Your net worth is rubbish due to poor real estate estimate, your net worth might be very off.
After all these years, Zillow still can’t get its property estimates right. Zillow is also a great reason why you’ve got to be careful calculating your net worth if you have property.
To prove my point regarding “Your Net Worth Is An Illusion” I took a look at Zillow’s latest zestimates of my primary residence and rental property. Apparently, in a span of 3 months, my primary residence gained a whopping $300,000!
I’m popping open a bottle of Crystal, buying a rose gold Patek Philippe Calatrava at Tiffany’s, and ordering the Audi R8 on as we speak. Just kidding, especially since September is frugality month. Besides, Zillow isn’t writing me a check for $300,000!
The dollar sign shows the purchase price after a 4 month escrow that began in late 2004. In other words, the purchase price was $250,000 below what the zestimate measured as fair value in the middle of winter.
You’d think that after 10+ years of existence, Zillow’s price algorithms would be more refined. Perhaps the data is legit, but I’m not buying it. Since net worth calculations don’t include one’s primary residence, let’s strike this example and look at a rental property.
Zillow Estimates Prove Your Net Worth Is Rubbish
According to the chart, the rental made a healthy $100,000 (14%) come back since the summer as well. I can’t believe it dived from $890,000 to $700,000 in the first place, given the location and relative value compared to other properties in the area.
This is a good reason why it’s healthy not to look at online appraisals if you don’t plan to sell. I never would have checked if it wasn’t for the recent net worth post. It just messes with your head. All the same, I’m glad to see values come back a little.
What Else Does Zillow Say
Even after going through the biggest downturn of our lifetimes, property in good locations are holding their own. If you were in a coma for the past 18 months and woke up today, not much has really changed. Restaurants are packed, traffic is horrendous, and I’m still always squished against the window on da bus.
Prices don’t go up or down in a straight line. Prices are cyclical and winter is generally a better time to buy than summer. Why on earth would someone list their house during the holidays when the weather is horrible, compared to just waiting until Spring? It’s called: motivated seller. Sure, your savvy realtor will argue that there’s less supply and hence less competition during the winter. However, buyers during this time frame are even more selective. That said, this past summer looked like an opportune time to buy so far.
The lower line in the chart consist of all the properties in the particular zip code. The primary residence is a house, hence it is more expensive than the average. The rental, on the other hand, is a condominium which hugs the average, although it is still priced above. More expensive properties look like they have higher volatility than the average.
Prices are freaking expensive in San Francisco! My house is modest and probably the size of most people’s basements in the Midwest. The one key positive is that if San Franciscans can ever relocate (nearly impossible), everywhere else except for New York City is cheaper.
See: Use Bad Pricing Estimates By Zillow And Redfin To Your Advantage
Calculating Your Net Worth Properly
These values mean NOTHING. Zillow or an appraiser can say a property is worth whatever they want, but unless they’re willing to write you a check, don’t bank on it. Even though your net worth is rubbish, you can do things to make the calculation more accurate.
Yes, I admit I feel a little bit more buoyant now that the stock markets are on fire, and the property market has rebounded a little bit. However, until I have no mortgage on my rental property, I don’t include this as an asset even though it generates positive cash flow.
Strike your private equity, rental property, furniture, and bunny rabbit from your net worth calculation. Your illiquid assets are only as worth as much as someone will pay for them.
Even though we are out of the recession and are back to the go go days (hard to get restaurant reservations on the fly anymore), don’t trust for a second your assets are worth as much as some appraiser or website says. Write your assets off, and revisit them once you’ve liquidated.
Calculating your net worth takes precision. It’s better to be conservative than too aggressive. Your net worth is rubbish without better insights.
Wealth Building Recommendations
Explore real estate crowdfunding. If you’re looking to buy property as an investment or reinvest your house sale proceeds, take a look at Fundrise, one of the largest real estate crowdfunding platforms today. They allow everyone to invest in mid-market commercial real estate deals across the country that were once only available to institutions or super high net worth individuals. Thanks to technology, it’s now much easier to take advantage of lower valuation, higher net rental yield properties across America.
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Interesting discussion, as are most about how to calculate net worth. I’m sort of agnostic about including home values (and by extension, the value of all illiquid goods) in my net worth. On one hand, my home IS worth something, and if I view my net worth as ‘the total I could earn by liquidating everything I own’, then including the (estimated) value of your home in your net worth makes sense.
On the other hand, as you mention, until you have the money in your hand, you don’t know for certain how much a piece of property is worth. Including the potential value of something you don’t intend to sell, at least in the near future, hardly makes sense. (Although, if you don’t include the value of your home or other property as an asset, my feeling is that you shouldn’t include the mortgage on said property as a debt, provided the mortgage is less than the cost of the property. If you do opt to sell the property, the sales price SHOULD be enough to cover the mortgage, and then some, so including the outstanding mortgage debt makes little sense.)
All of that said, two more comments on this article. First, Zillow ‘zestimates’ (or any other estimates) should be taken with a grain of salt, at best. Unless you’re actually getting an offer for the property at that amount as you said, it’s just a guess at how much someone ELSE would pay for the property. Second, $100,000 per year in rent? Criminy, if that’s at all realistic, I’m surprised that anyone still stays in San Francisco.
.-= Roger´s last blog ..The Flaws of the Self-Made Man =-.
Rog – Agreed! Take everything with a grain of salt. And exclude EVERYTHING you have, except for the cash you can take out, where you owe nothing in return as your Net worth.
$100,000 in rent indeed. But with high rent, comes high salaries, otherwise, the high rent is unsustainable!
Hi FS,
Very interesting post. I’d have to agree and disagree. I do think that relying on a site like zillow to figure out if you can go buy your audi is a really bad idea. Good thing you aren’t doing that.
I do think that houses should be counted as net worth, as they can be sold. It does make sense to put in reasonable estimates and not to rely on it in the same way as liquid assets. For instance, if James and I sold today, we could easily rent a place for quite a bit less and utilize the gains for other business opportunities.
Cheers,
Miel
Hi Miel – Good to hear from you and thanks for sharing your thoughts. How much do we really know what the net equity is worth in our own abodes? By not including any of the net equity in one’s net worth calculation, there will never be a false sense of security.
I do know I’ve got a good amount of equity in my rentals and primary residence, but I put this equity away in the waaaaay back of my mind and just focus like a mad man on building up the liquid portion of the equation. The possibility of being surprised on the upside when one walks away will be that much greater!
Good luck on the DC property hunt! Doesn’t seem that much cheaper than San Francisco actually. Maybe only 10% or so. It seems like prices are creeping up again. Volume definitely is and that’s step one.
Best, FS
Interesting data points and reminder! I just checked my parents place in Hawaii on Zillow and the chart looks very similar but MORE so. Back to peak levels, jumping by $619,500 in the past 30 days. Wow.
@admin Will do! Their insights are always interesting when it comes to real estate (I know it’s something they are really interested in).
Thanks David. Although, I don’t think they got your message, I see they have a nice post on the DC area.
@Lee I’m shaking my head wondering why sell? Don’t they understand the maxim of buy low sell HIGH? They should be buying now, not selling. Part of the reason why I like property as an investment is that it’s hard to ever panic sell b/c it takes A LOT more effort to sell, and costs more than to sell a stock.
According to most sources, the UK recession will be the deepest we have ever experienced. Where most countries are heading out already (such as the US), ours is still deepening, and an at alarming rate.
It’s a fair comment that property prices only matter if you intend to sell. Half of my friends are trying to, in an effort to clear their own debt mountains. That’s where the problems are: they believe they have £30k equity, but in reality are perhaps £20k+ negative. One has been on the market for 18 months without so much as a sniff at the current asking price. They just blame a “slow market”. Any hint that they may have grossly over-estimated the current value just gets laughed off.
I keep trying to convince my friends that “your property is only worth what someone else will pay you for it” when they exclaim that theirs is now worth “x percent more than it was last year!”.
No one is buying in the UK right now, so houses may as well be worth NOTHING.
No matter how many times I say it, no one ever listens.
I think that’s why I feel so comfortable when I’m chatting inside the PF crowd; we’re all on the same wavelength!
Interesting Lee how you mention that the housing market is still slow in the UK. Things have definitely picked up here in the US. The other point I should have made, and maybe I’ll just go back in and edit the post is that property seems to lag the stock market on the way up, and on the way down.
The PF crowd is definitely more rational. But, at the end of the day, if your friends feel happy believe their property is worth X, and don’t plan to sell anytime soon, then kudos to them.
@Geek Good point Geek. We can therefore do a Net Present Value calculation on the rent saved to see what it’s worth, after one has no more mortgage payments.
Take likely rent i.e. $100,000 / year… .divide by a risk free rate of return 4% = $2,500,000. This is the back of the envelope way to calculate one’s paid off home, based on “rent saved.” Thanks for bringing this up!
Also, what I can say is that the ownership stock is superior to the rental stock usually for living. A lot of rentals, homes and condos are run down or not updated. That’s part of the reason I, along with a lot of friends and colleagues bought. We wanted a nicer place to live, since we didn’t want to sink more money upgrading a rental if it isn’t ours.
@David@DINKS Finance David, I hope people don’t laugh at me if I ever decided to sell. I’d be interested to hear what James/Miel have to say about DC. I know that area very well, and their insights would be interesting. Can you do me a favor and ping them and provide some feedback?
What’s probably more interesting than the actual value the chart places, is the trend.
After paying off a mortgage, your house is worth whatever you’re saving on rent. This does point towards “net worth is meaningless” since a $100k house and a $500k house are both saving you rent.
Who knows where you’d move to in order to save on rent if you didn’t own?
Still, it’s likely that owning would be worth a few thousand per year vs. renting even allowing for taxes and repairs. Unlike renting a place out, which is not guaranteed income.
If anyone still pays off mortgages…
Good point. A lot of people thought their houses were worth a ridiculous amount a couple of years ago. Try putting it on the market today for that price and you will get laughed at! Or, maybe not laughed at but that for sale sign will be out front for a long time.