate community, and specifically Zillow, (an online platform for real estate agents to connect with the public, and for the public to search for available real estate) a Zestimate is basically in algorithm or program created by Zillow to automatically value properties based on other recent sales. Zillow describes the Zestimate as a proprietary formula to estimate market value.

Before diving into this, understand that I am not a fan of the Zestimate. Read on for my biased opinion on the program, and its “proprietary formula”…

I’m going to break this down into a few sections. How it works, the difference between a Zestimate, a CMA, and an Appraisal, why it doesn’t work (biased opinion) and in what circumstances you should use it.

How it works

To some extent, I’m speculating here. However, I do have a fair amount of experience with these programs, algorithms, and a general sense of how the digital world functions. That being said, here is how I think it works…

Zillow’s primary function is to utilize incoming information feeds from Multiple Listing Services (programs where Real Estate Agents pool listings) to provide a one-stop-shop for customers, (primarily buyers) to view all listings for sale in one location. Zillow doesn’t really make any money doing this. Zillow’s moneymaker is real estate agents. Real estate agents pay for advertisements to promote themselves on Zillow, hoping to connect with potential buyers. Zillow is also able to obtain information on sales as well, where multiple listing services and/or states allow it. There is so much data from all of these multiple listing services that Zillow has been able to create an algorithm for individual markets to automatically value properties based on their basic features. These basic features can include square footage, landscaping, acreage, bedrooms, bathrooms, recent remodels, the list goes on. For the most part, the real estate industry’s information data feed, referred to as a RETS feed, provides the same information Nationwide. Some areas might have a standardized feed to include amenities like pools, proximity to a golf course, and even information on local schools. Most multiple listing services provide the information on the nearest school, and I believe Zillow can pick up on this information to include it as part of the overall valuation. So, recent sale data comes in, and the subject property is adjusted based on its size, location, amenities, etc.

The difference between a Zestimate and an Appraisal

You will receive all sorts of disclaimers from Zillow stating that is Zestimate is not an appraisal. That is because it is not. You will receive the same disclaimer from a real estate agent when they provide a broker’s price opinion or market analysis. However, while market analyses and appraisals are similar in the way that they are prepared, I do not believe the Zestimate is. A sales appraisal is prepared by choosing similar properties and adjusting those “comparables” to obtain the value for the subject property. This method is how brokers and appraisers alike are trained in the industry.

As opposed to the above method, my assumption is that the Zestimate simply adjusts the subject property’s value based on its square footage or amenities. While this might seem similar, it does not produce the same result.

Why it doesn’t work

To be clear, I’m not saying that it is wildly inaccurate. Truthfully, I guess that means that an argument can be made that it does work, but I digress.

The biggest problems with the Zestimate, in my opinion, is lacking data and niche markets.

Lacking data – if you recall from above, Zillow relies on data entries from local multiple listing services to arrive at a value based on other sales and the amenities included with those sales. However, not all multiple listing services provide sales information publicly. In some cases, it is a non-disclosure situation. Idaho, for instance, is a non-disclosure state. In these circumstances, Zillow must rely on data entries from real estate professionals. Based on my own personal experience, I can tell you that not all, if not very few real estate professionals actually take the time to enter all of the correct data for a recent sale. In Zillow’s defense, they did have the initial list price data, features, and listing amenities.

Niche markets – this is arguably a bigger problem for Zillow, particularly in the Teton region. In my opinion, this valuation method works best when similar data is available across the board. For instance, tract housing.. These types of developments feature very similar homes, at very similar prices with quite a bit of data available. However, in our unique market, we often times find developments with home selling at nearly twice the $$ per square foot than an adjacent home. This can’t be good for an algorithm operating primarily on price per square foot.

Should you use it? Sure. Just remember that this is a rough guideline. Personally, I would imagine the Zestimate to be much more accurate in urban markets such as Idaho Falls such as opposed to Teton Valley for reasons above, but it can be used as a guideline. I would not advise that you make a decision to sell the farm based on your findings online…

The Zestimate – How Accurate?

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