Real estate traditionally has been a low information business. Real estate assets live long and change hands so infrequently that a formal appraisal process is the only accurate way to determine the value of property. So what about sites like Zillow and Trulia? These sites provide up to the minute home values (with questionable accuracy) for neighborhoods across the US.
How do Zillow and Trulia Value Homes?
These sites use a tool called automated valuation modeling (AVM). Automated valuation modeling takes tangible factors, places a value on them, and then places them into a mathematical model to produce a final value. That is a complicated way to say that they simply approximate the value of each home based on prior sales prices of homes they deem similar. If five homes sell on your block that are all about the same age and square feet, it is a safe bet that your house will sell at that value if it has the same specifications.
Pros of Zillow and Trulia
The biggest pro of these sites is that they provide the actual sales prices of homes in one aggregate area. Until the advent of these sites, consumers were forced to go to a real estate broker to get any kind of comparable information. They sites give consumers an information edge to make more informed selling decision.
Additionally, these sites are pushing the envelope by offering an online market for home buying and selling. In the next five to ten years, these sites have the potential to completely change the way the residential real estate market works. Since real estate agents have held a lock on this information for over 20 years, expect this process to be long and hard. But, in the end the consumer will benefit from the increased access to information.
Cons of Zillow and Trulia
Accuracy, plain and simple. Automated Valuation Models only work well in areas with a high volume of transactions. Areas like New York City, Chicago, Los Angeles, etc. do not typically have accuracy issues, but smaller towns typically have valuations that are all over the map. While this will probably make these sites profitable, they will have trouble with widespread adoption because of this issue.
Another con revolves around the negatives of information access. While all of the information Zillow and Trulia provide is accessible to the public, before these sites this information was harder to obtain. Everyone now has access to your home value with a few simple clicks of their mouse. While this is not a big deal to some, others prefer to keep this information private. There are a lot of perceptions that go with the value of your home. If you work with people who live in far more or less expensive homes, you may feel like this will affect the way people see you. To date this has not been a huge issue, but as these sites grow, expect this issue to crop up.
Focus on true housing appraisals has taken a back seat with the introduction of Zillow and Trulia. While these sites provide great consumer access to comparable transactions, a true appraisal is the only way to get an accurate assessment of your home’s value.