One of the questions that I get from people a lot is, “Hey Ryan, Zillow (or Realtor.com, or any other home portal) says my house is worth $X, is that right?”
My answer almost every time is “No,” and sometimes I have to laugh at the values. Sometimes I’m laughing because they’re too high and sometimes because they’re too low. To understand why these are almost always wrong you have to think a little about how they work and what they are trying to do.
You see, what the developers of these value estimates are attempting to do is a lot like trying to bake a cake and only knowing a few of the ingredients and none of the quantities. They do their best to reduce a very unique product down to only a few variables like square feet, style of home, number of rooms and so forth and then apply a mathematical equation to the variables to come up with a number.
The number is wrong because it doesn’t consider everything that a human buyer considers. The smell as you enter the house, the neighbor who is less than meticulous about yard maintenance, the fact that the roof is starting to fail, or even that the relationship of the rooms in the house to each other just doesn’t work for your family. These are the kinds of variables that are nearly impossible to measure to be able to incorporate them into an equation.
The times when these valuation mechanisms work the best is when you have a house that is very similar to the surrounding homes, there are lots of sales, and there is not a lot of variation in the pricing of homes. Anytime that you throw in a wild card (like the shag carpet from 1979) the formula breaks.
These mechanisms will likely get better with time, but as for now, many times they’re not even close and my guess is that they won’t be for a long time.
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