Spring Real Estate 2006

Publication Date: Friday, April 28, 2006

Buzz or sting?
New Internet real estate sites don't tell the whole story

by J. Robert Taylor, J. D.

Recent news reports have been hyping real estate Internet sites such as Zillow.com and REDFIN.com. Zillow claims to be able to value your home over the Internet. REDFIN has also made a splash in Seattle by representing buyers and rebating to the buyer a portion of the commissions offered to the selling agent.

The Zillow site is best tested by using very recent sales to see if the Zillow value for the same property is close to the actual sales price achieved. I looked up some recent sales of homes in Palo Alto and Menlo Park, then went to Zillow.com and entered the address.

Example 1: A home that sold six months ago for $2,500,000 in the Crescent Park area of Palo Alto. Using the Zillow calculator the value is just under $1,500,000. You are encouraged by the Web site to refine your estimate of value by choosing comparable properties from a list of recent sales.

Many of the "comparable sales" were in Menlo Park, and obviously it is not appropriate to value a home in Palo Alto on the basis of sales of property in another city and county. In looking at the "comparable sales" something else became apparent. None of the comparable sales listed had sold for more than $1,500,000 and none were in the same neighborhood as the property I was trying to value.

How can you come up with the right value if you only look at lower-priced sales of property in different neighborhoods? Obviously, this is a problem.

Example 2: A home that sold two months ago for $1,898,000 in the Old Palo Alto area of Palo Alto. Using the Zillow calculator the projected value was $1,221,591. The highest value on any comparable sale given was $1,400,000. Again, many of the comparables given for this property were on the other side of Oregon Expressway and were not appropriate comparables. The indicated value was off by more than 35 percent from the actual value achieved.

Example 3: A home that sold for $1,525,500 in January 2006 in the Willows area of Menlo Park. Using the Zillow calculator the projected value was $1,106,083. Many of the suggested comparable properties were in Palo Alto, which should have skewed the price higher, but it did not seem to help.

Many of the listed comparables had sold more than a year ago and it is difficult to tell if Zillow took into account any changes in market conditions over the past year in coming to its estimate. The typical appraisal is limited to sales occurring three to six months prior to the date of the valuation. None of the suggested comparables were priced more than $1,300,000. The Zillow indicated value was again off by more that 25 percent.

Why Zillow doesn't work

The data collected by Zillow is from publicly available data from the county assessor's office. Unfortunately, the county data is only accurate if the buyer and seller disclose the transfer tax on the grant deed. If they chose to keep the price private (and their names out of the local papers) the buyer and/or the seller can elect not to record the transfer tax on the face of the deed. If they do this then the assessor's records show a transfer, but there is no way to get the sales price from the data provided by the county assessor.

In the Bay Area, buyers and sellers are seriously concerned about privacy, therefore they almost never record the transfer tax. The last thing most buyers want is to have all their friends and neighbors reading how much they spent on the house they just purchased and the size of their loan. The last thing most sellers want is for their neighbors and friends to know how much money they made in selling their home. Privacy is protected, at least in part, by not recording the transfer tax on the face of the deed. This is the downfall for sites such as Zillow since they are totally dependent upon cheap publicly available information in order to base their "zestimate" of your home value.

Since a large portion of the market in our area is sold by Realtors, their multiple listing database has the vast majority of sales and therefore is a better source of accurate comparable data. Unfortunately for Zillow that data is not for sale and is not available except for those who belong to the multiple listing service. Reliance on the Zillow-type calculator of value could therefore be based on inappropriate data.

We know in the Bay Area that the real estate market is dynamic. Several times over the past eight years the market has jumped by a factor of 20 percent in just a month or two. Clearly the Zillow estimator could not track this type of market change. When your home is priced it is often as much about the current competition as it is with the past sales. Both are important ingredients in determining market value since always pricing on past trends may fail to recognize the current trend.

The other Internet site that is getting some buzz is REDFIN.com. It is a real estate site serving buyers by proposing to rebate two-thirds of the commission paid to the selling agent.

Sounds good, but as always there is a catch. REDFIN does not actually show you the home. It tells the buyer to go to an open house or to contact the listing agent to see the property. Try that in Atherton or Woodside!

Clearly, many homes that are for sale may not have open houses scheduled at the time you have available to see homes. Also good luck getting a listing agent to show you the property after you explain that the REDFIN agent you are hiring to represent you doesn't offer that service. REDFIN is assuming that listing agents are happy to leave their office and show property to another agent's client, a misguided assumption to say the least.

Let's say you get lucky and the home you are interested in is open on Saturday and when Saturday comes around it is actually still for sale. You can then contact your REDFIN agent and he/she will supply you forms you can fill out yourself to make an offer.

The REDFIN agent will then help you review the contract and negotiate the purchase. How they do this without ever having seen the property is unclear. In California, selling agents have a duty to inspect the property and disclose any perceived defects that may materially affect the value and or desirability of the property. Selling houses is not like selling shoes. When you try on a pair of shoes you instantly know if they feel right and the price you must pay is clearly marked.

Purchasing real estate has a much more complex set of issues to deal with, including location, property condition, neighbors, design, easements, zoning restrictions, value, financing, and the list goes on. Unfortunately for REDFIN, these issues can be very important to consider prior to making an offer on a property. This takes viewing the property with a professional eye and knowing the client's needs and concerns. REDFIN seems to be attempting to shift all of these responsibilities to the buyer. This would be a problem for the agent in California since brokers here have statutory duties that cannot be shifted to the buyer.

Further problems might arise when the buyer begins to complete his own sales contract without the aid of an agent or an attorney. Presumably the agreement would be reviewed by REDFIN, but the devil is in the details and without seeing the house and knowing the issues it is difficult to draft an appropriate contract that addresses the specific issues that are of concern on the property you want to purchase.

The Internet is a nifty tool. However, when investing in an asset that will likely be a healthy percentage of your total net worth, it is a good idea to get all of the expert help you can. To quote my mother, "the best is none too good." Becoming an expert is often much more expensive and time consuming than just hiring one. Listen to the buzz, but beware of the sting.

J. Robert Taylor, J. D., a real estate attorney and broker for more than 20 years, has served as an expert witness and mediator and is on the judicial arbitration panel for Santa Clara County Superior Court. Send questions to Taylor c/o Palo Alto Weekly, P.O. Box 1610, Palo Alto, CA, or via e-mail at btaylor@taylorproperties.com.