If you have ever heard that a residential property valuation “is only as good as the comps that were used” (or in its abbreviated form “garbage in - garbage out”) then please read-on and I will take you on a flyover tour of that garbage...
The residential real estate sector in this vast country is correctly viewed as the amalgamation of thousands of individual market areas. Many of these market areas have the luxury of a great uniformity of housing stock and a great density of “sold” data. For these fortunate places the use of “$-per-square-foot” norms are a simple and potentially powerful indication of the market value for any property, provided it fits the mold.
...and then there are all the other markets!
As a listing agent I’ve been authoring my own Excel-based valuation tools for nearly 15 years in markets where no such luxury of uniformity or density exists. In this time I have observed Realtors moving away from their own homegrown valuation methods and toward pre-packaged tools meant to work in any and all markets. Many of these 3rd party tools now allow more user input and overrides so you won’t hear me dogmatically arguing against them - but the trend toward one-size-fits-all methods truly does amplify the importance of the “garbage in - garbage out” statement.
What I have compiled here are 4 categories of flaws in the selection of comps as inputs for value models. These are the big ones in my local practice - the ones that definitely lead to “garbage out”.
No model, homegrown or pre-packaged, should be expected to overcome:
1. Wide Variations in Build Quality
Build Quality is not Finish Quality. A homeowner equipped with a contractor and a checkbook can readily change countertops, sinks, vanities, tile work and flooring (i.e. finish quality) however it’s much less common - and sometimes impossible - for owners to change things like wall thicknesses, floor joists, roof structure, slab/foundation pour or original detailing (i.e. build quality, or perhaps “craftsmanship”).
Perceptive agents can see that buyers DO observe and reward noticeable increments in build quality with higher purchase prices.
These pictures show two 4 bedroom, 3.5 bedroom houses - both super desirable and both received immediate, multiple offers. One sold for 30% more because of differences in Build Quality that were obvious to prospective buyers.
Unfortunately there is no MLS field that will assist a model to correct for wide variations in build quality. It must be the responsibility of agents to feed these models with greater consistency.
Not all square footage is equally valuable and individual demographics of buyers value square footage very differently. Families tend to value clusters of spacious bedrooms. Bathroom doors directly off kitchens are frowned upon by almost all. Any room that takes “imagination” to furnish is discounted by more sophisticated buyers.
Preferences for layout change over time so the distribution of square footage must make sense to current buyers. The way a prospective buyer responds to the size and the distribution of the rooms can't be captured in an MLS field. Realtors have the luxury of seeing prospective buyers respond to room locations, room sizes and room transitions - these reactions are things a valuation model can never pick up.
The attached photos show 3 very good-to-excellent Build Quality houses with 4 bedrooms and over 4,000 sq ft that sold at very different price points based (in part) on distribution of space.
Agents know that houses with dated or awkward floor plans sell for less. We also know that there is no MLS field for “Confusing” or “Awkward” so the burden falls to us not to compare vastly divergent layouts.
3. Ownership Structure
Coop, condo, condex, duplex, PUD, HOA, 55+ designations have one thing in common to a Realtor: they modify the way that prospective buyers place value on the assets they see. In other words, a $30,000 kitchen rehab could be worth only $15,000 to a condo buyer but that same rehab could add $45,000 to the value of a standalone home.
There is really no way for a digital tool to understand that people make a mental calculation of value when fees, covenants and restrictions are part of the ownership bargain. Best practice is to compare like-to-like but an agent should their local knowledge to assess what “like” really means.
Aspects of property such as views, water frontage, dramatic approaches, mature plantings and even physical position within an association or PUD are, by their very definition, subjective in value. No valuation model should be expected know that water frontage that is easily viewed from the living room is more valuable than that same frontage placed 200 yards down a rocky path from the dwelling. Or that markets penalize a condo unit placed such that headlights pierce the kitchen windows every time a car enters the association after dark.
Sellers and Buyers look to Realtors to possess this very specific knowledge of consumer preference but I also want to see us be reliable sources for the amount of value-add or value-deduct that each intangible aspect implies. Putting a value on these aspects is an article for another day but for now let’s just agree that accurate comps are those that did not garner (or lose) value for intangible aspects that the subject property does not possess.
Wrapping up and getting on a soapbox for a moment: I advocate for agents to use a MINIMUM of 70% of the input comparable properties be ones that they have ACTUALLY toured. Build quality, layout, etc are hard enough to place a value on when viewed live - so agents that depend on MLS photos to learn the “story” that each comp tells just makes results that much less dependable.
Using more discipline, structure and familiarity in selecting the comps to feed the models may be a formidable challenge but experience tells me that it’s still got to be easier than getting home sellers to buy-in to our valuation results!