Right On the Money!

Why Accurate Price Estimates Are Critical to Your Home Buying Experience

It seems like every real estate search site has an automatic price estimate tool. They use algorithms that pull data from public records and the MLS (multiple listing system) to estimate prices. With all this public information readily available, it would seem like it should be easy to create an accurate pricing estimate tool. But online listings are limited, and many tools don’t take important information into account (such as the condition, updates or specific location).

Automatic price estimates would be great if they were consistently accurate. But nationwide they can be off around 8 percent. In the Chicago market, we’ve found estimates off by as much as 18 percent from the final selling price. Nor are estimates consistently inaccurate in either being too high or too low. This is often the subject of much head-shaking among agents.

“How to convince a seller or buyer that the estimate is off, and I mean way off. I’ve seen them $100,000 over or under,” said Mickey Hobson, of the Matt Laricy Group which is a division of Americorp Real Estate. “Good luck trying to make that buyer feel confident.”

A place is likely to have a too-high estimate if it’s condition isn’t optimal, or if the listing data is inaccurate (e.g. there are more bedrooms or square footage than listed). Sometimes the date of construction is incorrect in the public record.

“I’ve seen a lot of underestimates, so buyers think they can get it for $50,000 less than it’s worth,” said Jenna Chandler, an agent with the Wahl Real Estate group. “Usually because of the condition or location. For example, you might see something sell on the east side of Western for $50,000 more than the west side of Western, just by a block.”

Samuel Ciochon, an agent with Coldwell Banker, underscored this, saying, “Agents are known for trying to change the name of a neighborhood to change the perception of pricing there. That’s why they were trying to redub Cabrini Green, NoCA, or calling the Humboldt Park neighborhood ‘West Bucktown’ in listings.”

Sometimes the information added to a listing can cause confusion if the information is incomplete or inaccurate.

The truth is, real estate value is always relative, and always changing. As witnessed in the 2007-08 bubble that lifted all ships, bringing an unprecedented level of speculation and price inflation, and leading to a crash landing.

On a more local and common level, the rise and fall of neighborhoods reflect the importance of perception on value.

“When a neighborhood has buzz, gets a snappy nickname, well agents get into it, too. It’s alluring, exciting to get into a hot market,” Ciochon said. “It can really help a neighborhood take off, influencing the price in surrounding areas as well,”

Digital vs. People

Some of the top searches for agents include the words “sleazy” or “liar,” and how many horror stories have we heard about inexperienced, pressured, or just checked-out agents?

And yet we also know people who became friends with their agent.

So why do agents have such a bad rep?

“You can take a class over a weekend and get certified, so that’s lowered the bar to entry,” said Hobson.

The market has been flooded in recent years with young agents and part-timers, meaning expert agents are getting lost in the shuffle. Other seasoned agents echo the sentiment that basically a few bad apples give agents a bad name.

It can take more than a weekend to develop deep knowledge in such a complex field, so obviously, newly minted agents are coming in less experienced from the get-go.

With this in mind, why are agents so mistrusting of algorithms that predict estimates? Maybe you’re thinking, “Of course agents mistrust automatic price estimates, a tool that could replace them!”

But so far, the existence of algorithmic price estimates has not replaced agents, even if it makes their job more challenging to explain the actual value of a home to clients.

Some professions, especially those relying on ever-changing local data, tend to be a bit more resistant to being replaced by machines.

Automating what agents do is a nearly impossible endeavor. This is why, though people may slightly suspect their intentions, nearly 90 percent of home transactions still use agents in the process. That figure has been rising since 2001. Far from displacing agents, the Internet has offered them a place to increase their potential connections and referrals.

The Perception of Value

Why do pricing algorithms exist if they are so often so off-base?

Because people want them. In practice, estimates seem more like a nice teaser, but can be a misleading first-step in the home buying journey.

Estimates are like a special sauce—they are mysterious and sometimes just way off. The most-simple tools that follow a general economic index are the most conservative and accurate starting points. An agent then fills in the blanks based on local market and economy, location, condition, updates, and any other factors they’ve decided to include.

Michael Gerhardt, of RE/MAX, added, “It’s not that complicated. Let’s face it—real estate is ultimately an investment, and every investment has its cycles. I think that for now, we are over the high-highs and low-lows—prices will continue a normal, healthy rise, around 3 to 5 percent a year.”

Getting a Deal

Not all agents found estimate tools to be a problem.

Ciochon said, “I actually think they’re a fine starting point, because those buyers and sellers are still trusting agents, who really know what’s going on in the market.”

They admit that the best estimates are still guesses, too. “Everyone has an opinion,” Ciochon said, “Buyers, sellers, agents, appraisers. The right price is simply what the buyer is willing to pay. It’s more art than science.”

We keep emphasizing that it is great agents that make for great experiences. Smart, savvy, informed agents.

The je ne sais quoi they add is their insight on the range of options in the neighborhood, the situation, size, and condition of the property, how these all line up by importance, and what makes for a good (or a bad) deal. Informed by strong data, the agent has an intuitive sense that comes from deep knowledge over time.

They work on the ground, with local people (agents, inspectors, mortgage brokers). They tour their neighborhoods regularly and keep up on the market. Judging by real estate, anyway, it would seem that the deep knowledge of a field is still grounded in people. Kind of comforting isn’t it?

Emily Johnson

Emily Johnson is a writer, researcher, editor, and publishing consultant with a decade of learning in the field. For Truepad she covers real estate trends and develops knowledge base articles that help people learn about the process of buying as they’re looking for a home. She went through the process herself two years ago and is a proud homeowner in Logan Square.

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