AI & Real Estate

 I recently read an article about RBC (Royal Bank) getting into the real estate space with the purchase of an "AI-powered real estate company" & that has renewed conversations in our industry about the flaws surrounding home valuations powered by AI/Algorithms.

For many years Zillow (in the US) was the butt of the joke around their unreliable "Zestimates" & what a disservice their inaccurate information was for buyers & sellers.

And now we get to join in the fun too, lol! Well, to be fair, it's not new here either...

HouseSigma, Zolo, Listings.ca & others have been offering a similar "Automated Valuation Tool" for a while so it's not like RBC is offering something new or innovative, they're just the new kid in town...

But here's the problem with these AI/Algorithm valuations - just like Zillow & their Zestimates, they're not necessarily accurate & it can create a lot of confusion because consumers can get "stuck" on these numbers which can be off by hundreds of thousands of dollars!

There is a screenshot making the rounds at my office right now, that came from a thread on Reddit, about a condo townhouse in South Oshawa that shows a HouseSigma value of $923k & a list price of $899k (on the market for 48 days so far). The highest selling price to-date for a 3bed/2bath condo townhouse in any of the complexes down in that area is $750k from back in March of 2022. The most recent sale in that particular complex was in December - a nicely updated unit without being too over the top - and it sold for $545k.

The townhouse in question has been completely renovated, but so were so many others that sold for far less! The $899k number makes zero sense...not at the height of the market & certainly not now! This should have been chalked up as some kind of glitch in the system BUT somebody on the selling side has chosen to ignore the actual data & waste time, money & resources at a price that would never be achievable? It just makes no sense!

And this is a flip too, so they must be hemorrhaging money...🤦

And there are lots of stories like this - maybe not quite as dramatic, but still lots of face-palm worthy fodder for around the water cooler (or in online chat groups)!

There are so many variables when it comes to valuing property & nuances to be considered when comparing homes to each other. How could it ever be possible for AI to be anything more than just another data point to be added to the mix when using a proper sales comparison approach to valuation? I just don't know. And in the case of the over-inflated HouseSigma price on the townhouse that I mentioned above, I think it would be considered such an outlier, that it would probably be disregarded anyway, lol!!

But if I had a dollar for every time someone said to me, "but Kelly, HouseSigma says XX..." 💰💰

Here are some theories I've heard as to how these numbers are being generated:

The RBC tool takes what the seller paid for the house X years ago and applies the market increase/decrease, then spits out a number. If this is their method the only comparable they are using is the subject property. If the client over/underpaid for their property, it will affect the outcome severely.

They are using the price that TREEB uses for 2022. It's the average of all of the monthly prices for the entire year. The correct number should have been the December number. Just compare this to the stock market. By using the number they did, they ignored half the interest rate increases. 

They use statistical regression analysis. Practically useless in rural areas where there is not enough data for those calculations.

 Algorithms tend to be proprietary so it's likely we'll never know the exact formula they're using - and it's also likely that it varies from site to site as well. I'm sure it's something that gets tweaked regularly as well!

It's not that I'm against AI, I think there are lots of useful applications for it to help us save time, but I think it's a first step - NOT the only step in whatever it is that we're trying to do.

I'll leave you with this final screenshot that illustrates that just like everything you find on the internet, you've got to take it with a grain of salt & when you're dealing with an asset (or a potential one) worth hundreds of thousands of dollars, you want to seek real live, experienced, professional help!

Until next time,