Takeaways
- Hate the Zestimate? Get used to them. They’re not going anywhere.
- I predict CMAs will give way to AVMs in the next 10 years
- Real estate professionals need to prepare their business models for this disruption
The Next Big Thing in Real Estate is…
Machine learning. Aka artificial intelligence.
Don’t believe me? Read here, here, here, here, here, here or here.
AI is about to offer numerous new tools to the real estate industry, from chat bots, to AI assistants, to property matching. But in my opinion, the most disruptive innovation will be the turbo-charging of real estate automated valuation models (AVMs) like – you guessed it – the Zestimate.
Wut? Zestimates Are Lousy!
Indeed! In fact, I took a look at our own, local Fort Hood market to show just how lousy they still are. Below are the 9 sales to date in 2017, comparing the actual sell price, the Realtor’s recommended value (original list price), Zillow Zestimate, and country tax assessment. Let’s see who is closest to the actual, final sell value!
| Actual Price | Realtor | Zillow | Tax Record | Winner |
|---|---|---|---|---|
| $28,000 | $30,000 | $33,931 | $32,750 | Realtor |
| $97,500 | $104,900 | $100,420 | $100,283 | Tax Record |
| $101,900 | $103,900 | $97,982 | $89,750 | Realtor |
| $111,600 | $109,900 | 86,065 | $97,099 | Realtor |
| $114,900 | $114,900 | $92,624 | $113,490 | Realtor |
| $163,000 | $168,000 | $175,222 | $165,149 | Tax Record |
| $175,000 | $189,900 | $272,116 | $188,830 | Tax Record |
| $199,900 | $199,995 | $193,002 | $188,082 | Realtor |
| $249,900 | $239,900 | $210,735 | $160,880 | Realtor |
The Realtor wins! The tax record was closest three times. Zillow was never the closest. How far off is the median Realtor’s list price versus recommended Zestimate and tax record?
| Realtor | Zillow | Tax Record |
|---|---|---|
| $2000 | $12,222 | $11,818 |
Incredibly, in our area, Zillow would be better off just copy-pasting our tax record assessed values. And still, the tax record is off by more than 5x what Realtor’s are off by. Not a suprise when tax assessed values uses data that is years old.
This is a small sample size to be sure, but still startling numbers. For sellers and buyers alike, this should drive home just how meaningless Zestimates and tax assessments are when pricing their home.
But it won’t always be that way…
Not For Long
Right now, the Zestimate is generally despised by real estate professionals. Our MLS detests Zillow so much that we stopped syndicating listings to Zillow (erroneously, in my personal opinion). Zillow gets a lot of ire from agents, but curiously not Realtor.com. And yet, as I show in the pictures to the side (all estimated values for the same house in White Rock Estates), realtor.com has it’s own AVM. Our own Fort Hood MLS has an AVM in the Realist software! Big companies know that AVMs are the future, and are spending millions to build the best, using machine learning.
And they will succeed. AVMs are going to replace Comparative Market Analyses (CMAs) sooner than you think.
“Oh, no. A computer could never do what I do!”
Yeah, keep thinking that. I imagine that’s what taxi drivers thought about three years ago. The Internet wiped out many industries in the 2000s (travel agents, stock brokerages, encyclopedias, newspapers, video stores…). The taxi business was unscathed. They could think to themselves “there’s no way the Internet can drive a car! My job is technology proof!” Then came Uber. Next comes driverless cars. Bye bye, taxi drivers. Forever.
What do we do as agents when valuing a home? We look at similar homes that sold nearby. Or didn’t sell nearby. Add a price adjustment for square feet and price adjustments for a few other features like garage spaces and granite counter tops. We make educated guesses about how to value these differences. Well, that is exactly what a computer will do. Except 1000 times faster and with 1000 times more data points. You’re not going to compete with that.
Not only are automated valuation models here to stay, but they will soon be doing a lot more than just frustrating listing agents during listing presentations….
Meet Your New Appraiser: Zillow
That’s right. Home valuation models will eventually become so accurate that lenders will no longer feel the need to appraise homes. They will use various proprietary AVM models (maybe Zillow, maybe someone else) to come up with their appraisals. For Realtors, that is just one thing off our plate. But for other industry professionals like appraisers, their entire profession is facing likely extinction in the next 20 years.
Feel bad for your favorite appraisers? Save some sympathy for your favorite loan officers, too. This same AI technology will also be able to efficiently qualify and coordinate a buyer’s financing. Mortgage companies might not only throw out appraisers, but loan officers and underwriters in the near future, as well, or at least dramatically redefine their roles in the process.
Life After CMAs and BPOs
What does a Realtor do if they aren’t recommending prices? Already Realtors have lost control over the home search. Now buyers and sellers won’t even need them to come up with fair market values for the homes they are buying and selling?
There are several reasons I think the real estate agent will be relevant long into the age of AI – the foremost reason being heterogeneity – i.e. every house is different. Literally every one. Every house has it’s own unique location. Often they have their own floorplan, materials, condition, problems, upgrades, and more. This means that there are many moving parts to a real estate transaction that AI won’t be capable of serving in the near future. These new changes will simply be new tools and modify how Realtors do business. They won’t have to do CMAs anymore, but instead are a buyer or seller’s financial planner, local expert, and navigator.
When listing a home, or writing an offer, we may be more and more fixated on a particular AVM recommended price. In multiple offer situations, we might write offers above the asking price knowing that it won’t appraise and that the buyer will have to come out of pocket. Our offer documents will probably get some major updates to reflect these changes.
Conclusion
Don’t get cocky. If you think you’re going to beat the robots, well, good luck. I for one welcome our new robot overlords. Just joking, but seriously. Technology is our friend. It is going to dramatically change the way we do business, mostly for the better, and is going to disrupt industries. Don’t pretend it isn’t going to happen and be left behind or out of business. Prepare to adapt now.