In the old days, putting a price on your home took a little work. You might have enlisted the help of a realtor, who'd compile values of similar homes recently sold in your neighborhood. Today, though, you can get an idea of your home's worth in less time than it might take you to read this article. The problem is that many of those values are wrong -- really wrong. And that has implications for home buyers and sellers -- and investors, too.
There's a problem, though. It seems that many of these values are not even roughly the right estimates, but instead reflect huge errors. In The Wall Street Journal, Alyssa Abkowitz explored these errors, offering the example of one California homeowner who got a $640,500 valuation from an online real-estate website, considerably less than the $1.5 million value offered by a human appraiser.
Indeed, even when I looked up my own home's value, I saw that it was listed on one website as having 2.5 baths. Unless there's an extra toilet in my house that I haven't noticed yet, that's an error, and one likely to affect the estimated value. Another site listed it correctly with two bathrooms, and offered a lower valuation.
This is a big deal according to Abkowitz: "Together, four of the biggest sites that offer home-value estimates get 100 million visits a month, with Web surfers using them to determine what to ask or bid for a home, or whether to refinance."
Problems despite admissions
It might seem like this isn't a big deal. For one thing, the companies themselves stress that the valuations are estimates and even recommend checking with appraisers or real estate agents. And if a valuation is half as much or twice as much as it should be, most folks encountering it will likely dismiss it.
But many errors are at least a little more subtle than that, and they can wreak havoc on your home plans. Imagine that you're trying to sell your home, which has been professionally appraised at $200,000, a reasonable price given the location and our current housing market. If one or more online sites value it at $160,000, you may have trouble with prospective buyers who looked up its value online.
What to do
If you're planning to buy or sell a home, take the online estimates with a few grains of salt. If your own home is being incorrectly valued, you may be able to submit information to change its value -- such as pointing out a finished basement, or the actual lot size.
Meanwhile, if you're an investor who was looking at companies such as Zillow and Move as possible investments, it's reasonable to think that if awareness over errors grows, the companies' reputations and futures might suffer. But remember that the companies are upfront about errors and are working to improve their algorithms.
You can also broaden the scope of your stock hunt if you're interested in profiting from the eventual housing recovery. (Hey, it might not be quite around the corner, but it will happen sometime.) Consider, for example, companies such as Home Depot
Once new housing construction regains its footing, companies such as timber specialists Plum Creek Timber
The errors in online home values serve to remind us that it's always good to be at least a little skeptical of the data you're given. That can help in your investing research as well as when you enter the real-estate arena.
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Longtime Fool contributor Selena Maranjian holds no position in any company mentioned. Click here to see her holdings and a short bio. The Fool owns shares of and has created a covered strangle position on Plum Creek Timber. Motley Fool newsletter services have recommended buying shares of Lowe's, Zillow, and Home Depot, as well as writing covered calls on Lowe's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.