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.)