1 in 5 valuations are wrong – Kent Lardner

In today’s show we will tell you about the evidence that shows that 1 in 5 valuations are wrong by as much as 10%. We talk with Kent Lardner, from 3Comps.com.


Kevin:  In my experience, most disputes in real estate seem to come down to price. There are discussions about whether or not the agent has given good service, but by and large, my experience is that most buyers want to buy a property for less than what it’s really worth and most sellers want more than what the property is worth, so therein lies the first problem.
Then, of course, you bring in another layer of problems when you involve real estate agents who low-ball or try to buy listings, which we’ll talk about in just a moment and explain what that really means, and then you bring in valuers who have a reputation of always valuing too low. Well, I was staggered the other day to find out that one in five valuations actually miss the mark by some 5 to 10%. What’s happening?
Kent Lardner is a good friend of ours and has built a website called 3Comps.com, which I’ll explain to you in just a moment, tell you how it works, and how you can benefit from getting on the site. He joins me.
Hi, Kent. How are you?
Kent:  Hi, Kevin. How are you?
Kevin:  Good. Kent, I wanted to go through that description because it really is a bit of a minefield, not only for agents, but for sellers, for buyers, and for valuers, when we start to talk about price of real estate. Let’s have a look at a couple of the disputes that you have come across or the types of disputes, and maybe we can talk about those, first off.
Kent:  Sure, Kevin. I’ve been looking at appraisal disputes for a number of years. The first one that stands out is the listing price dispute, which most real estate agents know about. Certainly, that comes down to unrealistic expectations or agents seeking to buy a listing. Obviously, the better agents who can communicate the reality of the market and do a quality CMA can deal with that, but that has a flow-on effect.
There are obviously a number of different appraisal disputes that I’ve identified. The second being sale price disputes, where the appraiser or the valuer estimate may fall short of the agreed sale price. That’s the focus of some of the research that I’ve done more recently.
The final appraisal dispute that I’ve identified is the mortgage claim dispute. In Australia we have a few lender mortgage insurance companies, and typically where they’ve been a little bit aggressive in some of the claims, that has a flow-on effect to the valuers, because they’re obviously worried about claims that might follow through. That creates a bit of a cycle where they tend to be a little bit conservative or may feel pressured to be conservative because they may have been hit by a claim in the past.
Kevin:  One of the most common questions I’m asked is how do I really know what my property is worth? I nearly always will say, “Look, get a few agents in and get a bit of an idea. But if you really want to know, make sure you get a valuer in.” But maybe that’s not such good advice.
Kent:  It depends on the marketplace. One of the things we found through our study is marginally underpricing. When you look at the sample and the research I’ve been doing, about 60% of them fell on the conservative side.
The methodology that I’ve been using is quite a standard test, where what we do is we take a valuation against a property, and then we take that and match it up to a subsequent sale. If that sale happens between three months and 12 months later, what we do is we index up that valuation and pair it up to a subsequent sale.
Now, there are obviously some things you need to call out there, such as it’s a different market, etc. But when you apply that same methodology across multiple valuers and then compare the variation or the error rate, you can see some of the valuers have a much tighter tolerance or much narrower variance, and others do have a tendency to have a broader range of variation.
When I dive into that, what I find is some of the biggest variances or errors are obvious ones. It might be a change of zoning or it might be a renovation. But you take those out of the sample, and then what you’re left with is the true error.
When I dig a little bit deeper, what I do find is that more often than not the comparable sales that are being used are often the ones that they’ve done the detailed analysis on and they have them already in their computer, in their laptop, and they’re re-using those same comparable sales. If you leave that too long, that has a bit of a flow-on effect, especially if the market is growing.
Probably the number one root cause of it is you have a comp sitting in the system that you’re familiar with, you’ve inspected the house, you’ve looked at it, and you’re re-using it, but it might be just that little bit too old and it needs to be refreshed.
Kevin:  I guess there will always be room for error when you have humans involved like this. But balancing all that up, there has also been a lot of criticism about desktop valuations and how they don’t take in all of those parameters that you’ve just been talking about. It’s a combination of two things, isn’t it? It’s the combination of getting some human involvement into a desktop valuation that’s going to make it even more effective. Is that a fair assessment?
Kent:  Yes. I’ve done a fair bit of analysis over the years on desktop valuations, and probably the irony a lot of people would see is that they’re rather less prone to error primarily because the process by which the banks and the companies select what’s eligible for a desktop. They go through a filtering process that identifies the easiest-to-do properties. Actually, one would argue that nothing really beats that full detailed inspection, what’s happening is there’s a bias towards those desktops because we’re selecting the easy stuff. We’re cherry picking.
One of the theories that I’ve long held is that if you look at the service areas that the valuers have to cover, they have to cover much broader service areas, sit in traffic, do detailed reports, and work quite hard. What that really means is that they’re covering a broader market area.
Compare that to a typical real estate agent. I’ve long held the theory that an agent who’s focused on maybe two or three postcodes, maybe a dozen suburbs, they really deep dive into that market. They’re inside the house continuously. They’ve spent several hours in the house. They’re actually really good at finding comparable sales.
Kevin:  In other words, sometimes valuers could spread themselves a bit too thin, or even some agents are guilty of spreading themselves too thin by trying to take on too big an area, rather than become an area specialist, Kent.
Kent:  Yes. The crux of it is the more focused you are on a certain area, the better you know that market and certainly, the better you are at finding comparable sales, which I think ultimately, this is what it comes down to. It’s about identifying current and relevant comparable sales to the property you’re looking to sell or value.
Kevin:  Tell me about your new website, 3Comps.com. How does that work, and who can benefit from that?
Kent:  3Comps is a really simple model. It’s about an agent being able to select comparable sales, as they would in their CMA, and then passing that on to a valuer or passing that on to the companies that produce the automated valuation models. It’s that simple.
It’s a free service. Typically entering your address in and entering three comparable sales. It takes about three minutes to do. Then by passing that on, the objective is to avoid appraisal disputes or avoid valuation disputes.
Kevin:  Who can benefit from the site, and who can use it?
Kent:  Ultimately, I think it’s the sales process that benefits. If you’re looking to sell a property, if there’s been a tendency to have a dispute, or if you’re a real estate agent who has experienced a delayed process due to a valuation dispute, you’d certainly understand the value in helping grease that axle. What it’s about is creating a list of three comparables to pass on to the real estate valuer, and it just helps their process.
Kevin:  Can consumers access the site and get some benefit from it?
Kent:  Yes. It’s accessible to the public. It’s accessible to valuers. The site is 3Comps.com. All you do is search as you would search on a portal. For a real estate agent, they register, and they can upload and use the administration screen to upload their comparable sales.
Kevin:  For a consumer, what will the public see when they go to the site?
Kent:  It typically would only ever apply to the properties that have been listed. But what we’d also like to do is have some use for it in that refinance world. If a real estate agent is associated with a mortgage broker or has referred a loan to somebody, it might be handy to throw the comparable sales in for a refinance, as well, if they’re aware that the property is going for a refinance loan.
But certainly for a new listing, it is the comparable sales that the agent would have already selected in their CMA. Certainly, for a home owner, they’ve already seen those comparables. For a home buyer, though, it suddenly opens up access, and they can see the relevant comparable sales.
To date, what we have is an increase in automated valuation models that are coming online. Sometimes you see good comparable sales; sometimes you don’t. Most of the time, they’re algorithm based, but nothing, in my view, really beats the experience of a local real estate agent to select those comparables.
Kevin:  Check it out for yourself. It’s 3Comps.com.
Kent Lardner, thank you so much for your time. It’s been great talking to you.
Kent:  Thanks, Kevin.

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