Home Valuation – Who, What, and How

June 29, 2010


Comparing Apples to Apples

Comparing Apples to Apples

I recently spoke with a long-time client who is considering refinancing their home to take advantage of today’s low interest rates. The client had called her mortgage banker to start the process. Her northwest Chicago home was purchased in May of 2004 for $590,000, not quite at the peak of the market, and several years before the crash. During the conversation, the banker did a “valuation” of the home using a very popular consumer-friendly website, and determined that the home had lost $250,000, or roughly 43% of the 2004 purchase price. While my client had anticipated a drop, she panicked at the $250,000 quote and immediately called me for confirmation. After an evaluation of MLS data, I estimated the value of this home at a minimum of $550,000, or 93% of the 2004 purchase price.

On-line Valuation Services are Riddled with Problems

The problems with the mortgage banker’s so-called “valuation” are numerous. Many of the consumer-friendly websites, whose names are commonly thrown around as solid sources of accurate information, use mysterious valuation formulas based on comps chosen solely by the computer. There is no human evaluation of the information before a number is spit out to the homeowner. If you use these sites for valuation purposes, keep in mind that when reviewing the comps, you may find homes that are geographically close to yours, but physically very different, including size, style, and condition. If the $250,000 drop quoted by the mortgage banker was even close to accurate, my clients’ home, which was completely gutted to the studs and rebuilt in 2004, would be priced less than a currently listed home with one-half the square footage and finishes original to its 1952 construction date.

Inaccurate Information can Hurt Your Relationship

While we all know that home values have decreased in many areas, a 43% drop should have immediately raised the “common sense” red flag for the mortgage banker. As a member of the Chicago real estate community, he/she should have enough expertise to know that there are very few neighborhoods in the city where prices have dropped that drastically. The mortgage banker acted irresponsibly, and did not properly service his/her client. Note that the number quoted by the banker could just as easily have indicated a $250,000 INCREASE in price, also completely inaccurate, depending on the home and the location. This usually occurs when the subject home is the smallest in the neighborhood.

What is the Bottom Line?

The bottom line? There is absolutely no substitution for human participation in the real estate valuation process. No website or system currently available is robust enough to account for all factors affecting a home’s value. Buyers will be evaluating the value of your home using their agents’ input, and sellers must do the same to get an accurate estimate. The MLS is the most comprehensive source of sales information, and is generally available only to real estate agents and appraisers. Appraisers are bound by very stringent state laws in creating their reports, and usually cost $200-$300 per appraisal. Real estate agents will generally provide what we call a CMA, or Competitive Market Analysis, free of charge. We are hoping to get your business, of course. However, a good agent will provide you this report with no pressure and plenty of supporting analysis.

We would like to thank Dillinger for kindly sharing today’s photo via the Creative Commons License.
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About Stacy Braack

Stacy is a seasoned real estate professional with a broad range of hands-on experience including first time buyers, investors, luxury homes, and distressed properties. While this may appear to be a scattered set of expertise, she believes the experience provides maximum effectiveness in today's chaotic market, which requires extensive knowledge of all aspects of the industry. Stacy's educational background includes a BS in Industrial Engineering from Stanford University and an MBA in Marketing and Finance from the Kellogg Graduate School of Management. Professionally, Stacy has done everything from operations consulting to city government before she found her passion in real estate almost eleven years ago. It is this passion that drives the most benefit to her buyers and sellers. She is fully committed to your goals - both financial and personal. Her clients describe her as extremely direct, honest, and responsive, and they repeatedly trust her to handle one of the biggest events in their lives. For buyers she works non-stop to find you both a home you will love to live in and one that is a smart investment. Many of her 2008 buyers have realized instant equity in their new homes through 'pit bull' negotiation skills. While the market has been tough for sellers, her listings have sold at a rate above that of the market. Extensive, constant, and extremely high-quality marketing, including both print and internet mediums, support every listing, from investment studios to luxury penthouses. She believes that your goals are her priority and her full-time job. She has built her business on referrals from satisfied clients, and she would love to add you to that list. You can contact her at 773-405-4431 or stacy.braack@sothebysrealty.com

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4 Responses to “Home Valuation – Who, What, and How”

  1. Josh Says:

    I agree with you 100% in that computers/websites can’t take the place of humans in the real estate market. Although the web is a great source of information, it’s never going to be 100% accurate in terms of appraising. Not many people would buy a house online without checking it out in person first, so why would an appraisel be accurate without checking out the condo or neighborhood?

  2. Stacy Says:

    No one would ever purchase a house online without checking it out in person. Nor does an appraiser conduct their evaluation strictly online. The first step an appraiser takes is to visit the property, take measurements, and shoot photos for comparison purposes. The appraiser also takes into consideration many neighborhood features, marking a property down if it is on a major street, next to industrial areas, etc. However, the appraisal is a very data-based process, and cannot easily value features such as a street lined with mature trees, proximity to the buyer’s favorite restaurant, etc. These are factors that the buyer/seller must consider in their decision, but that do not easily translate into an appraisal. The point of my post is that you CANNOT value properties effectively using the numbers spit out by these web sites. You must visit, evaluate, and THINK about the values used.

  3. Scott Says:

    This makes me feel better. We had two appraisals done on our 2 bed/2bath penthouse condo in Bridgeport. We purchased for $298k in August 2008 and know the value has gone down a bit in the past couple years. The first appraiser came in, spent 10 minutes walking around, measuring, took some pictures and left. She didn’t ask any questions about the appliances, the private rooftop deck (700sq.ft with 360 degree views downtown) and left. Not shockingly, our appraisal came in at $253k, very low in our opinion. Her analysis compared our place to 4 or 5 apartments near ours but none which have the same finishes, details our luxury as ours (we have been told our place is a luxury condo). We had a second appraisal about 6 months later and this time, the woman walked around, actually looked at all the finishes and spent time admiring views, 12 foot ceilings and rooftop. Her appraisal came in at $291k and compared us to other luxury properties both in the area and also in other comparable areas such as Humboldt Park and West Bucktown. So it makes me happy to know that these low appraisals are sometimes the work of lazy appraisers who rely on computers. Hopefully we can get this on the market within the next 12 months and sell it for somewhere near $285-290k!


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