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.

Real Estate Social Media Outsourcing: Simply Social

Real Estate Social Media Outsourcing: Simply Social

Maya Paveza Real Estate Social Media ExpertIt’s time to announce the latest development for EstateSocial and Maya Paveza (creator of the mayaREguru brand and persona).

Over the last few years the frequency of the request for help “outsourcing social media for real estate” has grown exponentially, and we are now going to meet some of that need.

EstateSocial will start taking reservations for market positions for real estate agents to purchase exclusive rights to have Maya create their content and socialize their real estate business. This will include daily account management, content posting, and even monitoring of potential leads in your market on social channels. We will also “engage” with your audience on your behalf after creating an agreed upon “tone” and “voice” for your social media presence.

Maya Paveza is recognized as one of the thought leaders in social media for real estate and, quite literally, wrote “the book” on social media for real estate in 2009. The NAR CRS Designation selected Maya to present Twitter for Real Estate, she also have presented social media for the IMSD Designation, Active Rain and spoken at numerous conferences for the real estate industry, as well as general social media conferences on the topic of real estate including multiple Coldwell Banker Social Media "RockStar" Panel 2011140Conferences with her friend Jeff Pulver. In 2010 Maya and Human Business Works, a company created by Chris Brogan, created and launched TheHipRoof – a real estate social media educational community (now offline and dormant following Maya’s 2011 ice skating accident in which she broke her hip and arm and was sidelined for more than 18 months).

“I have resisted the demand, under the misconception that outsourcing wasn’t the right way to do it, but with my physical limitations I now need to re-examine a lot of things in my life and my focus. I realized if I really wanted it done right, and to protect the truly qualified and differentiate between the real experts and the masses of “pretenders” who are after the real estate industry like sharks in a feeding frenzy it was time to act. That inspiration came from a recent conversation with my friends Whitney Hoffman and Gloria Bell which reminded me and reignited my joy of social media, we are passionate about social media so rather than fight “the pretenders”, it’s better to be out there and be accessible and affordable, it’s a choice, and it’s about love of the medium and the industry” said Maya in a recent interview with a media publication (not yet published), “I can’t do the day to day activities I used to as a real estate agents, and as hard as I have fought to return to training and coaching, I am getting an enormous push-back because my business isn’t where I was – when I was the #1 Agent in the State for a brand – I am physically unable to do that now. The time offline took me out of the public eye enough to focus on my family, priorities, some consulting work, and to realize I just really enjoy creating and curating content, so why not do it for others and make it accessible, truly affordable and really good quality content curation and engagement, I mean who else has the experience I do – I actually am a REALTOR, an Associate Broker and Salesperson, not some marketer who is targeting the industry, I was in advertising, marketing and technology before I changed my focus to real estate, but it has been my passion – along with technology since I was 10 years old. I am extremely excited to start and looking forward to collaborating with some of my favorite vendors!”

The packages are currently in development, as well as the market definitions but we guarantee that original content will be exclusive to you in your market space and that content will include an original blog post once per week, content curation and sharing on the following platforms Twitter, Facebook, Instagram, Pinterest, Google+ and more, all created and implemented by Maya Paveza herself.

It's all about the friends you makeA focus of all content will be to build organic search engine optimization and reach. The first packages to be offered will be for agents direct to consumers, with future packages for brokers who are focused on recruiting.

Packages will be priced below $500.00/month with a weekly blog post, 4 original Twitter posts per day, 2 times daily Facebook posts, and additional posts on the other platforms. There will be a one time set-up fee to create and/or optimize social media accounts.

For more information email maya (at) mayapaveza.com

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.