Real Estate and AVMs: The Deviation from Reality

Real Estate and AVMs: The Deviation from Reality

If you have been a REALTOR for more than a week I am sure you have had to overcome the “AVM Objection” or as some call it the “Zestimate Objection” from a client or consumer. Whether Buyer or Seller, it’s a fact of real estate today – the consumers trust the Zestimate far more than we trust a real estate agent. The best way to overcome the danger of the Zestimate mystique is to better understand what an AVM is and why the RVM is your best tool to help you demonstrate why an AVM isn’t the be-all-end-all of real property valuation.

I am going to attempt to keep this simple, so it’s as easy as possible for us all to embrace and master our nemesis – any AVM really, but mostly the AVM’s presented on consumer facing websites which then in turn sell advertising.  I will try to explain some of the methodology behind the process, and also the “median error” or the “acceptable” margin of error that’s in the “small print” most people don’t read.

AVM or Zestimate?
The Zestimate is a form of an AVM, so to understand it lets first look at what an AVM is. AVM stands for Automated Valuation Model. It is a computer software program that combines data which is publically available such as assessed value for taxes, public records of property transfers or sales. The program calculates a value for a property based on the data collected.

The use of AVMs began as a business tool to automate the process of valuing a real estate portfolio. Governmental organizations, high-volume mortgage lenders and Freddie Mac were some of the first to implement use of AVMs. This led to the consumer facing models of the AVM when media companies (such as Zillow) saw the opportunity to monetize the data, by presenting an AVM as a “fact” on consumer facing websites, intrigued consumers were more likely to take the “bait” and request more information, leading to the pay-per-lead model or advertising models that we are familiar with today.

The high consumer demand that began in about 2003 to know what the “true value” of real property was led to the growth and reliance upon these consumer facing AVMs. The problem with these models is that they don’t take into account the “local” nature of real estate values or the actual condition of a property, it would not be efficient to customize the AVM for each market, so a general model – frequently based on broad top level categories like zip codes – is used with a much higher “acceptable” (to the website owner) margin of error.

The problem with the use of public data is that it has two critical data issues:

  • Timeliness: There may be a lengthy delay in public reporting of property sales and transfers.
  • Availability: If there is a lot of data available the AVM can have a better success rate, whereas in an area with few sales or transfer, it can be incredibly inaccurate. In some non-disclosure states it is even more difficult to get an acceptable accuracy score.

Proving the True Value of Real Property:
AVM websites know their accuracy rate is low.  As an example, Zillow rates their accuracy on a 1-4 scale. The scale is tied to the Median Error for a specific geographical area. The AVM is run whether or not there is enough data to produce a reliable result. The Zillow AVM assumes average condition for all properties, to normalize the results. It is unable to take into consideration improvements, or deficiencies in a specific property.

Definition-MedianAs of May 19, 2015 Zillow lists that their current Media Error is 8% but then further down the page they state it is 6.9% – to read the entire explanation you can go directly to that data on Zillow.com or I will try to briefly explain what it means. If you remember “Mean, Median and Mode” from high school math, then you will understand what Median means.

Median in mathematical terms is the middle number within a particular set of numbers, this means that there are an equal amount of results before and after the median result. Without stepping into the mathematical argument of whether the median or mean is the “better” (depending on purpose) number typically when a Mean (average of the data) is calculated the Median (middle number of all available data) will be a “better” result for the desired purpose. So if you wanted to spin information to appear more accurate you might not want to go with an average, or the Mean.

Zillow-8percent-05192015

Click to view full size

Median Error Points Based on the information Zillow Provides on their Website:

  • Whether the correct number is 8% or 6.9% that means that 50% of Zestimates on properties are within 8% or 6.9% of the final selling price of the property, and the other 50% of the Zestimates are further off (above) the indicated percentage of 8% or 6.9%.
  • Zestimate Within 5% of Final Sales Price: Zillow states that rate is currently 38.4% (61.6% therefore are 6% or more off final sales price)
  • Zestimate within 10% of Final Sales Price: Zillow states that rate is currently 63.6% (36.4% therefore are 11% or more off final sales price)
  • Zestimate within 20% of Final Sales Price: Zillow state that rate is currently 83.1% (16.9% therefore are 21% or more off final sales price)

What does that mean? That means that they have a REALLY HUGE acceptable margin for error, in my opinion one that borders on inane and unacceptably inaccurate. Are consumers reading this information before they start waving the Zestimate flag? Is Zillow actively promoting their acceptable Media Error rate? Of course not. A side note, Zillow lists that they have 110 Million properties in the system, that statistics was dated in March of 2013.

How-Zestimate-Calculated-051915 (Note: I emailed Zillow CEO Spencer Rascoff on 5/19 to ask for an updated number as of May 2015, a PR representative from Zillow replied later that day inquiring what my deadline was and was researching and would get me results the next day. I did tell her I did not have a deadline but as of 19:15 EDT 5/21 I have heard nothing further, I will update with a footnote when the information is received)

The National Association of REALTORS to the Rescue!
I know I am not the only one who has had a hard time demonstrating why the AVM is not the definitive answer, even Zillow recommends that consumers consult a real estate professional for more detailed and accurate pricing and information, but people don’t read these days. So how can we best overcome the Zestimate objection with a more accurate AVM model and our area expertise? Quite simply with the RVM and RPR.

A Little History: The Birth of RPR and the RVM
In 2012 RPR became a dues-funded member benefit for all REALTORS. The development of the RVM was focused on creating a modern AVM model that could help REALTORS accurately identify, visualize and convey accurate and current market information and trends to use in their business. By incorporating the MLS data – which includes historic records, as well as the most current information the RVM has proven to be the most accurate AVM available.

As of today, RPR is showing that it has over 129 Million parcels in the data, 1.8 Million Active Listings and 222,000 distressed properties, all ONLY available to REALTOR Members.

The RVM overcomes the two critical data issues that AVMs have:

  • Timeliness and Availability: The use of the real-time MLS data via strategic partnerships with MLSs ensures accuracy that has never before been available to an AVM model.
  • Accuracy: With the RPR provided tools, REALTORS can refine an RVM to properly and accurately reflect the value of a property. By being able to make adjustments for property condition, market condition and improvements, you are then able to portray the true story of a property’s value.

RPR-129-051920
By using the RVM as a starting point, we are able to refine the value – make adjustments and present a powerful report – choosing from a few options. There are Sellers Reports (similar to a traditional CMA), Buyers Reports (which include Neighborhood data which is derived from sources such as The United States Census data showing a variety of demographics that are usually of high demand to your clients).

So the next time someone tells you what their Zestimate is, be sure to know what the Median Error is for your area, and perhaps even print a copy of that data onto a PDF and keep it on your phone to show the consumer. With the RPR Mobile application you can pull up any property and if it has an RVM you can refine it and create a CMA as well as email it to your client all while you are in the subject property.

The value of data is in the accuracy of the data, but the marketing can trump true value and lead to the “Rule of Perception” overcoming truth and creating trust. It’s a danger of the digital age. Now, hopefully, you are better equipped to handle the conversation.

The Zestimate is a registered Trademark of Zillow Group.
Source materials include The National Association of REALTORS Realtors Property Resource materials;  Zillow Group.

Expert Answers: Why Can’t I Look at a House with Stucco?

Expert Answers: Why Can’t I Look at a House with Stucco?

A question was submitted by a Consumer in Pennsylvania recently, asking a very interesting question.

“We are relocating to Pennsylvania from California. We found a few beautiful houses we really like, and want to see. We were told that our Relocation benefits would not apply to these properties because the houses had stucco on their exterior. We investigated further and were told that some of the properties we like with Stucco have had stucco inspections and even some repairs if there were problems found. Why would we lose our relocation benefits and why are we being restricted in what properties we can purchase?”

This has been an ongoing problem with Relocation clients in this part of the Country since as early as 2009, and more prominent into 2011 and beyond. It is a valid question and one that needs to be revisited.

PA House with Good Stucco

A Home for Sale in Chester County PA has stucco but has been inspected and repairs made, yet relocation companies exclude it from their buyers options. Why?

I am not a stucco expert, a home inspector, or a builder, but I have sold enough properties with Stucco, and those with known and even unknown stucco problems. Prior to 2004 the method in which Stucco was applied to many of these homes was a manner that did not permit enough air flow behind the stucco so that when moisture built up the risk for damage to the boarding or wood behind the stucco was severe. The Stucco was being applied from at, or below, the soil line which is one of the methods modified after the discovery of many of the problems with the stucco application.

The biggest problem with stucco applications of that era were really related to the way in which windows were installed, as well as where a roof line met a stucco surface. If “kick out” flashing was not properly installed water would then run directly into the stucco and over time – since Stucco is porous, the water would get behind the stucco and damage wood – or OSB boards – beneath the stucco. Where the windows meet the house, similar infiltration would occur.

In 2006 I had clients purchase a property with Stucco. During the home inspection an area where a roof line met a stucco wall had “discoloration” which was believed to be “dirt” or in some cases “moss” because the area did not get enough sun light to completely dry out the area. In 2008 that same property was then resold and that same area of discoloration was actually discovered to have extensive damage to the wall beneath the stucco, in fact a large portion of the wall was completely rotted out, and infested with a fungal growth. What was “just dirt” in 2006 turned out to be approximately $30,000 in damages, which is a relatively low amount in the world of “stucco problems”.

Most properties built after 2003 or 2004 with Stucco were done differently, with the stucco being started well above the soil line, and with ventilation strips to permit airflow beneath the stucco. Most problems were also discovered to be directly related to inadequate “kick out” flashing installation, which is relatively easy to correct.

Yet a lot of Relocation companies – those that administer relocation benefit packages on behalf of employers, include clauses in their documents for purchases and sales that completely exclude any stucco properties from consideration of the person receiving the relocation benefit. This is archaic, in my opinion, since many properties have no either been inspected, had corrective measure taken, or built after the era in question, but people – like yourself – are being told they can’t purchase a property with Stucco without risking all, or part, of your relocation benefits.

I began to ask all my Seller clients – as early as 2007 – to do stucco inspections prior to listing a property, and complete any needed repairs. I continue this practice to this day, yet my Seller clients don’t get the exposure they deserve, and the Buyers are being restricted in their purchase choices.

You can get a sense of whether an inspection might be warranted by looking at a stucco property from the distance. If you see obvious discoloration under the windows, in the area where water would flow from the window in a driving rain, or where a roof line meets another surface – then you might have an indicator that a problem could exist. Note I said COULD. The only person to determine this with definitive certainty is a qualified Stucco inspector. Stucco inspections can be intrusive, including drilling into walls to get a core sample and expose the areas beneath the stucco exterior.

I would suggest that you contact your employer directly to discuss the question of “stucco” as it is addressed by the administering Relocation provider. The employer can review the package that is offered and work with the Relocation company to address any concerns you have, and even eliminate the restriction all together.

This out of date mindset has definitely stigmatized the sector of luxury homes with Stucco finish, and many unjustly so. I still recommend a stucco inspection be completely, which can be costly depending on how in depth it might need to be, but a $1500 Stucco inspection can prevent a Buyer from ending up with a $100,000 Stucco repair which many insurers will not cover.