Should You Trust Online Home Price Estimates?

Blog posted On October 13, 2021

In the age of Zillow and Zestimates, it can be difficult to discern what’s real and what’s not. Online home price calculators like Zillow’s Zestimate tool and Redfin’s Estimate calculator can give you a rough idea of how much a home is worth. This can help sellers get an idea of their market value and buyers determine what’s in their budget. However, it shouldn’t be the sole factor influencing your sales price or home offer.

What determines a home’s price?

Some common factors that can help an appraiser or real estate agent determine a home’s value include:

• Historical sales prices – Real estate agents and appraisers will often look to the previous sales prices of a property to estimate its increase in value.
• Supply of homes on the market – The more homes on the market, the more choices buyers have, and the less power sellers have to raise the price of their home.
• Demand of home buyers – If home buyer demand is booming, then sellers have more power to raise the price – especially if there are fewer homes on the market.
• Home size and condition – Price per square foot is a good guiding factor for a home’s sales price as well. Newer or well-maintained homes are often priced higher than older homes.
• Location perks – Is the home in a good neighborhood? Does it have a good school district? Is it nearby grocery stores? Does it have easy access to highways? All of these factors can have an impact on home price.
• Prices of comparable homes – Comparable homes are homes in the neighborhood that have similar features.

How are online home price estimates calculated?

There are a few main components that most databases consider when calculating a home’s price:

• Local real estate databases
• Sale records over time
• Property records
• Tax records

However, each online company has a slightly different approach to home price estimates. Anna Bahney, real estate writer for CNN, compares home price calculations to a “special sauce with its own secret recipe.” While the main calculation ingredients stay the same across different company platforms, there are small variations from website to website. Unfortunately, these ‘small’ variations for the sites are not so small for you. While one site might price a home at $400,000, another could price it at $412,000. The median accuracy for online home price estimates is typically 2% to 3%. For a $500,000 home, that’s a $15,000 margin of error.

What online home price estimates miss

Though online home price estimates are becoming more accurate, they probably shouldn’t be your sole source of information. For most buyers and sellers, an online estimate is a good starting point. But there are certain situations that technology can’t always calculate. For example, if home prices are appreciating at a rapid pace, then it can be hard to make accurate price predictions. “It is a more challenging environment to value a home," said Krishna Rao, vice president of analytics at Zillow. "There is a wider range of outcomes for any sale.” A home in Maryland with a Zestimate of $843,000 was listed at $550,000. This is because it needed at least $200,000 in renovations and upgrades. One week later, the Zestimate fell to $608,149 – likely taking into account the listing price. The online estimates aren’t always able to access information on a home’s condition, location, or natural lighting. "We are working on all sorts of data about your home but we don't have as much clarity about the inside," Rao said. "Like the layout. We may know it is three bedrooms, two baths, 1,700 square feet. But where they are and what the light is like in the kitchen matters a ton for the value of a home."

At the end of the day, online tools can predict a lot, but they can’t replace a human real estate agent or appraiser. "The [online] models can get a lot of information, but you can't have a robot go inside your house," said Anders Ibsen, an agent with Windermere Professional Partners in Tacoma, Washington. “They aren’t bad tools,” Anders said of the online calculators. “They just aren't all-knowing tools [either].”

If you’re selling or shopping for a home and would like to connect with a REALTOR^®, let us know. We would love to share our reliable recommendations.

Sources: CNN