Arizona Appraisers vs. Zillow

In my research with Chad Syverson on real estate agents, which is also discussed in Freakonomics, we argue that the current system doesn’t do a great job of aligning the interests of the agent and the homeowner. Consequently, you may not want to believe what your real estate agent tells you.

So how else are you going to figure out the value of your home? One sensible idea is to have an appraiser come and value your home before you put it on the market. Just about nobody does this, which seems strange. The following story might give you a hint as to why so few people put their trust in appraisers.

I bought my current house from someone I knew at the University of Chicago. We agreed in principle that I would buy his house before we ever talked price. We were friends. We needed some reasonable way to figure out the value of the home. We decided to bring in three appraisers, explain to them we wanted to know the true market value of the home, and take the median of their estimates as the sale price. We were surprised to find that most of the appraisers simply wouldn’t give us an appraisal. Apparently, it wasn’t their job to tell us the value of the home, it was their job to determine whether the price that a buyer and seller agreed upon was a reasonable price. I had a hard time understanding this distinction, but they wouldn’t even come out to the house.

We finally managed to get one appraiser to show up. He seemed very nervous about the task at hand. He repeatedly asked whether the buyer or the seller was paying for the appraisal. When we said we were each paying half, his anxiety increased further. Even as he looked at the home, he was making excuses about how he could not come up with a fair market value. We were so unnerved by his demeanor (and also were having so much trouble rounding up three appraisers to come out to the house) that we scrapped the whole plan and just settled on a price the old fashioned way.

Maybe I’m missing something, but it seems like appraisers have made themselves little more than a necessary and costly evil in the current home-selling routine. How did this come to pass? If an appraiser could really tell you what to list your home at before you put it on the market, just about everyone would want their services. There is no reason at all that a real estate agent should be better at knowing the value of a home than an appraiser — if they were, then the banks should ask real estate agents to say whether a price is fair! Yet, real estate agents are far more influential in determining listing prices.

Especially as the real estate market transforms with fewer homes sold via full-service real estate agents, there will be a growing unfilled niche for people who can value homes, whether that turns out to be appraisers or someone else. If I were an appraiser, I’d be trying to make sure it was me who filled that niche.

Zillow.com is one player trying to play that role. Using publicly available data, they have a quantitative model that tries to predict the value of a home. Appraisers, however, are not taking kindly to this. Recently, for instance, the Arizona Board of Appraisal tried to ban Zillow from giving their price estimates in the state. Maybe Arizona appraisers should just try to provide a service better than Zillow instead. (Of course, it is hard to match Zillow’s price — it is free.) In defense of the Arizona Board, one of their arguments is that Zillow’s estimates are inaccurate and misleading. I certainly hope that they are right on this count, because when I Zillow my own house, the value it computes is only about 60 percent of what I think it is worth, and much less than what I paid!

Maybe I should have had those three appraisers come out after all.

(Hat tip to Dan Dawson.)

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  1. nedluddsipod says:

    I suspect that the reticence from the appraisers has less to do with determining the price for you to buy the house and more with being held accountable by a bank for valuing the house as he or she did. Yes, appraisals have been rolled up into the closing costs of buying a home but a bank makes its decision, among other things, on loan to value and that’s where the appraiser comes in. (Except, of course, for the ridiculous no doc/stated income/125% of value loans and we all know how THEY are working out.)

    I live in Central California and right now appraisals are being done on dry erase boards; the maket here is dropping that quickly.

    (BTW: I am not an appraiser or RE agent but do invest in RE.)

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  2. nedluddsipod says:

    I suspect that the reticence from the appraisers has less to do with determining the price for you to buy the house and more with being held accountable by a bank for valuing the house as he or she did. Yes, appraisals have been rolled up into the closing costs of buying a home but a bank makes its decision, among other things, on loan to value and that’s where the appraiser comes in. (Except, of course, for the ridiculous no doc/stated income/125% of value loans and we all know how THEY are working out.)

    I live in Central California and right now appraisals are being done on dry erase boards; the maket here is dropping that quickly.

    (BTW: I am not an appraiser or RE agent but do invest in RE.)

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  3. hsloboda says:

    I just had my home appraised in an attempt to convert my land contract into a mortgage and get a little cash back to complete some remodeling. The appraisor ended that possibility by appraising it for the exact same price I paid for it one year ago despite numerous upgrades by me since the closing. His reasoning was that since not many homes in the area of that size had sold, there weren’t enough comparables. That makes his job real easy.

    Interestingly, my insurance company set a value nearly double on the house alone for replacement cost. I bought the house on two lots with a mobile home on the 2nd lot for $35,000 last year. It is 700 square feet. The 1989 mobile was over 900 square feet and in decent condition. I added a new high efficiency furnace to the house, the mobile had a new furnace in 2004, I added all new carpet and floor tile, and I repainted the rooms. Two homes, two village lots, 300 feet from Lake Michigan with access to beaches, public parks and marinas for a total of $35,000 that would, according to the insurance company, cost $58,000 just to rebuild the home if it caught fire, forget the mobile home and the lots! I think the appraisor took an easy out myself. You can get a car for what both my houses cost and they are NOT in bad shape. Real estate agents have similar homes listed in the $65,000 range without a mobile home added in.

    Go figure!

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  4. hsloboda says:

    I just had my home appraised in an attempt to convert my land contract into a mortgage and get a little cash back to complete some remodeling. The appraisor ended that possibility by appraising it for the exact same price I paid for it one year ago despite numerous upgrades by me since the closing. His reasoning was that since not many homes in the area of that size had sold, there weren’t enough comparables. That makes his job real easy.

    Interestingly, my insurance company set a value nearly double on the house alone for replacement cost. I bought the house on two lots with a mobile home on the 2nd lot for $35,000 last year. It is 700 square feet. The 1989 mobile was over 900 square feet and in decent condition. I added a new high efficiency furnace to the house, the mobile had a new furnace in 2004, I added all new carpet and floor tile, and I repainted the rooms. Two homes, two village lots, 300 feet from Lake Michigan with access to beaches, public parks and marinas for a total of $35,000 that would, according to the insurance company, cost $58,000 just to rebuild the home if it caught fire, forget the mobile home and the lots! I think the appraisor took an easy out myself. You can get a car for what both my houses cost and they are NOT in bad shape. Real estate agents have similar homes listed in the $65,000 range without a mobile home added in.

    Go figure!

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  5. pkimelma says:

    I think you are missing the point of what appraisers really do. When a house is being sold and a buyer has tentatively agreed to buy, the appraiser is assuring the lender that the value is acceptable given current comparable sales. That is, an appraiser does not decide the market (going up or down), but rather tries to give a justification to back the price established. He/She uses other houses in the area that have similar characteristics, but allows for some adjustment room (if the prices are going up). He/She is also supposed to look for warning signs (poorly maintained, problems, etc). A bank just wants to know that if they repossessed, they would have a chance of getting much of their money back.
    I also note that Zillow and others use information from the last appraisal of record (actual size, attributes, aging quality, etc).

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  6. pkimelma says:

    I think you are missing the point of what appraisers really do. When a house is being sold and a buyer has tentatively agreed to buy, the appraiser is assuring the lender that the value is acceptable given current comparable sales. That is, an appraiser does not decide the market (going up or down), but rather tries to give a justification to back the price established. He/She uses other houses in the area that have similar characteristics, but allows for some adjustment room (if the prices are going up). He/She is also supposed to look for warning signs (poorly maintained, problems, etc). A bank just wants to know that if they repossessed, they would have a chance of getting much of their money back.
    I also note that Zillow and others use information from the last appraisal of record (actual size, attributes, aging quality, etc).

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  7. jedberg says:

    The problem with Zillow is that they only use publicly available data. Their basic formula is to look at other homes in your area, figure out the price per square foot, apply that to your home, and then make adjustments based on other public data, like what percentage of the lot is filled with house, the size of the lot, the house’s age, if it is on a cul-de-sac, etc.

    However, they have no way of accounting for the condition of the house (how old is the roof, when was the last time the stove was replaced, and so on), or on the “curb appeal”, or the general flow and layout of the house.

    They also don’t account for areas where there are different housing tracts near each other. For example, where my parents house is, there are two tracts, built at almost the same time, but one was done with high quality everything, and the other was done with average quality. Needless to say, the high quality houses bring up the average price per square foot, which artificially inflates the average ones.

    Now, as for the appraisers, I don’t know why they won’t pre-appraise the house, but I’ll have to ask my mom, because she’s studying to be one right now!

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  8. jedberg says:

    The problem with Zillow is that they only use publicly available data. Their basic formula is to look at other homes in your area, figure out the price per square foot, apply that to your home, and then make adjustments based on other public data, like what percentage of the lot is filled with house, the size of the lot, the house’s age, if it is on a cul-de-sac, etc.

    However, they have no way of accounting for the condition of the house (how old is the roof, when was the last time the stove was replaced, and so on), or on the “curb appeal”, or the general flow and layout of the house.

    They also don’t account for areas where there are different housing tracts near each other. For example, where my parents house is, there are two tracts, built at almost the same time, but one was done with high quality everything, and the other was done with average quality. Needless to say, the high quality houses bring up the average price per square foot, which artificially inflates the average ones.

    Now, as for the appraisers, I don’t know why they won’t pre-appraise the house, but I’ll have to ask my mom, because she’s studying to be one right now!

    Thumb up 0 Thumb down 0