Sunday, October 16, 2011

Juicy rationalizations

Shrimp boat at sunrise.

Six ways to present an offer:
  • Here's an offer for your property. I think it's fair.
  • Here's an offer for your property and it's fair because it's exactly what the property appraiser's site says the market value is.
  • Here's an offer for your property which is more than fair because it's 10% higher than Zillow's estimate of the property's value.
  • Here's an offer for your property which is fair because these carefully selected comps I've included support that price. Never mind that two are nowhere near the size of yours and the other is a side view.
  • Here's an offer for your property. I know it's worth more but this is all I can pay.
  • Here's an offer for your property. It's fair because the last four comparable sales (attached) justify a fair value right around my offer price.
Unless offering full asking price, it is usually productive for a buyer to include some justification or rationale for his offering price. Usually. I've seen every one of the above examples employed over the years. Some of these strategies appear to begin the negotiating process with a better chance of success. However, using a flawed or obviously slanted approach can sometimes have a detrimental effect. The absolute best approach to determination of value is using recently sold, nearby comparable properties of similar size and condition and adjusting for differences. Cherry-picking only the comps that support one's offer is not an effective strategy if offering to an even slightly informed or well-advised seller. The same goes for sellers trying to falsely justify an inflated asking price. Two sources of estimated value commonly used by buyers to justify their offering prices are Zillow and the property appraiser's "market value". Both are often wildly inaccurate. publishes an estimate of value for every residential property, called a Zestimate, on their website. I often see buyers, sellers and their agents using Zillow as confirmation of their opinion of value, when that Zestimate happens to coincide with their opinion. Is it an accurate estimate and should it be taken as credible? Let's look at recent sales and see just how accurate Zillow was with their estimate of value right before the sale. I used the first page of results for recent residential sales on Zillow (22 sales) of properties in Cocoa Beach for my research.

Of the 22 recent sales the Zestimate immediately prior to the sale was within 5% of the selling price for seven properties. Not bad. Five of those sold for more than the Zestimate and two sold for less. Another five sales landed between 5% and 10% of the Zestimate. All but one of those five sold for more than Zillow's estimate. That means that slightly more than half (55%) of recently sold properties closed within 10% of the Zillow estimate of value, all but three closing for more than the estimate. That means in a broad sense that we can trust Zillow to be within 10% around half the time.

What happens the other half of the time? The skew gets extreme. Four estimates were 20% or more off the closing price, all of them closing for more than the Zillow estimate. One closed for 20% more, one for 35% more, one for 85% more and one property that had a Zestimate of $163,000 sold for $325,000. That's 99% higher than Zillow's published estimate of value.

What does this mean for a buyer or seller of property? Feel free to use the Zestimate as substantiation of your opinion of value if it is to your benefit but don't place any value on it other than as a tool when negotiating with an uninformed party. Don't be surprised if your opponent rejects it as she may have done her own research or may be a reader of this blog.

What about using the property appraiser's "market value" as a gauge to establish fair value for a property? Using the properties that have recorded from the same list of 22 recent sales, the PA's "market value" was off more often than Zillow's and by a wider margin. Most often it was far below the eventual selling price but a few estimates were way above. Don't expect any accuracy except by accident when using either of these estimates of value. There is a reason appraisers use side by side comparisons with other recently sold, nearby properties of similar size, adjusting for differences when doing most residential appraisals. It is the only consistently accurate gauge of market value available to us. The amount of error and variation in the online estimates of value make them good for entertainment if one is so inclined but not as a reliable guide to a property's value.

By the way, the "I know it's worth more but this is all I can pay" offer has it's place. If a buyer wants a property but can't pay what the comps suggest is a fair price, it's sometimes worth a try. The seller may reject the offer but there's always a chance she will accept it. I've seen that kind of offer accepted.

"I don't know anyone who could get through the day without two or three juicy rationalizations." Michael - Jeff Goldblum's character in The Big Chill