Valuation Websites are OK but not Perfect

Talk about letting your fingers do the walking! The Internet is certainly the information highway, but just because information comes to you over the Web doesn't mean it's accurate or reliable enough for you to bet your hard-earned savings on. Take real estate valuation Web sites, for example. Web sites such as Zillow, RealEstateABC and Domania pull together data from a variety of sources to give consumers information about properties, including such details as the square footage, number of bedrooms and bathrooms, construction, sales history, property taxes, comparable sales and estimated property values. They're great starting points for research, the experts say, but anyone who relies on these sites to set a sales price for his or her home or to decide on how much to offer for a house is making a drastic mistake.

Ask Pennsylvania banker Frank Baldassarre. One of his clients bought a house to remodel and resell based on the information he had found on an online real estate valuation site. The site said the average sales price of a house in the neighborhood was $600,000. He bought the house for $150,000, spent another $150,000 to upgrade it and put it on the market for $600,000. He got no offers. By the time the client called Baldassarre, who is senior vice president of Fox Chase Bank in Hatboro, Pa., the house had been sitting on the market for months and the client was running out of money to make the payments. After meeting with a real estate agent, driving through the area and seeing the competition at that price point, he realized he had overpriced the house. "These Web sites are a useful tool and can give you starting points," Baldassarre says. "But don't make decisions worth hundreds of thousands of dollars based on a click of a mouse with information from public databases."

Consumers flock to Web sites

Nearly 80 percent of home buyers reportedly start their searches on the Web these days, so it's natural that consumers would look online for this kind of information, says Ted C. Jones, senior vice president and chief economist at Houston-based Stewart Title Guaranty Co., who also is a former real estate appraiser and chairman of the Houston Association of Realtors.

"Would I criticize anyone for going to those sites? Not at all," he says. "But recognize their view is very high." Also, recognize that the site probably has a motive for providing the information. "There's an economic theory called 'no such thing as a free lunch,'" Jones says. "What's their motive? They're giving you information. What are you giving them? Are they trying to steer you to specific companies?"

One of the most common complaints is not that the sites have an ulterior motive, but that the valuations can be dramatically different from site to site -- and wildly inaccurate. "Try a few of the sites and you'll see you're getting answers that look like the result of a pinball machine," says Frank Gallinelli, president and owner of RealData, which produces software for real estate investors and developers. "If you just want to make yourself feel better or make someone else spend some money, you can prove virtually anything with these sites."

FTC complaint

The frequent inaccuracy of the estimated values was one of the major points of a complaint filed in fall 2006 with the Federal Trade Commission against Zillow by the National Community Reinvestment Coalition, or NCRC. The coalition, made up of more than 600 community-based organizations promoting responsible lending and equal access to credit, claimed the site intentionally misled the public and real estate professionals about the accuracy of its valuations, called "zestimates." In an audit of the site, NCRC found that the "zestimates" on the properties it reviewed came within 10 percent of the actual appraised value of the properties less than 30 percent of the time. It also charged that the site tended to overvalue properties in predominantly white neighborhoods and undervalue them in predominantly Hispanic or black neighborhoods.

Zillow spokeswoman Amy Bohutinsky says Zillow's "zestimates" are designed as a starting point and that the site says in many places that it's not an appraisal, but a free research tool for consumers, and that it tries to be "really transparent" about its accuracy. Zillow claims that its median margin of error is 7.2 percent nationwide, and that 62 percent of "zestimates" fall within 10 percent of the actual sale price of a home, Bohutinsky says. But even Zillow's figures mean 38 percent don't. Bohutinsky says that once Zillow learned about the NCRC complaint, it immediately contacted the group and began a "series of positive and productive conversations to help them better understand our business. We feel good that this matter can be resolved in the near future."

David Berenbaum, executive vice president of NCRC, confirmed that he had been contacted by Zillow's attorney and they were working on a resolution. "We want to make sure consumers understand the strength and quality of the information they're looking at, and we want to be sure the company's 'zestimates' are accurate in low-to-moderate neighborhoods and more affluent areas," Berenbaum says. "We hope we can create a model that others will emulate."

Good raw data

If the sites have a practical use, it's in the amount of raw information they give you, Gallinelli says. The primary benefit is that you can see the actual selling price and date that houses in the neighborhood sold, if the house is in a county where the sales records are updated online on a regular basis. Otherwise, ratchet down your expectations, Gallinelli says. "If you think this is the magic silver bullet, it's not. There are too many ways the estimate of value could go astray. If you put on blinders and think it will spit out the real market value, you're in trouble."

The bottom line is that online real estate valuation sites are great as a starting point for research, but they have limitations and they're not looking out for your best interests. "Just because it's posted on a Web site doesn't mean it's accurate," Berenbaum says. "There is no substitute for doing your due diligence."