Does Redfin Estimate artificially inflate the value of certain homes, or is it just incredibly accurate and sensitive to changing market conditions? The founder of a low-fee brokerage attempted to get to the bottom of the valuation tool and found some startling results.
In a post on Quora, a question and answer website, Joseph Alongi, founder of low-fee brokerage SoldNest said that he believes Redfin has had a big impact on rising prices in the past few years.
Does Redfin’s valuation tool inflate prices?
“They’ve had a major influence on home prices over the last several years and nobody talks about it,” wrote Alongi. “I’m not saying they are the cause, but I think they definitely added fuel to the fire.”
Alongi said he’s been following the estimate closely for the past four years and noticed a big change shortly after he started paying close attention.
“Their estimate would make an immediate adjustment after the home went on the market and another two or three within the first 48–72 hours,” Alongi said. “Redfin admits that they factor in the list price into their estimate when the home hits the market.”
Alongi said he also believes user engagement (i.e., how many times the photos get scrolled through, how many favorites and shares, how much time a user spends on the page) — compared to other comps — is another factor.
Alongi shared an anecdote regarding a client he had about a year-and-a-half ago that found a desirable home in the Silicon Valley neighborhood he had been eyeing. The client was a senior research engineer with a doctorate from Stanford and worked at a tech company in Silicon Valley.
Together, the two picked the house to test Alongi’s hypothesis that Redfin’s estimate will rise as offers start to come in. So they made a $1.9 million offer on the house, which was listed for $1.78 million.
“It was their absolute highest and it was a very strong offer,” Alongi said. “Similar comps sold at that same price with better layouts.”
“The listing agent thanked me for the offer but said that the seller wanted to wait until after the first weekend’s open house,” Alongi added. “So, my client and I checked the Redfin estimate the next day. $1,950,000. By the third day, it had reached $2,210,000 and stayed there. 20 percent over the asking price.”
In another case, Alongi listed a home for $1.1 million — which he believed was fair market value. In the coming days, he watched the Redfin estimate balloon up to nearly $1.3 million. The home sold for slightly more than $1.3 million — another case where he believes a rising Redfin estimate led to an inflated sales prices.
If Alongi’s theories were all true, it would mean the Redfin Estimator is stunningly accurate, but he believes there’s another issue: that in addition to being a listings portal, Redfin is a brokerage and the majority of its revenue is generated by its agents making a commission.
Before making the adjustment that Alongi suggests took place, Redfin agents could have found themselves in a conundrum. Theoretically, armed with all of the knowledge of the market, they could have told their client what they believe was a strong offer, but if the Redfin estimate was much lower, the buyer could be scared off or find a different agent with whom to work.
It could have posed a unique problem for Redfin agents. Telling a client one thing, but the Redfin estimate saying something entirely different, when discussing home values.
“In fact, there are many buyers who strictly base their offer on the Redfin estimate,” Alongi said. “I think Redfin figured this out a little more than a few years ago.”
Alongi believes that with buyers basing their offers off the estimate – which in his mind is rising artificially based on all of the above factors – the home price gets inflated, partly because of that estimate.
Alongi doesn’t believe an online estimate can give you an accurate value, especially because it can’t account for layout and condition. He said his former client, with whom he tested his Redfin hypothesis, is currently testing an artificial intelligence solution to help prospective clients save money by not making an offer off a portal’s estimate.
Redfin itself recommends that the estimate tool should just be used as a starting point — it’s not a substitution for an appraisal or the opinion of a licensed real estate professional.
How it works according to Redfin
A spokesperson for Redfin confirmed that the Redfin Estimate is updated automatically — daily for on-market homes and weekly for off-market homes.
“When a home is newly listed on the market, we have more data points and more-up-to-date information about it compared to a home that hasn’t been on the market for a while,” the spokesperson said. “In an effort to provide the most accurate home value estimate, we take into account the freshest, most relevant information available to us at a given time.”
“The Redfin Estimate uses more than 500 data points, including market data and neighborhood information, to generate an estimated value for a property,” the spokesperson added. “We can’t share more explicit details about the kind of data the algorithm analyzes.”
Redfin’s website doesn’t claim that it factors in listing price in its estimate.
“We use MLS data on recently sold homes to calculate your property’s current market value, making ours the most accurate online home-value estimate for on-market homes,” the page for the Redfin estimate reads.
How other agents responded
Others have chimed in on the Quora post to question the validity of the algorithm.
“I would add that the algorithm is also influenced by recent sales so you can have a house worth $1.2 million one week, and it becomes $1.1 million the next because a house down the block with similar square footage sold for less per foot, but the condition was inferior,” posted Adam McClure, an Oakland real estate developer.
“The condition of the house and lot value (flag vs. corner vs. prime with views, etc.) cannot be accounted for so the algorithm loses accuracy in the face of real-world conditions. If the estimates were super accurate why aren’t banks using it instead of appraisals?”
The issue with online guesstimates
Redfin isn’t the only real estate company to have its estimate tool come under fire recently. Many in the real estate community have questioned if Zillow’s Zestimates were taking listing price into consideration. The company admitted that it does update the Zestimate if the listing has additional information — but not actually the listing price.
Nextdoor, the neighborhood-centric social media site also has home valuations.
Opendoor, the well-funded iBuyer, recently also hinted that it may be getting into the estimation business. Opendoor wants to become nothing less than “the source of truth for real estate valuations,” Opendoor CEO Eric Wu told Inman last week.
This article was pulled directly from Inman News with no curation or modification by Affinity Hills Realty. The views and opinions of authors expressed in this publication do not necessarily state or reflect those of Affinity Hills Realty, its affiliated companies, or their respective management or personnel.