Will Comparative, Income, or Cost Valuations Work?

 

Q) Hello Creed, I’ve read your latest Inman article and I agree with you 1,000% when you say the way to beat Zillow is by valuing properties more efficiently. I also think Qvalue is a good idea, and an even better idea as an affiliate of a property portal. This will also work outside of the USA, where property portals are no better than Ziprealty.com in 1999. With the great success of Zillow and others in mind, I recently retired from the private equity sector and started [removed].com in [removed: outside the US]. We aspire to grow it across Europe and beyond as a de facto NAR/MLS/Zulia. Does this interest you in any way?

A) Hi [removed], retiring from anything sounds delightful :) congratulations.

I like honesty so let me say that QValue is in its infancy—from the world’s perspective; but it’s taken eight years of my life. I’ve had inquiries from US brokers but have pretty much put everybody on hold. I have three levels of potential–well I think: 1) sell out to one of the monsters so they can kill the other monsters, 2) sell regional licensing to larger brokerages, and if that all fails 3) have a pretty decent market advantage for myself locally. These are ordered in level of desirability.

I agree that the QValue system will work pretty much anywhere on the planet with a means of obtaining MLS-like information. Actually building an MLS/zulia from the ground up would cure many of the problems caused by bad—bad MLS data and formatting. From there it can be customized fairly easily to accommodate however subdivisions or neighborhoods are designed outside of the US (assuming differences in real estate plotting and laws). These differences have limited relevance, as the system can be adjusted to location differences; from there I believe much of the developed world thinks of housing in a similar way, with similar goals and desires.

Obviously you should not base your potential for the system on my one article. Much of what I have been doing is seeding concepts in the marketplace right now. First getting the marketplace to acknowledge the probability of massive change, realize even what seems high-tech now can change in a flash, and then incite them to start looking for the means to be the agent of change.

We can talk about this some; I imagine skype if you are in S[removed] right now–maybe you’re hanging out in the US?

 

Q) It’s always good to be honest, it’s the best way to make money!
I am in S[removed] (8 hours later than Colorado) and running out to dinner now.
Just curious, how complex are your valuation formulas? and are you (or
your team) formally trained in statistics or mathematics? The reason I ask
is that we are very well versed in valuing property using the comparative,
income, cost, and trending approaches…but we want to take our valuation to
an even higher algorithmic level which includes the soft qualities you have
written about on QValue website.

Hi [removed] the concepts are mine; the programming has been accomplished by specialists all over the globe.  It starts with GIS mapping experts, one with a PhD in such.  My database guy has 35 years’ experience running stuff for General Electric in Canada.  My data scientist in London received a patent for his work for NASA (US space agency).  I’ve used a few different people on the text analysis.  Most of my folks are in the $75 to $120 an hour range.

My team is internet based: 1 London, 1 in US, 3 in Canada, 3 in India, 1 Armenia, I’m sure I’m forgetting some right now…

The standard appraisal method cannot work with AVMs.  AVMs are blind and the appraisal method requires much subjective intervention.  Comparative is out.  The correlation of all of the standard measures of valuation using physical attributes only give you a base value—pretty much moving everything toward the center or median value for the area.  Additionally each attribute’s correlation to value varies completely by neighborhood—anything related to the appraisal or comparative methods are useless in AVMs.

The cost method is useless, as real estate values are based on existing demand.  A $100,000 to build home may be worth $50,000 or $150,000 based on current demand.  It’s out.

Trending is really not good either.  First you would have to derive your value based on one of the aforementioned methods then project forward.  So already your premise for value is wrong—extrapolating that forward won’t make it any better.

The income method may work for commercial or rental properties, but that would be based on some rent per foot for each using either human interpretation or a generalized average value for an area.  The problem again is that it’s based solely on physical characteristics.  People make decisions emotionally based on anticipated future events then rationalize their decision with facts afterward.  QValue takes both into consideration to determine value.

We use random-forest-regression plus the K-Means algorithm for clustering.  But anybody can do that.  First you must know how to create an array of potential values based on what the market desires the most and what they will pay to meet those desires; that’s the hard part—a blend of proprietary text analysis and regression.  Thus every valuation is custom completed from step one to the end.  There’s not a magic one-size-fits-all design.  The valuation must determine each attribute’s correlation to value, both physical and emotionally driven attributes, and be custom run for every house.

I hope this helps, thanks