Executive Summary
While most aspects of the financial planning update are getting easier, especially as account aggregation software becomes more prevalent - allowing the planner to automatically get regular updates from all client financial accounts, including those not under the planner's direct investment purview - the value of real estate continues to be a sticking point for many planning firms. How do you update the client's net worth statement without slowing the process down by waiting for the client to provide an estimate? Will the client's estimate really even be accurate, anyway? And the process can be even more problematic for firms that set fees based not on assets under management but net worth. How do you get a fair estimate of the value of property that relies on the client when the client's fee is impacted by that estimate? In an increasingly technology-driven world, there's now an answer: with real estate valuation services on the web, like Zillow.
The inspiration for today's blog post was a recent conversation I had with another planner about the challenges of trying to update a client's financial plan, especially regarding the difficulties of updating values for the client's personal real estate. "We just use Zillow," said the planner, "it's made the process a whole lot easier!"
What Is Zillow?
Zillow
is a website that provides information and tools around the real estate market, including most notably their Zestimate service, which seeks to estimate the value of any piece of real estate using Zillow's proprietary formula.
The Zestimate is based initially on publicly available data, including the dimensions of your home and lot as documented in public tax records, the tax assessments themselves, and comparable sales in your neighborhood (as well as prior sales of the home itself). Zillow uses all of this information in an attempt to extrapolate the value of land, square footage, number of rooms/bedrooms/bathrooms, etc., to determine an overall value, not unlike how a real estate agent might evaluate the home and look at comparable sales to estimate a price.
Of course, it's difficult to estimate a price for some properties, especially if there are not a lot of comparable sales in the area (and/or the sales are foreclosures, which the Zestimate ignores), so in reality Zillow provides not only a Zestimate price but also a Zestimate range (which represents a 70% confidence interval around the Zestimated price). A wider range indicates more uncertainty either due to more volatile comparable sales or a lack of enough comparable sales for a good baseline; a narrower range indicates that Zillow had a strong base of information upon which to provide the estimate.
In addition to the Zestimate provided initially, the client can create an account on Zillow and "claim" his/her property to correct or provide further supplemental information. For instance, if the home has had significant interior upgrades that weren't reflected in public records, Zillow won't know until the user supplements the information. Similarly, a remodeling/expansion that is not yet captured in public records might not be used in the Zestimate but could be updated by the client/user.
Zestimate Accuracy
So how good are the Zestimates that Zillow provides? Zillow does provide information on their data coverage and accuracy statistics (by comparing Zestimate prices with actual transactions that occurred for those properties). Notably, for some states where there are relatively few sales and/or homes that have Zestimates, the data coverage is limited; in addition, some states provide far less information in their public records. As a result, some states like Alaska, Kansas, Idaho, and Maine have almost no coverage at all, while other states may have Zestimate coverage in metropolitan areas but not in more rural counties.
Where Zillow does have coverage, though, the data suggests that Zillow provides at least "reasonable" estimates; in most areas where Zestimates are provided at all, the median error is between about 6% and 10%. And of course, this is across all sales of properties that had Zestimates; if the property information has been updated by the owner to account for details not evident in the public records, the error rate ostensibly would be even lower.
In fact, in situations where the client firmly believes that his/her property is worth more or less than Zillow, it's not always clear whether the client is right and the impersonal computer is wrong, or if Zillow's more data-intensive analysis is correct and the client is simply providing a poor estimate!
Using Zillow Zestimates in Financial Plans
Notably, Zillow still does not carry the weight of a formal appraisal. It cannot be used as a basis for substantiating the value of a home for a mortgage. And even Zillow encourages users to have a real estate agent do a local comparative market analysis and/or get an appraisal from a professional appraiser before setting an actual price to sell a house or make an offer to buy one.
Nonetheless, as a general estimate of the value of a home, arguably a Zestimate is a pretty good starting point; to say the least, Zillow likely takes into account more information about the activity of home sales in the region than the client, who may simply guess at a value based on the assessed value for tax purposes (which isn't always representative of a fair market value price) or a single property sale up the street (which may or may not have truly been a comparable property).
Clients who think the Zestimate for their property may be too high or too low can always log into the site, "claim" their house, and supplement with additional information that can make the Zestimate even more accurate. And at a minimum, a conversation about why the Zestimate seems higher or lower than the client expected may itself be a fruitful conversation about the value of the real estate, potential planning issues or concerns, and the client's longer term intentions for the property.
But the bottom line is that services like Zillow (or some of their competitors, including Trulia or the National Association of Realtors' own Realtor.com) seem like a good way to get at least an initial estimate of the client's real estate, especially in metropolitan areas and/or other regions where Zillow's Zestimates have a good track record and a reasonably narrow range. At the least, it's probably a more data-based and rigorous process than simply asking the client for a guesstimate, and may even lead to a more fruitful conversation.
So try it out the next time you're updating a plan; or better yet, pull up Zillow on the screen in your conference room during the client review, type in the client's address, and use it as an opportunity to frame a discussion around the client's real estate and long-term plans.
So what do you think? Have you ever used a site like Zillow to estimate home values for a client's financial plan? Do you find it useful, or too inaccurate to be relevant? Is it more useful for some clients and/or in some areas than others? Is it useful as a conversation tool as well?
