There are some really misleading numbers in real estate. Like, really misleading. And whether you’re a first-time buyer or an experienced buyer, it can be challenging to know which numbers matter, and which numbers to ignore.
Without further adieu, here are my top 3 misleading numbers in real estate.
1. Price per square foot – The Number 1 Misleading Numbers
Price per square foot is a home’s sold (or list) price divided by its square footage. If you are in the market to buy a home, you are going to see this number *everywhere*.
Does this number matter? Nope. Usually not.
Price per square foot could matter if you were comparing apples to apples. (For those interested, your average Seattle apple costs about $15 per square foot. Feel free to whip out that fun fact at your next party.) But, unlike apples, square feet aren’t typically comparable.
How Sellers Use Price Per Square Foot to Mislead You
When people talk about price per square footage, they’re trying to understand whether the property is a “good” or “bad” buy. If the seller is emphasizing price per square foot, they’re usually trying to draw attention away from the price or some other flaw in the property. Sometimes you’ll see this number on silent talkers in home tours. This is because listing agents know that people look for easy metrics to give them a sense that they’re getting a deal. (Check out my recent blog “Looking for the Real Deal? 8 Ways to Find a Deal on a House in Seattle in 2023” for my thoughts on whether that is even possible.) People worried about overpaying for a house often fixate on simple, contrived numbers like this because it ostensibly turns homes into apples, and that’s easier to wrap their minds around. But know that this number has effectively zero impact on what your home is worth and what it will sell for later.
Now, there is a caveat here for some condos and for vacant land. For example, if you’re looking at closely comparable condo units in the same building, price per square foot can be a good negotiation tool and reference point for you as a buyer. But, don’t let this distract you from the reality that 99 times out of 100, price per square foot is a red herring. Feel free to reach out and I can give you some fun examples.
2. Zestimate (and other online automated valuation tools).
A Zestimate is Zillow’s estimate on what their AI overlords think is a home’s fair market value. In other words, it’s the price that Zillow thinks a home should sell for. Zillow uses a proprietary algorithm, so we don’t know exactly what they’re factoring into this number. However what we do know is that the Zestimate takes into account only measurable stats. This includes things like rooms, price per square foot (ahem… see #1!), age of the home, sales in the surrounding area), and what the home has sold for previously.
What the Zestimate doesn’t take into account is everything inside the home. It doesn’t take into account whether or not the home needs repairs or updates, or how loud the street or airplane noise is, for example. In short, the algorithm is not visiting the home!
(Historical point of order: Remember when Zillow was buying homes, but had to stop? Well, they were using their almighty algorithm, and they lost a ton of money and had to lay off a ton of people. Just saying.)
Here are two recent examples from Magnolia. It took me less than 5 minutes to find these egregious Zestimate failures. First, take a look at this 3-bed 1-bath rambler. Zillow thought it was worth $868,000 (or even up to $911,000), but in reality, it sold for just $785,000. Or how about this sweet 2,700 sq ft mid-century home that went for $1,650,000, when Zillow thought it was worth only $1,216,500 (Zillow seems to struggle with calculating for views). Then there was this one that was fully 20% ($200,000) off. I could go on.
Other real estate websites have their own estimates as well. Just keep in mind that the same rules are going to apply. At best, you could use the Zestimate as a jumping-off point to know what general price range you’re in. But the numbers are quite regularly $100k off, and I have seen it be $500k off before! At that point, the number is almost useless for most people.
How This Hurts You
Another thing to keep in mind is that the Zestimate can throw both buyers and sellers off. It can make you think you can’t afford a home when you might actually be able to. Or, it might cause you to lose out on a house. If a buyer actually needs to pay $1 million for a house to be competitive in current market conditions, but the Zestimate says $850k, the buyer might not make a competitive offer. For sellers, it’s the same thing, but in reverse. The Zestimate can give you an unrealistic expectation for what your home will sell for, and this could even cause you to turn down a solid offer.
3. Interest rates: The Sneakily Misleading Numbers
Interest rates are constantly changing. In fact, they change pretty much every business day!
The interest rate you see in the news is likely not the rate you’re going to get. Also, the rate you see a lender advertising, or your friend telling you the rate they got, can be misleading. Interest rates aren’t the same for everyone; it depends on your credit, financial circumstances, lender, type of home loan, whether you spend money to buy the interest rate down, etc.
Also, the interest rate you end up with might not be the rate you have for the life of your mortgage. With a traditional 30-year mortgage, for example, your interest rate is locked in for the rest of your loan. However, many people decide to refinance their home when rates go down, which allows them to pay less interest for the rest of the loan, in addition to lowering their monthly payments.
What About ARMs?
ARMs (Adjustable Rate Mortgage) are also being advertised quite frequently. This is a specialized loan product that loan product lenders advertise to try to bring in business because an ARM can go up after a certain set period of time. It’s not a big deal if you are likely to move within the timeframe that your ARM is for, but it can be a big deal if you’re not planning to move. However, even with an ARM, you have the option of refinancing (for a price) if rates drop.
Interest rates might seem high right now. We are all dreaming of 2020 and 2021 when rates were in the 2-3% range. Historically, this is not the norm. Back in the 1980s, rates were in the high teens. And if you look at the interest rate over the last 30 years, the current interest rate is still below the median. Hence their misleading numbers status!
Don’t worry—you don’t have to figure all of this out on your own. We’re happy to help whether you’re buying or selling, and it’s never too early to reach out. We can help you strategize and make a plan!