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.