These sites make for attractive tools on real estate search websites, for prospective home buyers and sellers, by providing automated house value estimates. Yet they fail to provide disclaimers on the limitations that these models tend to magnify price in housing markets and hurt house sales. Online home value estimators use complicated statistical models that attempt to predict a home's price based on comparisons with similar properties by using county property record data on a variety of attributes (sq ft, # of bedrooms and bathrooms etc).
A danger in using this data is that there is a great deal of variation in the quality of information captured by these recording offices. Sq ft can be wildly off, as well as the characteristics of the properties. They tend to work better on homes of similar type and quality but break down quickly on custom homes, homes in rural areas, small neighborhoods and nonstandard property features. Further, no statistical model can understand the market and condition issues of a particular property. For example, these models cannot factor in property upkeep or whether the property sits directly across the street from a gas station, which could reduce its value.
This is of some concern, is the trade off between the % of homes where an automated valuation model could be used accurately. The greater the use of the model across property types, the higher the valuation errors, typically. In the specific application of online valuation engines, buyer offers can be highly influenced by the estimates generated from these models. In forming an offer, a buyer needs to obtain a reasonable view of what a home is worth. The values displayed by online real estate sites provide an easy way for a buyer to develop an offer. However, they do not consider many other factors, for example, a recent remodel. This could lead to low bidding by the buyer, resulting in losing the opportunity to buy.
Such outcomes create an artificial drag on house values during recovery periods and amplify price appreciation trends during boom periods given potential data lags in market pricing. In addition, the use of such valuations in forming bids can lengthen or prevent real estate transactions from being consummated given large potential gaps between sale and offer prices using these estimates.