Should You Trust An Algorithm For Your Home’s Value?

Zillow Takes One On The Chin

In case you’ve been living under a rock lately and haven’t heard, Zillow is getting out of the home-flipping business. They recently announced they would no longer be involved in purchasing and reselling homes and they would shut down the Zillow Offers service.

Should You Trust An Algorithm For Your Home's Value

Their announcement was a shock to those in the real estate industry because they have been so prominent for the past fifteen years. They lead the way with their groundbreaking Zestimate, however, when the rubber met the road and the company needed to rely on their proprietary algorithm to make buying and selling decisions it came up short.

Their lagging 2021 third-quarter financial results indicated that predicting and forecasting home prices was more difficult than they had anticipated. While any appraiser worth their salt could have told you that the Zestimate wasn’t worth the paper it was written on the company had to see it for themselves.

How Reliable Is An Algorithm?

I’m not here to beat up on Zillow but instead to discuss the reliability of their algorithm and other AVM’s that purport to be able to accurately predict the value of a home without going into it or having accurate data about it. While big data can be helpful in certain situations it is difficult to predict with any amount of reliability the market value of a specific parcel of real estate.

Over the past several years the banking and lending industry has moved to utilize more appraisal waivers to speed up the loan process. If a property qualifies for a waiver the traditional appraisal process is bypassed and an AVM is utilized to arrive at the value of the property.

The bank AVM is very similar to the Zestimate in that it utilizes proprietary algorithms to predict the value of a home. It could be argued that the bank’s AVM may be slightly more reliable due to the fact that their physical data on the house may be more accurate than Zillow’s.

This is due to the fact that Fannie Mae and Freddie Mac have been mining appraisal data from reports they have received from appraisers over the years, much to the displeasure of appraisers. This data, while current at the time the boots on the ground appraiser visited the house, can change with home renovations and updates, thereby injecting inaccurate data into the algorithm.

Beware The Waiver

As a homeowner, you have the right to get the most accurate valuation of your home. This is not always the case when a waiver is used andShould I Get A Property Inspection Waiver you could be missing out on getting the maximum amount of equity out of your home.

When banks decide to utilize a waiver they are making a business decision for their company. While they claim it is to same the consumer time and money, which it may, their ultimate goal is to increase their bottom line by not paying for a traditional appraisal.

An AVM done by the bank may help them make a loan decision but it may not provide you with an accurate market value for your home. Their analysis may only provide them with the information they need to structure the loan.

There are two key questions you should ask yourself. Do you want the bank to utilize an AVM that may not even give you the market value of your home and do you want to trust the AVM to make a loan decision when they have been proven to be questionable as in the Zillow scenario?

It’s interesting to note that several years ago Zillow held a competition to help increase the accuracy of the Zestimate. It was open to anybody who could help fine-tune their algorithm.

Zillow ended up paying a team one million dollars for their efforts but alas it didn’t seem to help the company with their Zillow Offers Service. No matter how sophisticated an algorithm is it pales in comparison to having a live person look at a home, measure it, and apply human reasoning with statistical data.

As my appraiser friend Ryan Lundquist recently said when quoted on Money.com, “Zillow (or any AVM for that matter) can’t smell if twenty cats live there”. So if you are interested in getting the most accurate valuation of your current home or one that you are buying you may want to consider an appraisal by a living breathing person as opposed to a computer program that doesn’t know everything about a property.

Question

Do you have any further questions about how an appraisal by a human is far superior to one done by a machine that may have a faulty algorithm? Leave a comment below and as always thanks for reading.

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Comments

  1. Amen to this Tom! Maybe, just maybe people and lenders will finally take Appraiser’s expertise seriously and just hire us to do the job. For a measly few hundred dollars they can save themselves billions of losses by using flawed estimates. Just goes to show you, you get what you PAY for! Stop trying to save money because you will LOSE money in the long run by not hiring Appraisers to do the job they alone are trained to do.

    Love the Cat reference by Ryan. So true!

  2. I’m anxious to see how the public responds to Zillow. People love the site. Will this damage Zillow’s reputation or be no biggie?

    • I personally think it will not change the public perception of them. People have been told how inaccurate the Zestimate is and this proves it. They are well known for their listing site and sales stats which appear to be well received by the public.

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