You’ve started the exciting process of searching for a new home, and as your real estate agent walks you through potential properties, you might notice that some of the listing prices vary by quite a bit … which may cause you to wonder just how the seller’s listing prices are calculated.
Why is one house priced lower than another, even though it has more bedrooms? Why is the one located in a particular neighborhood, but otherwise seemingly ordinary, at the top of your budget? How do you know that the listing prices on a house are accurate, and is there any way to research a home’s potential value yourself?
The short answer is — yes! There are free online valuation tools that you can use to see what a house might be worth. You’ve probably even seen these estimates when you look at listings online, and the difference between that online valuation and the home’s sales price can be pretty substantial. These types of valuations seem like a handy way to check a home’s sale price against the value, but how accurate are they?
We’ve investigated online appraisals, speaking to qualified real estate agents and experienced appraisers for insight into how free online appraisals work and how they differ from a full appraisal conducted by a licensed professional.
Let’s take a look at just how these free appraisals work, and whether this type of valuation has, well, any value!
What is a free home appraisal?
Free home appraisals, sometimes referred to as automated valuation models (AVMs), calculate the value of a house based on an algorithm that factors in other houses of similar size and age that recently sold in the same region, as well as geographic data, such as flood zones and neighborhood walkability. Getting a value can be as easy as plugging in a property address.
Because these online valuations are free, it can be tempting for both buyers and sellers to try to use this kind of assessment when trying to figure out what a house is worth. But does the modern technology of these automated appraisals take into account everything that should be considered when determining the value of a home? According to the experts, not necessarily.
Where do free online appraisals get their data?
When you plug in the property information for a free home appraisal, the data is calculated by the specific algorithm created by that particular site. That’s why you might see slightly (or sometimes more than slightly!) different home valuations on different platforms — and those values can change quickly, sometimes in as little as one day.
The algorithms pull information from recent home sales in the immediate area and use homes that might have the same number of bedrooms and same overall square footage, even if they don’t have anything else in common with the house you’re investigating. Some algorithms also calculate value based on average sales in a particular area — which, especially in older neighborhoods where not every house has the same floor plan, and many homeowners have made major upgrades, may be inaccurate.
Veteran Nevada agent Daryl Hanna, who works with over 65% more single family homes than the average agent in his area, says that while these algorithms do usually base their data on location, home size, and recent sales in that area, they can’t factor in any of the important details about the house.
“With an AVM, that algorithm isn’t standing inside your home,” he says. “It doesn’t consider upgrades, where the house is located in a neighborhood, or if it’s near power lines or a busy street. It’s like throwing a dart within a one-mile radius.”
Who does free appraisals, and when did they become so popular?
The advent of online real estate services, which started to become common in the early 2000s, meant that homebuyers could peruse available homes for sale on their own, and sellers also had a greater ability to try to sell their home themselves. Many of these sites started providing AVMs on properties, and today, most sellers will at least look at the online valuation of a property when deciding on a sales price, and buyers will often start their house-hunting process via computer.
According to appraiser Paul Rowe of Rowe Appraisal Group in Chicago, AVMs aren’t a completely new creation.
“I’ve heard older appraisers talk about them, and they were used by tax assessors upwards of 30 years ago,” he says, “but modern AVMs and their relevance in the real estate market is definitely new.”
Online sites that offer free home valuations include:
- Zillow: Creates online values, or “zestimates” for consumers and provides search engines for house hunting across the U.S.
- Redfin: Redfin gives an estimated value based on the home’s address, and offers details such as neighborhood walkability.
- Trulia: If you plug an address into Trulia’s site, you’ll get the average listing price of other homes in that area.
- Realtor.com: You can get an estimated property value, as well as information on property tax assessments and median home prices nearby.
- Eppraisal.com: This site gives their own free home valuation, as well as showing the Zillow zestimate for the property as a comparison.
HomeLight’s home value estimator also provides free online appraisals to help you find out what your home is really worth. Simply answer a few questions, and we pair your answers with housing market data from multiple trusted sources.
Our estimate includes real-time bids from investors to help determine value, and while we always recommend a full market analysis from a top agent, our online valuation is a great place to start!
Why is an accurate home valuation so important for buyers?
As a buyer, getting an accurate valuation for your home purchase not only ensures that the house is priced fairly for the current market, but also that you aren’t overpaying. In a seller’s market, it isn’t unheard of for buyers to end up paying more than the list price on a house, and in these situations, the current value of the house might actually be less than what the buyers agree to pay.
Your home value also affects things like:
- Homeowners insurance: Your insurance cost is based on the replacement value of the home, so having an accurate valuation will ensure proper coverage in case of damage to the home.
- Estate planning: Buying a house is often one of the biggest purchases we make in our lifetime, and knowing how much your house is actually worth will help when planning for retirement or preparing a will.
- Resale or investment plans: If you think you might sell your home at some point, you’ll want to have some idea as to whether or not your house has equity already, and how fast that equity might grow.
- Home improvement loans: Some buyers might purchase a home that needs work, and decide to get a home renovation loan, or HELOC, on the house to pay for any improvements. The caveat is that you must have a certain amount of equity in the home in order to cash out that equity, and an accurate valuation might mean the difference between being able to qualify for that home improvement loan or not.
I work with a lot of sellers, and when they are getting ready to list their house they always start online with a free valuation. The problem is, depending on the algorithm used for that particular AVM, these online estimates can vary widely.
- Sandy Jamison Real Estate AgentCloseSandy Jamison Real Estate Agent at Tuscana Properties Currently accepting new clients
- Years of Experience 18
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The potential downsides of online appraisals
San Jose real estate agent Sandy Jamison, who has more than 17 years’ experience in the industry and works with 86% more single-family homes than the average agent in her area, says that these online estimators can be “largely inaccurate.”
“I work with a lot of sellers, and when they are getting ready to list their house they always start online with a free valuation,” she says. “The problem is, depending on the algorithm used for that particular AVM, these online estimates can vary widely.”
Jamison says clients are often confused by automated valuations, and it is up to their agent to explain why using the number they see online isn’t necessarily the best way to set a sales price.
“I often have sellers call me, saying that the online estimate on their house has increased and they want to raise the price. And buyers will look at the lower end of these valuations and want to offer less for a property,” she says.
“But it’s important to properly analyze the data and really look at the true value of the home.”
Hanna adds that buyers should understand that there is a reason why banks require an appraisal from a licensed professional. “The home’s location, upgrades, the condition of the property — all of these things impact value,” he says.
Like Jamison, Hanna has also worked with sellers who wanted to base their listing on a price generated by an AVM, and he has to explain to them that most of the time, it’s not doable.
“It’s a waste of time to try to sell a property that is [extremely] overpriced,” he says.
Hanna says if an AVM is only slightly higher than what he determines the property is worth, he’s okay with pushing the price a bit, but only if the seller agrees to lower the price of the home at a certain point if they aren’t getting offers. “If we aren’t getting any offers, it’s priced too high,” he says.
How AVMs fall short
In addition to not being able to see things like upgrades or overall property condition, AVMs usually base their automated comps on sales in the immediate neighborhood. An appraiser is going to not only look at recent comps in the area, but also similar homes in other nearby neighborhoods. An AVM isn’t going to be able to research comps in the area and decide which ones are most relevant, whereas an appraiser takes much more into consideration than just the selling prices of the comps.
AVMs also can’t factor in variables like an income-based valuation, a type of appraisal often used by investors. An income-based approach to a property estimates the value based on the amount of income (rents) it might generate. If a buyer is purchasing a multi-unit property like a duplex, using an AVM isn’t going to provide an accurate estimate of value.
So what’s the difference between an online appraisal and a full appraisal?
While an online appraisal generates a quick automated calculation based on various algorithms, a real-time appraisal conducted by a licensed professional is much more involved.
Rowe says there is a world of difference between online valuation calculators and an appraisal conducted by a person who physically goes to the house and walks through it, looking at things like upgrades, home condition, unique elements of the home, and then thoroughly reviews comparable properties.
“There’s the scientific aspect to it, where we use the tools we learn in appraisal school to determine value,” he explains. “Then there’s the art of it, which comes from experience, understanding the market, and determining which components of a house you’ll give the most weight to when doing your evaluation.”
A full appraisal is also going to be required by mortgage lenders because it tends to be the most accurate way to verify that they aren’t loaning out more money than the house is actually worth.
“Most lenders want standard appraisals using the sales comparison approach, which uses recent similar sales and adjusts for differences within those recent sales,” Rowe says. “We look at all these different units of comparison, then have to decide which ones have the most weight.”
The sales comparison approach involves reviewing other recent home sales in the area, often referred to as “comps.” Jamison makes sure to discuss the appraisal process with her clients.
“I tell them: The appraiser is going to look at the best three sales within a mile radius and three listings that are the closest match. Then they are going to look at different variables to establish value,” she says. She adds that she also shows clients comps in their area so they can better understand how the process works.
Depending on where you live, an appraisal will usually cost between $350 and $500, which might seem like a lot when you can do an online estimate for free, but according to Rowe, there’s something to be said for the old adage about getting what you pay for.
“There’s an allure to AVMs because you can just plug in the info, but they are kind of a black box,” he says. “You don’t know how they come up with their value, and even a 5% discrepancy can mean a potential difference of thousands of dollars. That’s a big gap, and it could affect the sale of the home.”
Rowe adds that appraisers are, by law, unbiased third parties. They are required to tell it like it is, and, coupled with advice from an experienced agent, the appraisal process is still the best way to determine a home’s current fair-market value.
“This is the biggest investment of many people’s lives,” he says. “It’s not worth trying to save $500 by using algorithms that you might not be able to trust.”
What an appraiser does that an AVM can’t do
When an appraiser does a valuation on a property, it not only means looking at neighborhood comps, but multiple other factors pertaining to the home.
Items an appraiser reviews may include:
- Roof gutters and siding
- Whether or not the house is on a slab or has a crawlspace
- Drainage and evidence of any water against the foundation
- Condition of landscaping and curb appeal
- General exterior condition and maintenance
- Measurements of interior to confirm square footage
- Upgrades inside the house, such as countertops or appliances
- Flooring condition
- Location of home within the neighborhood
- Number of bedrooms and bathrooms, garage size, lot size
- General layout and floor plan of the house
Ryan Lundquist, a Sacramento-based appraiser with nearly 20 years of experience, says that he finds it important to look at a house through the eyes of a buyer, and he tries to consider every aspect of the property. “I start from the outside and then move inside, and I’m looking around the whole time,” he says.
When reviewing comps, Lundquist says that his goal is to find properties that are similar enough that the house could be a substitute for the house he’s appraising. “If the buyer wasn’t purchasing the house I’m appraising,” he says, “I ask myself if they would buy the house I’m using as a comp.”
Lundquist calls this a “substitution of value” and says it’s an important part of finding a good representation of the home in question. He says he also looks at current listings and pending sales in order to find the best comparisons.
While most of the best comps will be more recent sales, Lundquist adds that in some situations, he might look at older sales. “If it’s a very unique home, I might use an older sale as a comp,” he says. “There’s no rule that you can’t use something that is older, but you have to account for how the market has potentially changed since the home last sold, and adjust accordingly.”
Lindquist also cautions homeowners who want to base their sales price on any and all homes that recently sold near them. “Sometimes owners look at every sale and call them comps,” he says. “A comp is actually comparable. You can’t hijack a sale from down the street and call it a comp, when it’s really not. You need to keep it real and consider which comps an appraiser might actually use.”
Other types of appraisals
While free online appraisals and standard full appraisals are the two you’re most likely to hear about when discussing home prices, there are some other tools that can help in calculating value.
BPOs and CMAs
When an agent lists a house for a client, they will help determine a competitive sales price by doing a comparative market analysis, or CMA.
The agent reviews available data of similar homes in the area that recently sold, and then based on factors such as upgrades, age of property, and how well it’s been maintained, the agent helps their client decide on a listing price. This differs from an online valuation in that the agent actually sees the house they are evaluating, and can therefore factor in everything that adds or detracts value from the house.
Similarly, a BPO, or broker price opinion, also provides an estimated valuation of a house, based on recently sold homes that are comparable in size, age, and upgrades. A BPO is considered a more concise version of a CMA, and in addition to being a tool for homeowners to use, it is sometimes used by banks or lenders in lieu of a full appraisal when estimating the value of a bank-owned property.
Jamison says these kinds of home valuations are an educational process for both buyers and sellers.
“We have to explain why we came up with the value that we did, and why one house might have a higher value than another,” she explains. “One house might have a pool, which is going to mean a higher value, or have a lot of upgrades that another, similar house doesn’t have.”
Hanna adds that when he does a CMA for a client, his extensive experience in the Las Vegas market is put to good use. “I’m from Las Vegas, born and raised,” he says. “I know the neighborhoods, and I make sure that the comps I’m looking at are actually comparable.”
Some appraisers may use a combination of online data and third-party inspections, alongside a physical inspection of the home. This is called a hybrid appraisal, and while it’s similar to a standard appraisal, usually at least some of the information used to calculate the home’s value is taken from online technology.
While there is some debate within the real estate industry about their accuracy, hybrid appraisals are not uncommon in today’s market. Rowe says their company does them, but notes that hybrid appraisals do not use AVMs to determine value.
“Our hybrid appraisals involve one person doing the inspection and another doing the analysis,” he says. “We do get a lot of our data online, but not from AVMS. We review MLS listings, online county assessor records, and mapping tools, but typical AVMs are not very useful to us.”
How you can utilize an online appraisal
While an online home valuation might not be as accurate as a full appraisal or even a CMA, it can still be worth your while to take a look at them, as it can help give you an idea of what the home you’re looking at is potentially worth, as well as the current overall housing market.
Make sure you review more than one online estimate, and examine the property details and data for each tool; different data inputs will help explain discrepancies. You’ll also want to be aware of how different the results can be with various online calculators, and avoid trying to create some kind of average valuation of the house in question.
Most importantly, talking to an experienced agent about which of these online tools might show the closest correct value is key when it comes to utilizing a free online appraisal. Your agent will help you find a property you love, with an accurate sales price to go with it!
Header Image Source: (Zac Gudakov / Unsplash)