Automated Home Appraisals Unreliable

I remember last year I helped a seller market and manage the sales process of a penthouse condo in Boulder. We had two buyers, both wanting to make the purchase with cash (no loan), and one of them backed out.

This was a bit of a surprise since this buyer insisted they understood the market, and what a rare opportunity and great value this property was in the Boulder housing marketplace. This buyer’s discussion with an appraiser ‘friend’ gave them cold feet, and they lost trust in their own knowledge base and instincts.

It was no surprise to me that the second, “back-up” buyer, swooped in and made an offer the moment the first buyer backed out.

What was interesting was how divergent the appraisers were in their professional value opinion compared to everyone’s instinctive sense of the value. Even the two appraisers I spoke to expressed that they had a sense that the value of the property was at or above the price in the contract, but both said that the methodology they had to use to create a professional appraisal wouldn’t allow them to get the price as high as the contract price.

A recent Wall Street Journal corroborates this dilemma.

Call, text, or email me today! … I’d seriously enjoy having the opportunity to talk to you about your plans if you’re moving, or if you know someone who is considering a move, and needs some straight answers.

In a WSJ article from a couple of weeks ago, they touched on the well-known problem that home appraisals were blamed for being too generous in the early 2000’s.

It’s true that it seems, in retrospect, that many appraisers were simply taken to task, either on their own, or due to pressure from the lenders who hired them, to make sure the appraisal matched the contract price. There are many stories of Appraisers being victim to lenders and mortgage brokers threatening to stop sending appraisers business if the appraiser didn’t ‘bring in the price’ at contract value.

Well, many things have changed in the last decade.

Now the story is that appraisers are too tight/conservative or even labeled as ‘stingy’. This over-compensation is having a detrimental effect on home buyers applying for new purchase loans, and home owners looking to refinance.

The primary criticism is being leveled at computerized real estate appraisals. These automated appraisals rely on models which use prices from home sales, as well as other data and some unknown, and ever-changing algorithms to determine the value of a house. (It’s one of the reasons I like helping my clients meet loan officers at local banks and lending institutions who don’t rely on third party opinions as much, and don’t utilize out-of-state underwriters who don’t understand our local and regional real estate marketplace).

While the automated appraisals may be very inexpensive, it’s well worth the few hundred dollars to get a traditional appraisal. That’s the difference between getting a loan, and buying your new home… or not.

In some cases home owners have seen their home equity line of credit (HELOC) shut down, or reduced in value, due to an automated interim appraisal. One consumer-level example of these ‘automated appraisals’ which you or I can look at to see how unreliable these automated price evaluations might be Zillow.While Zillow is an interesting tool, IMHO it’s an unreliable methodology for understanding the true value of a house.

Have you ever looked at the value of your home as expressed at Well I have, and there have been times where I’ve thought if I could get the price Zillow claimed my home was worth, I’d sell it in a heartbeat! The problem is, no one in their right mind would over pay that much.

In contrast, and more directly related to this story, I’ve seen Zillow, similar sites, and automated appraisal systems so grossly under-value homes that I’ve had comparably contrasting internal dialogue that goes something like this: “wow, if I could really buy that home for that price (so far below what I know to be true market value), I’d pounce on that opportunity ASAP.

Well, that’s sort of what happened with the penthouse condo in the beginning of my story. A cash buyer opted to go with what he knew was a reasonably good value in the Boulder market, and since he was paying cash, he didn’t need to, or elect to, rely on an appraisal. Both buyer and seller got a fair deal, and fortunately for that transaction, an appraisal didn’t get in the way. At least for one of the buyers!

The moral is, if you have the option, always insist on a full, professional appraisal, and trust the other professionals you are working with to help you understand the true market value.

Thinking about buying a new home, getting ready to sell, or know someone who plans to move? I think we should talk.

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You may also find my neighborhood profiles, and Boulder business profiles informative and useful. They’re both great ways to learn more about what’s going on in Boulder. Call, Text, or Email me today!

Zachary Epps, GRI, ABR, REALTOR®, full-time RE/MAX professional, and author of the Boulder Real Estate and Neighborhood Guide, The Boulder Condo Guide, and The Home Buyer’s Handbook.


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