Q: What is your take on online home value estimates on houses? My real estate person says they shouldn’t be paid attention to, but I think they’re pretty close. What do you think?

A: Monitoring online home value estimates is a fixation of many a Web-savvy real estate consumer. It can be more than a little addictive to watch the value of your own home, the homes in the areas you’d like to live, and even, some say, your friends’ and relatives’ addresses move up and down with the market. I strongly believe that these estimates can be useful, if you understand how they are determined, how they can be skewed, and what they should and should not be used for.

Let’s explore precisely these issues now:

1. Understand how these home value estimates are determined. Ten years ago, if you wanted to get any sort of idea what a home might be worth, you had to consult with a real estate agent (or a few, if you wanted to get to a relatively reliable number), hire an appraiser (at the cost of a few hundred bucks) or, well, sell the house! I say that because the well-accepted definition of a home’s value is entirely dependent upon what a qualified buyer would pay for it at any given moment, in an arm’s-length transaction ("arm’s length" simply indicates that it’s not an insider deal, but rather a deal between strangers).

This means that a home’s value changes over time, reflecting market dynamics like supply, demand, interest rates and the mortgage lending environment, so ultimately, any projection of a home’s value is truly only an estimate unless and until the home is sold — then, the sale price is the definitive answer of what the property was worth at closing.

This also means that the best way to estimate a home’s value is to look at what similar, nearby homes have actually sold for, as close as possible to the time the home’s value is being estimated. That’s what appraisers do; that’s what real estate agents do; and that’s ultimately what these online home value estimates attempt to do.

These websites build algorithms, just a funny word for calculations, that do their best to replicate the home value estimation process of real estate professionals, by pulling a description of your home from the public records available from your city or county, pulling other publicly available records of the recent sales prices of similar or comparable homes in your area, and making mathematical adjustments to create a rough estimate of your home’s price based on how similar or different it is from the "comparables" (especially on measurable factors like number of bedrooms, bathrooms and square footage) and how your overall local real estate market has moved in the time since those comparables actually sold.

2. Understand the margin for error and the factors that make your own home’s estimate more or less reliable. Keep in mind that the key difference between an automated online estimate of a home’s value and the estimate your appraiser or agent might provide is the fact that the latter are professionals (and humans!), with the ability to detect physical, aesthetic, condition and location nuances that a computer relying on public record data will simply never be able to appreciate. As a result, online estimates have a much larger margin of error than the estimates of human professionals typically do.

Many online sources actually provide the data on how accurate (or inaccurate) their home value estimates are on a monthly, city-by-city basis, if you snoop around in the fine print portions of the website. I’ve seen some say they are as accurate as being within 7 percent of the home’s later sale price, on average, in a given town, and others say they are as inaccurate as 40 percent or more off in a city. That would mean that on average, in a specific town, homes actually sell for 40 percent more or less than the value estimate the site provided for that same property in the month that it sold!

And that’s really inaccurate. The error potential for online estimates is precisely why most real estate agents find them to be wildly unreliable, especially when they can offer you a human, professional estimate (of course, sellers probably think that human professionals have other issues, like bias, which is sometimes true, but the subject of a different article!).

One way you can begin to assess how accurate your home’s estimate is likely to be is to understand the circumstances that impact these estimates’ reliability. Automated online estimates are more likely to be accurate when:

  • The home and surrounding homes are newer (public records are more likely to be accurate for newer homes).
  • Your home has not had many unpermitted upgrades or additions.
  • Your home is located in a tract or subdivision where most surrounding homes are similar aesthetically and otherwise.
  • Your home is located in a neighborhood, district and town where the areas within a few miles’ radius are relatively similar in school district quality and desirability to buyers.

On the other hand, automated online estimates are less likely to be accurate when:

  • Your homes and surrounding homes are older.
  • Your home and/or surrounding homes have had lots of changes and additions over the years.
  • Your home is located in an area where nearby properties vary widely in style, size, even usage types (i.e., you have single-family homes, apartment buildings, condos and commercial properties all in the same area).
  • Your home is located near the boundary of a city, county, school district or neighborhood that is very different from yours.

3. Be careful what you use estimates for. Because of these strengths and weaknesses, it’s critical that you be very careful what you use online home estimates for.

I believe that the best uses are to track movements in the value of your home and your area’s homes over long periods of time, like you might want to do if you are considering refinancing when you get to a certain value or if you want to apply to your lender to have a private mortgage insurance policy removed at a certain value benchmark.

You also might use these online estimates to determine whether your home’s value is so far off from its tax-assessed value that you should consider applying to have the assessed value reduced.

However, I don’t think these online estimates are well-used to determine the list price of your home. Overpricing is such a serious, potentially harmful misstep (it turns otherwise interested buyers off and can cost you thousands if you overprice and your home lags on the market) that I’d encourage you to opt for getting several estimates of your home’s value from experienced, local agents or even to get a formal appraisal, if your budget allows. Use these human professionals’ value estimates as the basis of your home’s list price.

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