Looking for Software to Accurately Estimate Market Value? Think again.

Jan 20

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Your profitability depends on the rent you can collect and how much you pay for the property. Needless to say, an accurate estimate of market rent and market value is critical.

Can any apps or websites accurately estimate market value and or rents?

No.

Software can provide an average price for an area, as seen on Zillow and other sites. However, such software cannot provide accurate (or reasonable) information on a specific property. Below are some examples.

Subjective Data Failure

Software is good with analytical data (SF, beds, baths, etc.) but fails with subjective data. For example, suppose you have two properties. One property is in exceptional condition, and another is in poor condition. Software will determine the average $/SF for the area and multiply this by the subject property SF. This means that the predicted price will be low for the property in exceptional condition and high for the property in poor condition. Software fails in other ways too.

Poor Comp Selection

Are the comps below good comparables to the subject property? The answer is no. The properties are similar in size and such, but the subject property is next to a freeway, which is very loud. The comps do not have the freeway noise. In such a case, the subject property might look like a bargain, but in reality, it might be overpriced.

Below is another example. The subject property is in a community where the prices are about $180/SF. Across the road is a completely different community, with prices ranging between $280/SF to $310/SF. Because the properties are in close proximity and similar in size, they will be included in the price calculation for the subject property, which is invalid. So the subject property might appear to be a bargain, even if it is overpriced.

Takeaway

Never evaluate a property based on Zillow, Rentometer, Redfin, or any other similar source. The only way to evaluate a property is to have a knowledgeable person evaluate the specific property based on similar recent comps, taking into account location and condition differences.

Guidelines for Selecting Good Comps

Below is a summary of the comp selection guidelines we follow. Note that we frequently hit a situation where we can not find comps that meet all the following guidelines. In that case, you will need to relax one or more of the guidelines. Knowing which guideline(s) to relax requires experience and market knowledge. This is not something computer software can do at this time.

Distance: All comps should be within 1 mile of the subject if it is in an urban or suburban neighborhood.
Age: All comps should be within ten years (newer or older) of the subject property.
Size/square Footage: Only above-ground square footage is calculated in the square footage. The square footage on the comps must be within 20% of the subject. Basement square footage and finish are calculated separately from the above-ground square.
Property type: Comparable properties must be the same as the subject property. Single-family detached homes must be compared to single-family detached, duplexes to duplexes, townhouses to townhouses, etc.
Bedroom/bathroom count: Only above-ground bedrooms and bathrooms are counted. Comparable bedrooms and baths count must be within one of the subject properties.
Style: It is not required, but you should try to use the same style of home. 2 story to 2 story, split level to split level, ranch to ranch.
Sale date: Sold comps should have sold in the last three months.

With rentals, there is an additional consideration. While recent similar rentals are good indicators, the current competition is more important in determining the rent. For example, suppose there are four similar properties in similar condition for rent in locations that prospective tenants consider competitive. Such competition is what determines the rental price.

Get a Skilled Realtor

The inability to select the right comps is why all major real estate websites fail to produce reliable numbers. A skilled realtor is your most reliable source for determining market value. A skilled property manager is your best source for evaluating market rents. Never rely on websites when evaluating a potential property.

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