Without professional advice how are clients making their decisions on negotiation strategies, terms of the contract, and pricing? Honestly, I don't know the answer to that question. But, I do know some of the resources that are used by clients in this situation trying to make those decisions. Everything is on the internet. Surely the answer to my home's value is there, right?

 

There are many online, automated valuation tools. The big name in online pricing is Zillow and their Zestimate so I'm going to focus on them. Check out the graph at right. The source data for the graph is straight off Zillow's site. The blue line is the median price of homes sold in Sammamish, WA. The red line is Zillow's Home Value Index for homes sold in Sammamish, WA.

 

At first glance the index appears to track the actual median price closely. Unfortunately, it's not that easy. There are actually very big problems with this approach.

 

For most of the time shown, until about February 2008, the Zillow Home Value Index is largely above the actual median sales prices. After February 2008 the index is largely below the actual sales price. What this means to me is that the index is always ahead of the curve. It shows values too high in a rising market and too low in a falling market. While those trends have issues in an of themselves, the bigger issue is simply that it's wrong in either case.

 

How wrong is it? Here's how wrong it is. This is a graph of the difference between the index and the actual median price sold. Check it out. Sometimes the difference is almost nothing. Sometimes the difference is $10,000 or $20,000. Other times the difference is as much as $100,000 high or $80,000 low.

 

If you have a $3,000,000 house an error of $10,000 may not seem like much. But, most of us don't have a $3,000,000. In fact, the median sold price of homes in Sammamish was $500,800  in July 2010 per Zillow. That same month Zillow's automated valuation index is $47,300 low. That's an error of 8.63%.

 

In fact, percentages are the only fair way to look at this error. So check out this graph of the percentage error between the index and the actual median home price.The errors are as high as 5, 10, and even 15%.

 

To be fair the index is a conglomeration of many factors and does not represent your house exactly. Additionally, despite the fact that Zillow provides a Zestimate on your home they make no claim that this is the exact, only, or best price for your home.  But, that is exactly my point. Only a professional Realtor that spends his or her time touring houses, negotiating contracts, and talking to clients about their needs regularly, can give fair advice on what the right value of a house is.

 

There are far more factors that determine a home's price than those that can be accounted for in an online valuation tool. Would you choose a professional over a pricing tool that might be wrong by as much as 15%?

 

That's my value in this situation.

 

-Chris