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Values: Being Precise About Precision Expectations (aka Good Enough)

Well, kinda, sorta.

In the discussions I often have with real estate professionals and users of their services (and mine) is the topic of precision in valuation. Its not a direct topic of discussion. It’s kind of stumbled into by accident. Coming up with a reasonable value with undefined expectations of precision can be frustrating for all parties (do we hear “managing expectations” anyone?).

Here are a few examples:

One of the first things I look at is the general price range of the properties being observed.

In my subdivision house example 1, $50 in a $20,000 (0.25%) housing market was the precision that the market expected. That’s pretty tight. In my second example, the precision at the near $1,000,000 price point in my market tends to be about $25,000 (2.5%). In my third example, the expectation is about the same at 2.5% ($500,000 increments at $20,000,000 price levels).

So in my market there is an expectation level of a precision level of about 2.5%. Our firm does relocation work where we are asked to anticipate the market value of a property when sold. The last time we were given a report by one of the firms we do business with, our accuracy level is 3% (the next closest firm was 10%). So this means that we are pretty consistent with the precision expected in the market. If I was valuing property in 1963 where I grew up (for the record, I would be 3 years old), then I would be horribly inaccurate at 2.5% because the increments would be in $500 steps rather than $50 steps.

The reasons for valuation inaccuracy are numerous but here are the biggies:

Sellsius [4] makes a strong case for using your senses in valuation in their post I See, said the Blind Man to the Deaf Lady [Sellsius] [5]. However, I feel strongly that the post should be called “I see said the blind man as he picked up his hammer and saw”, but that’s another topic. 😉

Here’s an excerpt:

There are 6 things an AVM (including zillow) cannot do but which impact value are:

* See
* Hear
* Smell
* Taste (this might be a stretch, but some air can be tasted)
* Touch
* Interpret

Precision is a big topic to cover and it affects virtually every real estate transaction. There is plenty more to discuss on the subject, but what the heck, this post is good enough.