AI and AVM’s Reliability
Carefully reviewing all recent comparable closed and pending sales is the only way to establish price accurately.
In 1936, one of the largest polls ever conducted predicted with near certainty that Alf Landon would defeat President Franklin D. Roosevelt by a landslide. Before the election, The Literary Digest collected nearly 2.4 million responses. Instead, President Roosevelt absolutely dominated, winning 98.49% of the Electoral College. The problem was not a shortage of data. Instead, it was the assumption that more data automatically produced greater accuracy.
Nearly a century later, homeowners can make a similar mistake when they place too much confidence in AI or Automated Valuation Models (AVMs) to arrive at a home’s value. They can process an enormous amount of housing data in seconds, but it still cannot see everything that determines what a home is truly worth: its FAIR MARKET VALUE. Instead, it provides a value that is typically inaccurate.
Many homeowners rely on Zillow to determine their home’s value. But more and more homeowners are turning to AI chatbots to establish value. In asking Google’s Gemini, “Is AI better than Zillow in pricing a home?” It states, “No, generalized AI models are not inherently better than Zillow because Zillow’s Zestimate is already a highly sophisticated, proprietary AI system built specifically for real estate valuation. They have spent two decades training its neural networks and machine learning models on billions of data points to create its current AVM.” Yet, Zillow acknowledges its shortcoming stating that their Zestimate “provides a transparent, free starting point to help homeowners, buyers and sellers better understand what a home may be worth.” It is “not an appraisal and can’t be used in place of an appraisal.”
This is evident in looking at the error rate for their Zestimates in Los Angeles County. On their website, they detail their accuracy for homes that were actively listed and then sold, as well as homes that were “off-market,” never entered into the Multiple Listing Service, and then sold. For homes that were active listings, they recalculate the Zestimate immediately after a home hits the market, using the listing price as a strong signal of market value and the listing description to assess upgrades, condition, renovations, and additions. After adjusting, of course, they are more accurate. The issue is that when homeowners rely on the Zestimate before it is recalculated, it is inaccurate. It is just a starting point for a conversation with a real estate professional about a home's price.
In Los Angeles County, for homes that are actively listed, the median Zestimate error rate is 1.9%. Meaning that a Zestimate of $1 million is off by plus-or-minus $19,000. The home would sell somewhere between $981,000 and $1,019,000. Yet that error rate is based on homes that are recalculated AFTER they are listed FOR SALE, giving tremendous weight to asking prices.
For homeowners that turn to Zillow BEFORE listing their homes, the median error rate is 6.69%. That translates to a plus-or-minus $66,900 for a $1 million Zestimate. That means the home ultimately sold somewhere between $933,100 and $1,066,900. That is an ominous $133,800 range.
Even a highly sophisticated, proprietary AI system built specifically for evaluating home prices can be substantially inaccurate. How can the errors be so significant? AI and AVMs cannot see beyond the data. They cannot see under the roof of a home. They do not understand a home’s condition, upgrades, or subtle nuances of a particular street, neighborhood, or location. That is where HUMAN REAL ESTATE EXPERTS with local market knowledge have a distinct advantage.
Every property has a unique value shaped by numerous factors. A real estate professional with firsthand knowledge of the property and neighborhood can more precisely isolate its FAIR MARKET VALUE by carefully weighing recent comparable closed and pending sales against the home’s condition, upgrades, views, lot characteristics, privacy, craftsmanship, floor plan, curb appeal, location nuances, remodeling, amenities, and much more. AI has become an extraordinarily powerful tool, but determining a home’s FAIR MARKET VALUE requires more than processing data. AI and AVMs cannot walk through a home, evaluate its condition and upgrades, understand the nuances that make up the neighborhood, or carefully weigh how it compares with recent comparable closed and pending sales. Instead, AI should be viewed as a starting point, not the ultimate answer in determining a home’s value. Accurately pricing a home requires firsthand knowledge and expertise of a local real estate professional.
