Should I Make An Offer or List My Home Based on Zillow Estimate in NJ
by Sharleen Yuan
Buyers, sellers, and investors wonder what price they should ask or offer. As 90% of buyers search for homes on the internet, websites such as Zillow and Trulia start to provide an automated estimate on homes. You may find very different numbers on different websites, as a seller, you may even feel upset about low estimates. Lastly, you may wonder - are these numbers accurate? Before you read through the entire article to find out the answer, let me just say it here: No, it is not 100% accurate. Zestimate is just a number, but as realtors and appraisers all know, real estate value is estimated by price range, and the final transaction numbers depend so much on randomness.
Illiquid Assets Pricing Cannot Be Determined by Algorithm
What makes an asset liquid vs. illiquid? Its uniqueness, value, and volume of transactions. Stocks are liquid because each common share represents the same interest in the company, the same voting rights, and the same dividends received; value of each share is cheaper compared to illiquid assets; stocks are traded among millions of individuals effortlessly daily on trading websites. In 2018, stock trading volume is 7.3 billion shares among exchanges. Companies being traded are public, thus more news coverage, more Wall Street analysis, and people can develop algorithms that take advantage of all the public information/data to execute trades without visiting the company.
Real estate, in contrast, is unique, expensive, and not frequently traded. Homes differentiate each other by size, living space, condition, layout etc. Median home price in the U.S. is $226,800, possibly the largest purchase in one’s life. Homes do not change hands often - according to a 2011 study conducted by the American Housing Survey and published by the National Association of Home Builders, the average buyer is expected to stay in a single-family house 13 years before moving. To purchase a home, you need to conduct property hunt for several months, negotiate, have lawyers review the contract, inspect, borrow, appraise, purchase insurance, close, renovate, move in.
The point is, illiquid assets require more due diligence than getting hung up on automated numbers.
How’s Zestimate Calculated
Though Zillow does not publish their algorithm, they do disclose what parameters are used in their calculator:
Physical attributes: Location, lot size, square footage, number of bedrooms and bathrooms and many other details.
Caveat: There are more nuanced attributes that affect buyers’ decision - bathroom/bedroom size, number of sinks, finishes, yard size, renovation year, appliances, workmanship, facing etc. Simply put, Zestimate cannot tell you how home buyers “feel” about the home.
Caveat: Tax assessment is supposed to be based on arm-length transactions, but it is not always the case since some towns do not reassess every year, or sometimes they assess too high. Some owners are more incentivized to appeal the assessments to lower their tax bill, which is a good thing for the buyers. Unfortunately, lower tax is negatively perceived by Zillow, saying that the home is worth less than the one next door whose owner did not appeal the tax assessment.
Caveat: First, I somehow find that Zestimate takes listing price into account. That being said, if the listing agent overpriced the home, Zestimate overvalued too. Below is an example where two townhouses in the exact community with similar square footage and layout are valued almost $238k apart. I’ve been to both of these nice homes (btw. 181’s photos are so outdated), and highly doubt the two’s value is that far apart. Secondly, I find it interesting that Zestimate sometimes does not use the same set of comparable to price almost identical homes. These two similar homes, 181 Kensington and 142 Kensington in Fort Lee, have a different set of homes to estimate their values. I wonder why…
How Far Off Could Online Estimation Be
Zillow states that Zestimate has a median error rate of 3.5%. This means 50% home values in the area could be more than 3.5% off from Zestimate. With automated valuations, the only way Zillow could ever get to a median error rate of 4% would be in “cookie cutter” subdivisions, filled with homes built in the same year, with the same amenity, and about the same size. In neighborhoods with greater diversity of home types, ages, interior improvements and land sizes — or in nonurban areas where comparable homes and data are hard to find - Zestimate is not that accurate. New Jersey and New York are two perfect examples - older states, older houses, lots of remodeling/replacement. Therefore, Zestimate confidence is only 2 out of 5. Below is a chart showing the Zestimate, listing prices, and sold prices of three different types of homes in Edgewater, NJ, suburban area by Hudson river, ideal for commuters to NYC. It shows 1) agent estimate beats Zestimate in accuracy, 2) Zestimate’s shows less error for cookie-cutter condos, 3) the higher the price point, the more off Zestimate is from final transaction price. Here is how Zillow rates its own accuracy. You can check to see how it performs in your states.
How Do I Know My Home’s Value
The most straightforward way to know your home value is to compile sold, active, pending listings from MLS. You can also use Zillow, Trulia, and Realtor.com, but just be prepared that it is a little lagged and some listing may be missing. Based on square footage, you will be able to compute high, low, and median values.
Next step is to be less emotional about your home, and pretend you're a buyer or appraiser inspecting the home, then adjust your price range.
In the meantime, keep an eye on competitive properties. If you are thinking about listing, then consider strategies that may drive traffic to your house; if you are simply monitoring the market around you, you can reach out to a realtor in your area. If you are in the New Jersey area, my website www.BuySellLoveNJ.com provides NJ Gold Coast Monthly Market Report.
Automated estimation, such as Zestimate, can never replace personal assessment. Whether you are buyers, sellers, investors, or agents, you should not get so hung up on the Zestimate that you overlook hard facts, data, comparable sales and neighborhood demographics.