FISBOs And Zillow Zestimates – Why They Both Suck For First Time Home Buyers
What Really Happens With A For Sale By Owner, And How Inaccurate Zillow Zestimates Really Are, And The Answers On The Zillow WebsiteEveryone is looking for the easy way and it’s rarely the best way. We’ve got two examples of that. The first one is For Sale by Owner homes, why it mostly benefits the owners and not the buyers. We tackle another quick and easy internet solution, the one to help you find out home values, Zillow Zestimates. Spoiler alert, they zuck.
—What’s happening? What is up my how to buy homies? That’s what I’ve decided to call you. I hope you like it. If you hate it, send me something better. I’m out of ideas. This email came to me from a reader. I called my wife, told her not to wait up. I said, “There’s something very important. I have to tell my readers,” flipped on the microphone and here I am. I moved my sitting desk into the standing position, turned on John Williams Greatest Hits 1969 to 1999 to inspire me. In fact, I was writing this out in my office, when my office isn’t dark but the rest of the building is, and I did it with a Star Wars theme blaring because the people have a right to know. I don’t know what I meant by that analogy. Maybe I’m equating myself to the force. Our first topic is For Sale by Owners. They’re commonly known as FSBOs in the real estate world. Many renters are out there, especially in more rural areas, think that buying directly from the owner is a great way to get a deal. Let me be clear before I start and poop all over the idea. It can occasionally be a way to get a good deal but it’s not because of the reasons that you think. Most of the information about the great deals that you can supposedly get when you’re buying an FSBO or For Sale By Owner, most of those ideas and ideals are outdated. Can it still happen? Occasionally, it can. This is why it happens. It’s not because it’s a great deal because you’re cutting out the realtors. It only works because usually the owner is so totally out of touch and doesn’t know how to work a computer that they haven’t figured out what a catastrophe this is for them. The other option sometimes is in that rare case that you meet that nice old gal or old fellow who wants to sell to nice kids like you for a fair price. Even in that instance, you probably can still get screwed without an advocate looking out for you with all the details in buying a home. Those are the rare positive potentials of getting a deal on FSBO or a For Sale By Owner. Just like E.T. Track 2, that’s playing in John Williams’ album when I was writing this stuff down. Don’t get sucked into a good story with nice aliens, a little girl in pigtails and flying bicycles. This is not a story game. This is real life. Here are the general thoughts on buying directly from an owner. Most of the time, except for the rare occasions of an owner who never heard of the internet or you’re buying from the nicest person in the world who loves losing money and they must love you. Most of the time this is what’s going down. When an owner wants to sell directly to a buyer, it’s a major red flag to me. As I mentioned in the old school world, this maybe would work out for the buyer every once in a while. Now in the digital age, the end of 2021 if you’re reading this in the future, and again, I hope you’re not on a flying car when homes can be marketed on the open market with that fancy new inner webs, it’s playing foolish for anyone to sell their home directly to one buyer without seeing what price the market would bear for their home. Think about it. Why would a seller even consider this, especially at the end of 2021? That’s probably going to be going on into 2022. What do I mean by that? The current housing market, where almost every home goes into a bidding war, who would not want to drive the price up on the asset that they are selling? There’s this factor. These are landlords or investors that are selling the home. Do you think they are looking at the numbers? Ask a trusted pro. Click To Tweet They were smart enough to figure out how to buy a home that somebody was renting. This is their investment. Investors want to make money and they love taking advantage of novice, inexperienced, desperate buyers. It makes zero economic sense to any seller to not test the market, especially in a competitive sellers’ market. Why would they do it? The short answer is a little abrupt. It’s because they’re cheap sobs. They’re hoping that someone like you hasn’t read this show. Here’s the way it works. The seller pays to sell the home. It costs money to sell a home on the MLS with the realtors. The sellers pay for both. In a standard 6% contract, they’re going to pay 3% to the agent selling and marketing their home and 3% to the agent you should have to represent you. A buyer’s agent protects the buyers. Remember, you don’t pay anything. The owner pays for it all. They’re hoping that some poor sucker will make an offer with no representation and protection so that they can make more money on the deal. They have all the power and you have no advocate and representation on your side. They are fully protected and you are naked as a jaybird. Time for this week’s, What Do We Say That? Naked as a Jaybird. Let’s find out. In the 1920s and ‘30s in America, jaybird was short for a jailbird. When they were brought in from the bus, they went to the showers were given their kit, and then made to walk from one end of the prison to the other naked. Hence, naked as a Jaybird. Let’s get into the email that inspired me to record this and get it out to you before Thanksgiving weekend so you can read this, either when you’re trying to calm down before you go visit your crazy family or when you’re driving home after what was a blood bath. This particular email is about tenants looking to buy the home that they currently rent. The lessons that we find out here, they’re good for any buyer looking to buy directly from an owner, whether you’re the tenant who lives there or not. I have had buyers, Dave and Colleen, great people. We spent a lot of time trying to figure out if they could buy the house they were renting. I gave them all the information I’m about to give you. We decided to buy something else. They did. They’re super-stoked. The email goes like this. “My wife and I have rented this home for many years. At this point, while we rent through a rental company, we have built and developed a relationship with the owner of the home. He likes us as tenants and often asks us for input on various repairs and how they will affect their living space. After our most visit concerning a water heater replacement, we had a conversation about potentially buying the home from him.” Out of the email, here come the lessons. First up, in this particular situation, from a pure negotiation standpoint, when the tenants of a home ask the landlord to buy the place that they’re currently renting, you’ve already lost at the negotiating table. You showed your cards. What we like to call in the business, the only person you’re bidding against is yourself. You just told the landlord who has to fork out money for a new water heater, “How about we take this money pit off your hands?” Back to the email, “We love the home and know its minor issues well enough that we’re confident that we can address them ourselves within our budget if we were to own it. After crunching some numbers based on the Zillow price.” Stop right there. Tangent alert, this is going to take us right into email number two about Zillow and Zestimates. We’ll get back to the FSBOs. A lot of times, when people are figuring out and evaluating how much they’re going to purchase a home when they’re buying directly from the owner, they love to use the Zestimate. Both of them get to our second zucky thing of the day because Zillow Zestimate zuck. This person sent this second email, they’re working with a unicorn and ran into a question on how much to offer the home. It’s a counteroffer. They’re already in negotiations. They reached out to me because they were talking to the unicorn and they were like, “I don’t really want to check with Dave.” The question was to me, they said, “In your experience, David, what’s your opinion of Zestimates being accurate when it comes to home appraisals?” “To try and decide whether to raise their offer but they don’t want to get stuck paying a ton more out of pocket if it appraises lower.” I’ll get into how the appraisals work in another episode. Basically, they’re trying to figure out the value of the home, what an appraiser might think the home is valued for. They’re asking me if the Zillow Zestimate is something that can help them figure out the market value of their home. This tangent is going to have some good lessons that will eventually lead us back to the FSBO story. I must address the Zillow Zestimate. I’ve been watching Zestimates since they first started. I’ve been doing this that long. In my pathetic world of realtor social media, you know how funny those realtors are. I have seen a bunch of memes about how wildly wrong they are. Most of them are cringingly not funny but they are correct. The basics of the Zestimate, they’re wrong. Zillow will prove it. The way it works is for a while. Zillow Zestimates were so bad and afraid of being sued. They had to put the numbers and a disclaimer on their website. They hid it a little bit because they didn’t want the public to know. Let me tell you where you could find these numbers if you go to Zillow’s homepage, Zillow.com. Don’t sign in or anything. Act like you’ve never been there before. Scroll down to the bottom. You’re going to see several small links to navigate you through the website. You’ll see down there on the left-hand side the Zestimates link. You’ll click on that link. If you’re super nerdy and you want to go directly right there, it’s www.Zillow.com/z/zestimate/. That website is their explanation of their wonderful Zestimates. Here you’re going to see the big question at the top that asks, “What is a Zestimate?” You figure if you click on that, that’s what you want to know. They give you a little paragraph explaining what it is but the real answer to a Zestimate is a giant spreadsheet created by Zillow. That spreadsheet was created by inputting some basic numbers on home sales. That’s how they come up with the value. They don’t take into account any outside factors like lot location, local area facts, what side of the street it’s on, views, the proximity of the neighbors, the horrible decor of the home, and tons of other non-numeric yet very tangible factors that make up a home’s value. They give you a paragraph that I’m pretty sure it doesn’t say that. Let’s see what they were forced to publish for fear of being sued about the accuracy of these Zestimates. Scroll down to the heading underneath their little paragraph. There’s a heading that says, “Active listings accuracy.” Take a look at those numbers. There are three different categories there, top Metro areas, States and then National. If you click on one of those, you’re going to see right there they admit that they are off. There is a category that says, “Median Error,” right at the beginning. Real estate is all about timing. Click To Tweet What I did was I clicked on State, the middle one, and I looked at Median Error. It’s about 2% off. I ran through it a little bit and there are 25 states above 2%. New Hampshire and Maine were 3% but the average was around 2%. That doesn’t sound like a lot, but 2% of an average home is $375,000. That’s the average sale price, 2% of that, which is the average unless you’re in New Hampshire or Maine. That’s $75,000. Double that. If you’re thinking about buying, $600,000 or $700,000 home, $7,500, maybe $10,000, maybe $15,000 off, that’s no joke if you’re crunching numbers in a bidding war and trying to be the chosen one and the offer of your dream home. That’s one of the stats right there on their page. There are a ton more that are down there as well. It’s going to open your eyes to see how inaccurate these are. Not to worry, I have a solution. First, let me give you another one of these stats. I went over and I clicked on the National link in the Active Listings Accuracy. Nationally, the Median Error is off 2%. Two columns over from that is a stat from the Active Listings Accuracy that says, “Within 5% of the sales price.” They’re touting it like that’s a win. “Didn’t we do great? We came within 5% of the sales price.” Let’s think about that. 4.9% is a buttload of money when you’re talking hundreds of thousands of dollars. The stat says that, “Of Zillow’s $1.5 million Zestimates, 82.2% hit this 5% threshold,” that they’re so excited about. That’s the 82.2% say, “We’re close to the value of the home, based on what it sold for. The price that the actual winning buyer or the bidding war what they paid for it.” The 82.2%, what does that mean? That means it sucks for 17.8% of you if you were using Zillow to help you decide how much you should offer or respond to a counteroffer. You want to get even crazier if you scroll down to the Off Market spreadsheet. This is a second spreadsheet underneath the Active Listings. This is the one that a lot of people are thinking about trying to sell their home and wondering, “How much is my home worth?” If you’re using that to figure out the values of a neighborhood, read these numbers. Remember, this is the one that they were forced to publish. The National Off Market numbers had a Median Error of 6.9% when they tried to guess how much a home is worth. Off by almost 7%. Their accuracy meter, the one they have within 5%, only 39% of their non-active homes landed within 5% of their Zestimate when they sold. What’s the lesson here? Whether you’re thinking about using Zillow to help you with a For Sale by Owner, if you do that, you’re over too in that scenario for anybody giving a damn about you. If you’re using Zestimates to help you decide what to offer on a home and what it will appraise for, that’s where the Zestimates are. There is a solution. You know you guys say, “Boomer.” When someone’s saying something that sounds old, I have to turn that around and talk to you guys out there. I’ll say, “Z-er or Millennialer, stop relying on the internet and spreadsheet data that misses major factors when you could hire a real person for free to give you a real market valuation, even give you a market forecast of where the value might be in the next coming year.” The people who control the values, the person who you’re trying to guess with the appraiser, why would you go to Zillow? Appraisers don’t use Zillow. It’s fine. You don’t know what you don’t know. No big deal. They’re asking me, “Should I use the Zestimate to help me figure out what it’s going to appraise for?” No, because the appraisers don’t use it. What they do is look at the homes, not a spreadsheet and they call realtors. I get calls every single week from appraisers because they’re trying to do their job correctly. They asked me about homes that I’ve sold. They want to get more information than what they can find on the internet through the MLS. They ask me specific personal questions about the home. “Why did it sell for a certain price?” It’s a human algorithm. Those appraisers, that human factor, control the values of the home in the market. How do they do it? By looking at the homes themselves or talking to other realtors. It’s pretty simple for you to figure out what I’m going to tell you is your big secret. What do you do when your precious internet can’t give you the answer? First, you hire a trusted pro and then you ask them. Your local unicorn realtor is always more accurate than Zillow, even if they post stupid memes about it. They can also tell you if values seem to be going up in the near future, which should very much be a part of your decision of how much you pay or even have to pay a little bit more to get that home. I mentioned this several times on the show, what’s going to cost you more, “overpaying” now on the perceived current market value for a home that is going to be worth 1%, 2% or 3% more in 6 months or deciding to listen to the Zestimate instead of your realtor, or just decide that, “I know what I’m doing. I want to get a deal.” You underbid on home now only to have to pay that 1%, 2% or 3% more for a similar home in a month or two. Think about this. If you undercut and you miss home, that home is going to get sold for a price higher than yours. That becomes the new comp. The appraiser is going to use that comp or comparative home as the new value. The one that was sold to the guy that outbid you buy $5,000 because you didn’t want to overpay. That’s the new comp and because the market’s going up, they’re going to decide that you should pay $5,000 or $10,000 over that guy’s price. You didn’t want to meet that price. You’re going to pay %10,000 to $15,000 more than you would have for the other home. Real estate is all about timing. All those numbers and the facts that I gave you all come down to figuring out the timing part of it. “Is the market going up?” That will affect what you’re going to be buying for a homebased on market value and the potential of where it might go. To sum up this tangent about Zestimates. Zestimate zuck, especially when you can get a trusted professional to give you a truer market valuation and they’ll do it for free. “Boomer that,” once again, I’m not a Boomer. I’m a Gen X-er. Back to the FSBO, the For Sale by Owner reader email. “After crunching some numbers based on the Zillow price, and some of the loan figures, it’s easily within our price range.” That’s me again. They crunch the numbers based on the Zillow price and the loan figures, they thought, “This is on our price range.” Back to the email. “We both have high enough credit scores to proceed with a home loan. If we continue to pay what we already pay for rent on the mortgage, we can pay it off rather quickly and potentially use it as a rental property when we move into a larger home down the road.” Solid idea. I like that. Here’s the thing. What are the odds that this home that you’re living in is the best purchase for you? That’s number one. Let’s not even talk about fact that, “Is the right deal for you if it’s sold by an owner?” “Let’s talk about that.” That’s what we’re doing. Back to the email. “The owner has come back to us and told us that he would sell it to us but his personal accountant advised him that he should only sell any of his properties with owner financing.” He was advised by an advocate protecting him, rather than sell the home to get all the cash, which would mean that he would take a capital gains tax hit. He should move his loan on this asset that he owns on his multiple properties. He should move the loan from his bank to you and let you take that on. He effectively gets no tax hit. No change in his monthly income because instead of collecting rent from you every month, he’s going to collect a loan payment and he gets to do all that without ever having to fix your water heater or anything else down the line. A sweet deal for him. I don’t think you should buy the home from him. You should hire his accountant. I know I sound like an A-hole and I’m being snarky. You absolutely need an advocate on your side. Click To Tweet As first-time home buyers, you have huge targets on your back for these landlords, whether you’re trying to buy one that you’re living in or that someone’s trying to sell off the market as a For Sale by Owner, they are investors and it sucks but they are investors and you want to be an investor someday. Who do you think knows what’s going on? There’s a big difference. Your first home is like your first murder trial. It’s going to be very messy and only a fool represents themselves in something this important. Back to the email. “We were happy with the price he offered us but after running the numbers of what he wanted and for how long we’d be paying, it was nearly doubled the value of the home.” This is going back to some basis on loans. I’m going to freak the crap out all of you out there. This is the way loans work. You know how you’re stoked when you talk to the car dealer and you get them down on the sticker price, you’re like, “I’m not paying that. Thirty thousand dollars a sticker. I’m out the door $25,000?” Let me introduce you to the financier’s best friend. It’s called amortization. If you buy a $375,000 home at 3% interest on a 30-year fixed loan, you pay your regular monthly payment on schedule but with no extra payments for 30 years. That sounds like a great deal because you’re all stoked because you realize in the year 2035, you’re going to have a $1,600 a month locked-in fixed payment. You’re probably going to be out looking for apartments for your kids in 2035. The rents are going to be $5,000 a month. You think, “Sweet deal. I paid $375,000 for my home. I got all this equity. I only pay $1,600 a month.” If you continue to pay on schedule and pay with no extra payments, in 30 years, the grand total you will have paid on the $375,000 home with the amortization of your interest is $569,164.36. That is amortization and that is how loans work. I know what you’re thinking, don’t go back and do that math on the car you got for such a steal. When you do that and figure out the grand total you’re going to pay, you’re going to cry a lot. Back to the email. “What’s your opinion on owner financing. Is there any advice you could give me to incentivize him to allow us to purchase it through a bank or mortgage firm that would allow us to try to take advantage of a potential first-time homebuyer, grants or loans?” First of all, probably not based on everything we’ve learned about For Sale by Owner. This dude’s accountant is telling him that’s the way to do it, I seriously doubt it. You don’t see the whole picture. The reason he wants to loan it to you is because it’s the perfect situation for him to do an owner financing situation and get another loan on the property from you instead of him having his loan through his bank. The tenant here mentioned that they wanted to take advantage of the first-time buyer, grants or loans. That’s the last reason why you should want to get your loan. The main reason is that the owner is totally screwing you. When you’re trying to get a loan, there are tons of low-down-payment programs out there that aren’t first-time homebuyers, grants or loans. A lot of those have income restrictions. They’re very messy with the paperwork and difficult to do but you can still get a 5% conventional loan, a 3.5% FHA loan, which is still a great loan or even a 3% conventional loan. Most of my first-time buyers and the folks we’re referring to all over the country, that’s what they usually do. The recap on For Sale by Owners, you are not protected. The owner gets all the protection, probably a cheap sob not wanting to pay someone else to sell his home. You should ask yourself, “Why aren’t they testing the market? What are the odds?” It’s because they want to sell it to me for less than they could get from a bidding war. Most importantly, which I didn’t discuss, no matter if you’re buying it from the place you’re living or if you’re looking at FSBOs yourself and you’re not living there, you need an advocate on your side. The protection of a realtor to help you with all the independent third-party evaluations, inspections, surveys of the property, and anything else that you should investigate before buying any home, you need someone who’s been through this, can explain everything to you, and then you need someone with your best interest in mind to help you negotiate anything that comes up from those inspections, investigations and surveys. If a resolution isn’t met, you have to be able to pull out of the deal with no harm to you. What if the owner is not willing to negotiate at anything? You got to pull out. How do you know that you’re going to be protected? Unless you’re working with someone who does this all the time. That, my bitching readers, my How to Buy a Homies. That’s why FSBOs, For Sale by Owners can bite you in the butt. You don’t know what you don’t know. That’s cool. In most states, the contracts have to be used when realtors are involved in any purchase or sale of any home, have a whole bunch of protections already written in what they call boilerplate stuff. It’s already written in for the buyer. I guarantee you’re not going to get those protections when the owner’s accountant is drawing up the official paperwork. If you like what you read on the How to Buy a Home show, then for God’s sake, give it a five-star review and a quick review. A couple of little lines is super helpful. I beg for that every week because I want to help others avoid the pitfall of buying their first home. I want a nation full of first-time home buyer winners. If you’re looking for a unicorn yourself to protect you in one of these situations, DM me, email me, find me at DavidSidoni.com, HowToBuyAHome.com. Fill out the contact form and ask. One reader called me The Master Unicorn Wrangler. I like that one. This is working for thousands of people across North America. I couldn’t be happier. They’re getting the protection and service they deserve. FSBOs and Zillow Zestimates. You shouldn’t have to do this alone, especially because you can hire a pro for free. The seller pays for your realtor. You can go through all these episodes and learn how to be protected and how to do this right. Everything is in there. I’ve done a bazillion episodes. You should start your plan yesterday. You can do this.