Why the Rule of Location Matters in Real Estate

Why the Rule of Location Matters in Real Estate

Since I was a child I have always been intrigued by real estate, and what my parents always said “Location, Location, Location” – I have carried that lesson forward in my life, as a REALTOR and an Associate Broker in Delaware, I see examples of this rule every day, but realize that most consumers don’t really understand what that means.

The first thing to consider is the value of your time. Depending on your profession, your social relationships, education, and interests there are certain things you will find more valuable than others. Typically people value their free time, that time when they are not working, over the time they do work. How does this come into play when we are discussing real estate? It’s fairly simple really.

It matters a great deal, more so than any other factor, to better understand let’s look at an example. The best example of the rule of location in real estate is to look at any major City in the world. For this example let’s take New York City.

The location of this kitchen determines it's cost.

The location of this kitchen determines it’s cost.

I went to high school on Long Island and college there as well as in Manhattan (what most consider New York City to be, but the city proper is an area that consists of five separate boroughs – Manhattan, Queens, Brooklyn, The Bronx and Staten Island), so I speak from experience.

The closer you are to Manhattan’s primary business districts, the higher the cost is for real estate. Once within the City limits, in any community, the closer you are to public transportation the more premium is placed on the value of the real estate.

This rule follows to the commutable suburbs as well. For instance if someone worked in Midtown Manhattan (The area defined as between 34th Street up to 57th Street) and lived on the Upper East Side of Manhattan, you would have the quality of life that is most desirable to those who work and live in Manhattan. The convenience and proximity of your home to your workplace, as well as the convenience of access to Central Park, the East River, great restaurants, stores, etc. You could be at your office within 10-15 minutes with little effort or inconvenience, or expense. For this you could be paying well over $5,000,000 for a reasonably sized condo, even more for a private home (aka Brownstone).

The other end of the spectrum is the individual who works in Midtown Manhattan and lives in the suburbs, whether on Long Island, West Chester County, or a multitude of New Jersey Counties, you would be looking at 10-15 minutes from the train station in Manhattan to your office, add to that the 45-90 minute train ride, plus the drive to the train station if you don’t live within walking distance, and your quality of life drops significantly. You are potentially spending 1.25-2 hours per day, each way, commuting to your office to work. If you work an 8 hours day, that ends up eating a huge portion of your day, and therefore leaving very little time for anything else.

Most of my friends who work in Manhattan and commute leave their homes before 6:00am to get a train and guarantee they are at work by 9:00am. Then on the return home, some will stay in the city for events, meetings, meals, or just to avoid the rush hour squash of the commute, and get home after 9:00pm. To then get a reasonable amount of sleep to be able to wake and do the whole thing the next day leaves very little time to do anything else.

This is where the rule of location comes into play, and should be extremely obvious to you now. The closer you are to your place of business, the less time you have to spend getting there and back, the more time you have to enjoy the quality of life afforded you by working.

When I help my clients review their options for locations, one factor that I always try to review with them is what their goal is for their real estate purchase. We will review a list of things that are important to them in their life, and also what their goals are. Frequently people are steered toward the shiny new construction projects which tend to be a lot further from the business hubs where they work.

Everyone wants new and shiny, but most consumers don’t understand that there are more important factors in a real estate purchase than the gloss of the finish. The value of location has a direct impact on the cost of real estate because the convenience of being close to the places you want to be, or need to be, does hold a premium to many.

If you have two identical 3,000 square foot homes, what would the price difference be if you were in the Wilmington, Delaware area and purchasing in Delaware (we have quick access to Pennsylvania, New Jersey and Maryland, so I don’t want to stretch out of the New Castle County Delaware area).

Let’s say that the first house is 3 miles from your place of work, was just built in 2014, has 4 bedrooms, 3.5 bathrooms, 3 car garage and a half-acre lot. All the finishes are high end, a gourmet kitchen with granite and top of the line cabinets, hardwood floors throughout, iron banister for the stairs and cat walk, a stone two story fireplace, and architectural details throughout. The cost at the near work location is $750,000. From this house you have the option of going home for lunch.

The second house is about 35 miles away, and you have to cross the Chesapeake & Delaware Canal to get there, it is identical to the first house as it was constructed by the same builder, but in this location the cost is $375,000. Better pack your lunch – maybe even dinner, definitely a snack, with traffic, construction and congestion you will be lucky to make it home in time for dinner.

If price didn’t matter, which would you choose? Hopefully this has helped demonstrate the true value and reason behind the old saying “location, location, location”.

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.