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.

Effective Communication in Real Estate: Buyers

Most consumers don’t understand the real estate process, and why should they?  They aren’t real estate salespeople and they don’t help people buy or sell real estate on a daily basis, yet many real estate agents neglect to explain the basics of the process to their clients.

It’s like speaking another language and forgetting that there may be a need to translate the terminology and process for the client to understand.  Agency is one of those terms that isn’t clear to most consumers, and sometimes not even to agents.

When working with agents, whether new or experienced, they frequently seem to forget that the terms and terminology that they use on a daily basis are “Greek” to the consumer.   I often have to pull that agent back to the basics and work with them to establish a process to educate their clients before they ever begin showing them houses.  When we fail to do this we are much more likely to find out clients have “wandered off” in another direction.

People don’t like to admit that they don’t understand something, so rather than say “What do you mean?” they will just nod their heads and go along with the flow of the conversation or tour.  Then the following week when that enthusiastic buyer is not returning your calls, or communicating with you – you will be at a loss to explain it.  The reality is this, many real estate agents are talking over a consumers head using real estate “jargon” and “lingo” that only confuses the client or customer.

The KISS principle applies beautifully here, but it’s a hard one to remember, keep it simple stupid, an in this case the “stupid” is the real estate professional who is in the process of scaring away their client.

Here are some tips to help you keep your clients, and communicate effectively with them.

  1. Start with a Buyer Education meeting.   –  When you first make contact, whatever the method of that first contact is, be sure to explain that your process involves a first meeting at your office to explain the process and answer questions on the real estate transaction, the buying process and the market conditions and practices.Part of this process is to also make sure that they are pre-approved with a lender and have a realistic and comfortable price point set for their needs.  You are also using this time to set a series of expectations between yourself and your clients.
  2. Set Expectations and Share Explanations.  – Making sure that your clients understand that you are there to serve their needs, and that part of that is to understand their expectations of you in the process is important.  This also allows you the opportunity to dispel some of the myths and misconceptions about the process and the practice of real estate.Some expectations that  should be reviewed at your first meeting include how they would like you to communicate with them, any specific time restrictions on your practice, how they can reach you if it is an emergency, and discuss and explain your commitment to them, as well as their commitment to you.
  3. The Mutual Commitment of Buyer Agency. –  Explaining in the simplest terms what agency means is important, I find saying something like “What we discuss stays between us, I can’t discuss anything you tell me without your consent, and I am obligated to provide you with any information I learn about a property you are interested in.  I am your agent, I work at your direction, as long as those directions are legal.” is a simple and effective way to explain it.

    I also like to explain that when I am showing them properties in a certain area and price point, I am not also showing those properties to anyone else.I am making a commitment to them, in my time and business, and may be turning away other clients, because it would not be fair or ethical to create a competitive situation for them.  You also need them to make the same commitment to you, which is why you then present the Exclusive Buyers Agency (or related) agreement to your client.  They protect themselves, and you protect yourself, when all parties participate and understand the commitment of buyer agency.

    Nothing hurts more than a client “keeping their options open” after you have turned away multiple other consumers in the same market as they are in to keep their best interests at heart, only to have them wander off and buy with another agent.  It happens, and it truly sucks to be the one it happens to, especially after you commit time and efforts to helping people over many years, sometimes even helping them find resources for credit counseling, etc.

  4. Ask If They Are Working with an Agent. – I always do this, and I suggest everyone do this.  Whether I was on office phone duty, or at an open house, I always ask a consumer who seems to want to engage my services if they have an Agent.  Frequently they do not, but sometimes they do – sometimes they tell me they have not signed anything and their options are open.  I will typically ask who their agent is, offer a compliment about that individual, or if I only know the name say “Yes, I have heard of them but have not worked with them, I only hear wonderful things” (keep it positive always), and I will redirect that client back to their agent.  I will also call that agent as soon as possible to notify them that their client reached out to me, or was at an open house.  I direct the consumer back to their agent, letting them know that their agent can show them any property that I can because we all participate with one another, so they won’t miss out on anything.

    Occasionally a consumer will insist upon working with me, they don’t get along with their agent, or they like my experience better, or thing I will provide them with better service, whatever the reason, I make sure they don’t have an agreement with another broker before, and will frequently send a referral agreement to the agent they had been working with (after I get them to sign an Exclusive Buyer Agency agreement with me) after I have contacted them directly and explained the situation.   Do unto others as the saying goes. It’s shame more agents don’t operate on this same principle.  I can’t even fathom the amount of guilt I would feel if I did this to someone else. Ick.

  5. Provide Market Data.  – I use RPR for this, I will pull neighborhood market activity reports, and also general neighborhood reports from NARRPR.com for the clients. These reports include some amazing economic indicators, demographics and some very sexy data in the form of things like heat maps for a variety of indicators.  I will review a report with the client and explain what each section is about and what the indicators are.  RPR is my secret weapon in impressing, and educating my clients.

If you communicate openly, effectively and respect other REALTORS we will all see a better public opinion of our industry I believe.  As well as educating the consumer, we are also educating ourselves.

So stop talking “jargon” and “lingo” and start focusing on customer service and needs.  If we communicate better, everyone’s experience gets better.

Listing Syndication: The ‘Dirty’ Industry Secret In the SpotLight

Listing Syndication: The ‘Dirty’ Industry Secret In the SpotLight

Wow. I don’t believe I have seen drama at this level in the real estate industry since, well – a few days ago with the approval of the Zillow Group formation, or with the Samuelson Memo.  Then there is Move Corp and it’s Heavy-Weight match about to happen in the US Courts.  The drama only exists within the industry and because people WANT it to exist. Stop, everyone take a breathe – this doesn’t matter to your business if you are “doing it right” – this only matters to a very small segment of our industry, and in that case it is a painful lesson in diversification.

Listing Syndication Doesn't Matter to a Consumer a REALTOR DoesIf you took a poll of 1,000 consumers asking them what ListHub is, what this all means, they would have no idea and probably not notice a thing.  Why would they notice anything?  If a REALTOR is doing their job well, then a client would never know, a consumer won’t know either but a consumer might not find you if you spend a lot of your marketing monies nested over with only Zillow or Trulia.  This is a reason that marketing diversity is a very wise idea.

The True Effect on REALTORS
There really should be none.  In 2015 most agents have their own websites, many have a product that offer “Broker Reciprocity” feeds via their local Multiple Listing Service (MLS).  For example, I belong to TrendMLS in Pennsylvania, Delaware and New Jersey, through my IDX provider I have completed paperwork, and received Broker approval to get a direct feed from the MLS for my website with my Market Listings.  I did have three such websites at one point, but today I only have one.

The Point: ListHub Dropping the Feed Won’t be Noticed by Consumer
Or it won’t be noticed by most consumers.  What I think the problem is that Trulia had a legitimate feed, and that might have been part of the value of Trulia to Zillow, or maybe not.  Don’t forget Market Leader with RealEstate.com, this is more about PR than anything else in my opinion.   I never understood WHY ListHub was providing data to a competitor, in 2013 in Orlando I asked that question directly of some folks at the Move VIP party, when I was told that the competitors were to be at a ListHub party and event – “They are our customers and pay us for the data, there isn’t really competition” the conversation went on to cover the benefit of the business relationship.

I will add that one of the people at the table for a portion of the conversation was Errol Samuelson, and I will say Errol never said a bad word about anyone ever when I spoke to him, he was always positive and believed that competition led to improvements in the industry and offerings.   Errol was very pro-Move and Realtor.com in my opinion and experience, so the news of his “defection” to Zillow was a total shock to me.

Anyone else notice the Starbucks location PR blitz via Spencer Rascoff?  It grew some nice media legs, and a few other things in the last week, in the run up to the approval of the merger you had the media blitz of the book, then a few other small and intriguing concepts like the Starbucks relation to property value, which in my opinion was a purely a PR move to get more traction – that’s what a business does to promote itself right?  This might be another move for traction, but so far the public opinion I have seen has NOT been terribly supportive, nor positive.  Don’t discount Rascoff, he is a brilliant individual and business person, his track record speaks for itself beginning with Expedia.

What REALTORS Should REALLY be Upset About
You spend your time building your real estate business, you work hard for your Seller clients and spend time and money preparing listings for market. You spend even more time managing the listings, posting them, sharing them, marketing them, and if they don’t sell – you don’t make any money.  Lots of other people do make money from your listings, but no one asks about that.

We pay to get an IDX feed from our own MLS’s, which we also pay to be members of, and then in turn that data is moved through various systems and channels to become syndicated and shared to multiple media websites focused on attracting consumers, selling advertising to real estate professionals and selling the listing leads back to us.  This isn’t the case with EVERY MLS or Association, but the practice is a common one.  I could rant on for pages, but the MLS/Big Data topic is another blog post coming soon.

The Data is the Power
The Data is where the power is, in all industries, the more reliable and accurate it is  the better the reputation of the provider.  That is really what this entire conversation is about.  The reliable data feed that ListHub provides is the basis for the value of a media site that serves consumers real estate listings, if the data isn’t accurate then the consumer will go elsewhere, without the consumers then the REALTORS won’t pay to advertise.  You go where the business is, or should.

Agents do not understand how this business really works, it’s not about your sales and the portion of the commission, it’s about the peripheral services – the title policies, escrow companies, mortgage lenders, and so on – included in this is listing syndication, training and coaching programs, partnerships with other organizations, each and every thing your Big Broker sells you have a percentage that is most likely going right into the Brokers pocket.

That’s where the money is made in the real estate business, strategic partnerships and alignments, not in determining which website the consumers will find the data on.    ListHub saying it doesn’t want to share is fine by me, they are aligned with Realtor.com and therefore REALTOR.org and NAR, so it’s about time someone stood up for us – since we won’t do it for ourselves.

There is one other factor, the question of the idea of a National MLS – is that coming?  I believe that it is, but real estate is an ancient business with many archaic business models, it’s difficult to break the mold and truly innovate, or is it?  Behind the scenes there is an amazing tool that is available to all of us, it’s our NAR member benefit known as REALTORS Property Resource aka RPR.  The power of RPR is rather remarkable, I believe it is a preview of what we COULD have available at a National level, but that isn’t what it is about – it is about serving the needs of the REALTOR Member with a lot of AMAZING data, more amazing than any public, and many premium, websites I have seen.  Why are some MLS’s resistant to join and share the data WE provide them with our PARENT organization?  That’s a pretty good question, maybe a more important one to ask than getting involved in the ListHub/Zillow Group conversation.

Why not just work with what we have – I think a public facing side of RPR partnered with Realtor.com – combining the marketing power, and the lobby of the RPAC – consumers would have the best and most reliable quality of data EVER. Right?  What do you think?