Will Big Data Put Appraisers Out of Business?

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Dustin Harris
Latest posts by Dustin Harris (see all)

Zestimate vs Appraiser... Will Zestimates Put Appraisers Out of Business?

Part of the boom in the availability of data has led to companies such as Trulia and Zillow who claim they can “Zestimate” a home’s value instantaneously. But can your potential customers trust such value?

In the old days, if a homeowner really wanted to find out how much their property was worth in the current market, they called an appraiser. Our customers understood that a licenced and qualified appraiser is trained, experienced, knowledgeable, and unbiased in his or her own marketplace.

In the past few years, the Information Age has flooded us with data; lots of data. Big data is a part of our everyday life from Facebook to Google. It has also infiltrated the housing market too and affects buyers, sellers, and home owners on a grand scale. But, will big data put the appraiser out of business?

Part of the boom in the availability of data has led to companies such as Trulia and Zillow who claim they can “Zestimate” a home’s value instantaneously. But can your potential customers trust such value? Let’s see.

Though Zillow (and other similar companies) keep their algorithms proprietary, they do give us enough information that we can get a pretty good idea as to where the data comes from. For example, according to Zillow’s own website,

we use public and user-provided data for house attributes, and some areas report more data than others.

As an appraiser for over two decades, I see a blaring problem here. Very few areas have accurate public information for size, quality, condition, and other important features of houses. As you know, these are features that can dramatically affect an accurate value. This is especially true in non-disclosure states where I work such as Idaho, Wyoming, and Utah. As for user-provided data? This is information coming from places like the home owner themselves. Nothing bias there. If Zillow depends on good data to provide good estimates, the phrase “garbage in – garbage out” comes to mind.

Yet, Zillow claims

Zestimates are usually accurate to within 10 percent in most American metro areas.

This sounds like quite an achievement, but it comes with a caveat; accurate according to who or accurate according to what? What metric are the folks at Zillow using to assess their accuracy? Of course, they do not say.

So, what is a Zestimate? No one really knows. By its own admission,

It is not an appraisal. It is a starting point in determining a home’s value.

Remember,

The Zestimate is created by an automated software process, designed by statisticians, and there is no ability for humans to manually alter the Zestimate for a specific property.

In other words, it is a computer program, plain and simple. Now as you know, I am a huge fan of and advocate for the good that computers can do for our productivity. However, my experience as a real estate appraiser has left me skeptical that they can know all that is important to know in the valuation process and/or that they can accurately determine a home’s value without the expertise of a local valuation professional such as an appraiser.

In fact, let’s put it to the test. For purposes of this article, I randomly pulled three appraisals that I, or my office, have completed in the past few weeks. These are all full, USPAP compliant appraisals for lending or private purposes. Here are the results:

Property #1: $215,000 Appraised Value. $241,192 Zestimate. Difference of 11%.

Property #2: $1,300,000 Appraised Value. $1,123,005 Zestimate. Difference of 14%.

Property #3: $100,000 Appraised Value. $167,288 Zestimate. Difference of 40%.

Of course, Zillow acknowledges that “the Zestimate’s accuracy depends on location and availability of data in an area. Some counties have deeply detailed information on homes such as number of bedrooms, bathrooms and square footage and others do not. The more data available, the more accurate the Zestimate value” (ibid). Let’s not forget that the founder of Zillow, Spencer Rasscoff’s own home was sold for 40% less than his company’s Zestimate. Oops!

So, will Zestimates put the appraiser out of business? I am not holding my breath. In the old days, if a homeowner really wanted to find out how much their property was worth in the current market, they called an appraiser. It appears that the more things change, the more they stay the same.

For more information on this subject, please download and listen to The Appraiser Coach Podcast Episode 407: Here Come the Zestimates

Dustin Harris

Dustin Harris

A multi-business owner and residential real estate appraiser. He has been appraising for nearly two decades. He is the owner and President of Appraisal Precision and Consulting Group, Inc. He owns and operates The Appraiser Coach where he personally advises and mentors other appraisers. His principles and methodologies are also taught in an online, Mastermind group. He and his wife reside in Idaho with their four children. Dustin Harris on e-AppraisersDirectory.com

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19 Responses

  1. Maureen Sweeney on Twitter Maureen Sweeney on Twitter says:

    Big Data is totally unregulated, with racism and all kinds of other bits baked into their algorithms. Besides those factors, what’s there not to love?

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    • Avatar Nick says:

      Ok, I’ll bite. How is racism baked in? Please source your assertions.

      2
      • Avatar IMJSAYN says:

        Here is a great article explaining the “Racial Bias: Redlining in the Modern Era”

        http://appraisersblogs.com/racial-bias-modern-era-redlining

        3
        • Avatar nick says:

          That’s on me, I thought she was suggesting that appraisers are the problem. Totally agree that there are inherent issues with Big Data, and that Big Data can lead to disenfranchisment, but blanket accusations of racism are not the ‘ONLY’ reason for this. It’s a bit reductionist to always play the race card. Especially with stats/meta data. Google had to readjust their face recognition algorithms because it didn’t do such a good job recognizing human from other primates. You may have heard about that in the news as it was especially egregious. For a company like Google though…I don’t know how intentional that was.

          4
      • Nick every single appraisal any of us do has a census tract number as a required element. There are no exceptions for federally regulated transactions.

        Even where no bias or prejudice is intended, language that the PC Police have ascribed as being ‘potentially racist, biased or prejudicial’ has long been prohibited.

        Buyers clearly do care and weight ‘neighborhood or school or special amenity neighborhoods in terms of ‘desirability’, but no appraiser can consider this. We are even prohibited from having people in pictures which could be indicative of race. Its gotten so nuts that property owner’s own photos of religious icons, family members or ‘other’ symbols adopted special groups such as ‘rainbows’ must now be obscured lest appraiser’s clients are somehow unduly influenced.

        Yet with all these prohibitions we continue to (mandatorily) provide lenders, underwriters and any other report users with census tract information which can be accessed with only a few keyboard strokes.

        THAT data has ALL the prohibited facts. It identifies all races in the area and their relative predominance; it identifies sex, married and unmarried percentages, ages, and in more recent years it now identifies significant gay-lesbian-TG-etc. if measurable.

        Any lenders self-developed or off the shelf risk software can easily factor these into scoring with no one the wiser. Certain ignorant vendors have even confessed that they build algorithms to incorporate demographic information . Look up Quantarium /Xome in other published articles on the topic).

        I have personally only run into one instance (on a commercial loan) where a lender was so stupid as to say (through the loan broker) “Oh yeah, I know that area” (based on zip code); and in reference to a property in unincorporated County area adjacent to Compton, CA “Its a bad area and we aren’t going to loan there.” Clearly a prohibited race or crime perception-based decision. One in which I couldn’t get the loan officer to divulge which lender made that statement so they could be turned in.

        Overt bias is not real common. Covert prejudice or ‘risk scoring’ by all the wonderful, unregulated AVM companies out there is another matter.

        Their clients can simply tell them they want higher risk ratings assigned via algorithm for certain prohibited census factors than for others, and nobody is going to be the wiser.

        Because regulators don’t care enough to look at the pitfalls inherent in automated systems.

        I know of NO appraiser that cuts a value or adds value based on racial or religious populations. I know of none that conflate a borrowers ‘social’ status or preferences with property characteristics. I cant say the same for AVMs tied to census tracts or even zip codes.

        Proponents of the ongoing secret prejudice claim they need census data to ‘make sure no one is being discriminated against’, yet it is the very tool that they use that makes ongoing discrimination feasible despite all the fair lending and equal credit opportunity laws that are passed.

        Until census data is made an illegal provision in any appraisal or any other aspect of lending decisions, the discrimination will continue.

        2
        • Avatar nick says:

          I’d love to chat more but don’t want the speech police to come after me. That said, I pretty much agree with everything you said. Keep fighting the good fight friend.

          2
    • How is Racism built into the Zestimate model? What proof or study supports this accusation?

      I’m not a fan or proponent of the Zestimate by any way. It’s simply a novelty used to sell advertising on Zillow’s web site. Not used or trusted by GSEs.

      1
  2. Dustin:
    Zillow also uses MLS data which are fed to them directly by MLS’s from Brokers all over the U.S. who choose to participate in Zillow for greater market exposure.

    The vast majority of brokerages choose to participate in Zillow. As they also do with Redfin, Realtor.Com, etc.

    Most buyers find properties they want to buy first with Zillow or the other on-line R.E. sources.

    Over time Zestimate should become more accurate, with more data, Artificial Intelligence & better algorithms.

    But, Zestimate will never replace Appraisers. Other AVM models are used by the GSE’s, not Zillow.

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  3. Avatar Bill Johnson says:

    Some would say that with a 30 hour work week, a single trip to the office (a week), outsourcing of the appraisal process to third world countries, and with as little as a 30 minute review before hitting the send button, that the garbage in and garbage out is the appraiser and or choice of appraisal process by many.

    No animals or humans were harmed by way of the above post.

    Seek the truth.

    2
  4. Avatar ej says:

    “Big data” along with big tech, the GSEs TAF, and the big box lenders are the Ku Klux Klan of our time.

    2
  5. Retired Appraiser Retired Appraiser says:

    Will it? LOL I was under the impression that big data put tens of thousands of appraisers out of business years ago.

    4
    • In CA there were 20,000+ licensees about 2007. Today, there are 9,752 licensees.

      This trend will continue.

      The demand for boots on the ground Appraisers has declined substantially for a number of reasons.

      There is still an oversupply of Appraisers, as indicated by a proliferation of low-fee AMCs.

      A large number of mortgage loans today involve Appraisal Waivers, including mortgage loans obtained by Appraisers.

      Fast, easy, convenient, cheap.

      This trend towards automation will of course increase.

      1
      • There were around 7,500 of us when licensing first started back in ’91. A lot were driven out by low fees, but many others driven out by BREA policies. Still others by the heavy hand of FNMA and AMCs along with TAF.

        The ‘trend’ toward automation was announced by MISMO and pursued by FHFA LONG before any shortage could be alleged. Full automation of the entire loan process has been the mismo objective since before the UCDP was created.

        Few take the time to read it but they will also try to replace C&I…which will be even easier once they agree to certain assumptions of “market” leases being acceptable.

        2
      • Avatar Bill Johnson says:

        Haven’t checked in a while Craig, but yes with +/- 900 appraisers all within +/-25 miles of me, can you say oversupply. Boy, I sure don’t miss those conversations with low level staff explaining that just because their are 500 appraisers closer than me and their algorithm places a preference on distance to, that I’m still the best man for the job (15 minutes away). Keep in mine however, as of yesterday the county of San Diego just broke a record as all real property is now valued at 605 billion.

        Seek the truth

        2
  6. Avatar Julio E. Sune Jr. says:

    TWISTY TECH
    SAME DAY UNDERWRITING,
    APPROVALS AND APPRAISALS
    XXXXXXX XXXXXX Finance is a XXXXX XXXXXX Lender with a cutting edge technology that allows us to underwrite loans and provide a decision for loans that have been submitted from the start of the business day.
    All loans will have an appraisal ordered the same day the loan is submitted. The loan process will take 10 days to close from submission date to funding.

    Advantages to this process will allow a shorter time frame on closing dates and inspection periods.

    The ad makes people think they will get a 1 day appraisal when in reality it is an appraisal order.

    1
  7. Avatar Julio E. Sune Jr. says:

    PIE IN THE SKY ECONOMICS [May 1, 2020]

    “Once the social distancing and quarantine measures are relaxed, we should see this temporary pause evaporate, and will have potential buyers return with the same enthusiasm.” – NAR® Chief Economist Lawrence Yun
    ==========================
    JULY 2020
    https://gsiexchange.com/warning-from-shiller-urban-home-prices-could-decline-at-this-rate/

    https://gsiexchange.com/banks-braced-for-more-economic-hardship-have-set-aside-billions/

    1
    • Baggins Baggins says:

      Now you have to also think about urban flight. Markets are shook up but we have not yet seen the full effects.

      Given the everything is o.k. tune we’ve been hearing from many realty based organizations, it’s doubtful they’ll be straightforward and forthcoming with honest recognition of these new and unusual trends. The game is who can kick the can for the longest before losing track of it.

      Think Zillow can come up with an algorithm for that?

      0

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Will Big Data Put Appraisers Out of Business?

by Dustin Harris time to read: 3 min
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