Online Home Value Tools Are Not A Substitute For An Appraisal

Online Home Value Tools Are Not A Substitute For An Appraisal

It's a good news, bad news scenario. More tools and technology provide more options for home buyers and sellers to determine home value. BUT, with so many options available, figuring out which tools are actually useful can be confusing.

As we discussed in our earlier post on the basics of appraisals, appraisals are an expert's opinion of a home's value. That expert is a state-licensed and certified professional. How much you can borrow and at what rate is often affected by the official appraised value of your home. Borrowers are often tempted to compare the appraised value with what they find on an online home valuation tool.

Not so fast!

The majority of online tools that provide borrowers guidance on home values are NOT an alternative to an appraisal. The real estate industry, however, often uses online tools that ARE an acceptable substitute to an in-person appraisal. However, not all lenders or loan programs permit the use of these home value tools.

Whew! Let's try to simplify all of this:

Online Home Estimates Tools

Most people begin the purchase or refinance process by jumping on the web and looking at home values using one of the popular online tools available on sites such as Zillow.com or Trulia.com. These online tools are great for getting a rough estimate of your home value, but cannot used as a substitute for an appraisal during the loan process.

Why is that? It's because these home value tools provide estimates, not appraisals. These tools are reliant on available data – which can often be incomplete – as well as formulas specific to these companies. As a result, prices may vary widely.

For example, Zillow estimates home values according to:

  • Location
  • Date last sold
  • Number of beds and baths
  • Square footage of the home

In contrast, CoreLogic, a third-party vendor of online home valuation tools to many mortgage lenders, prices homes according to:

  • Lot size
  • Year home was built
  • House type/style
  • Number of beds and baths
  • Square footage of the home

To demonstrate the differences, we found an older house selling for $279,900 on our PennyMac REO site. But, when we plugged in this same home's address on Zillow, Zillow told us the home was worth more - $295,062, to be exact. And, when we plugged in this same home's address on a large bank's CoreLogic-based home valuation tool, the bank site told us the home was worth $304,000 – that's $24,100 higher value than the list price on the property!

The takeaway is that these tools are a good starting point for your home's value. They can provide a ballpark estimate useful when considering a home purchase or refinance. Your loan officer will often ask you to estimate your home value when taking your mortgage application, so it's not a bad idea to visit a few of these sites before calling. But, of course, it's a good idea to use multiple tools and compare prices to capture a range. Again, these are not appraisals.

Automated Home Valuation Models

Professionals have access to more comprehensive tools -- which they have to pay for – called Automated Valuation Models or AVMs that in some situations can be used as a substitute for a traditional appraisal.

An AVM can be a fast, affordable way to get an approximate market value of a home. Where an in-person appraisal can take up to two weeks to complete and can cost several hundred dollars, AVMs can take a matter of seconds and cost significantly less.

An AVM will often calculate a home's estimated value by comparing a variety of data points, such as public county property records, ownership deeds, recent home sales reports and mortgage records. Some online home valuation tools will also collect additional home details, like unique property characteristics, local geography and county sales activity, to incorporate into a home's estimated worth.

Will All AVMs Appraise My Home Similarly?

A computer can only make an educated guess based on the information it is given. If any given AVM is collecting data from incomplete public records, missing ownership deeds, insufficient home sales reports and outdated mortgage records, your estimated home value could vary from site to site.

In addition, not all AVMs calculate a home's worth based on the same criteria.

Do AVMs Take Home Condition Into Consideration?

AVMs often do NOT factor a home's condition in valuation. Public housing records don't mention crumbling foundations, leaky roofs, or flooded basements. As a result, AVMs may price a property higher than warranted. In addition, characteristics such as spectacular views and kitchen and bath upgrades are absent from public housing records. As a result, AVMs may price a property well below the price a buyer might pay for it.

So, When Do Lenders Use AVMs?

Certain programs, such as the Home Affordable Refinance Program, permit lenders to use AVMs, or automated valuation models. And even with programs that permit the use of AVMs, sometimes there isn't enough data for certain markets for an AVM to work. Your lender can let you know if an AVM is used for the home loan program you're applying for.