You’ve started the exciting process of searching for a new home, and as your real estate agent walks you through potential properties, you might notice that some of the listing prices vary by quite a bit … which may cause you to wonder just how the seller’s listing prices are calculated.

Why is one house priced lower than another, even though it has more bedrooms? Why is the one located in a particular neighborhood, but otherwise seemingly ordinary, at the top of your budget? How do you know that the listing prices on a house are accurate, and is there any way to research a home’s potential value yourself?

The short answer is — yes! There are free online valuation tools that you can use to see what a house might be worth. You’ve probably even seen these estimates when you look at listings online, and the difference between that online valuation and the home’s sales price can be pretty substantial. These types of valuations seem like a handy way to check a home’s sale price against the value, but how accurate are they?

We’ve investigated online appraisals, speaking to qualified real estate agents and experienced appraisers for insight into how free online appraisals work and how they differ from a full appraisal conducted by a licensed professional.

Let’s take a look at just how these free appraisals work, and whether this type of valuation has, well, any value!

What is a free home appraisal?

Free home appraisals, sometimes referred to as automated valuation models (AVMs), calculate the value of a house based on an algorithm that factors in other houses of similar size and age that recently sold in the same region, as well as geographic data, such as flood zones and neighborhood walkability. Getting a value can be as easy as plugging in a property address.

According to appraiser Paul Rowe of Rowe Appraisal Group in Chicago, AVMs aren’t a completely new creation.

“I’ve heard older appraisers talk about them, and they were used by tax assessors upwards of 30 years ago,” he says, “but modern AVMs and their relevance in the real estate market is definitely new.”

Because these online valuations are free, it can be tempting for both buyers and sellers to try to use this kind of assessment when trying to figure out what a house is worth. But does the modern technology of these automated appraisals take into account everything that should be considered when determining the value of a home? According to the experts, not necessarily.

The potential downsides of online appraisals

San Jose real estate agent Sandy Jamison, who has more than 17 years’ experience in the industry and works with 86% more single-family homes than the average agent in her area, says that these online estimators are “largely inaccurate.”

“I work with a lot of sellers, and when they are getting ready to list their house they always start online with a free valuation,” she says. “The problem is, depending on the algorithm used for that particular AVM, these online estimates can vary widely.”

Jamison says clients are often confused by automated valuations, and it is up to their agent to explain why using the number they see online isn’t necessarily the best way to set a sales price.

“I often have sellers call me, saying that the online estimate on their house has increased and they want to raise the price. And buyers will look at the lower end of these valuations and want to offer less for a property,” she says.

“But it’s important to properly analyze the data and really look at the true value of the home.”

So what’s the difference between an online appraisal and a full appraisal?

While an online appraisal generates a quick automated calculation based on various algorithms, a real-time appraisal conducted by a licensed professional is much more involved.

Rowe says there is a world of difference between online valuation calculators and an appraisal conducted by a person who physically goes to the house and walks through it, looking at things like upgrades, home condition, unique elements of the home, and then thoroughly reviews comparable properties.

“There’s the scientific aspect to it, where we use the tools we learn in appraisal school to determine value,” he explains. “Then there’s the art of it, which comes from experience, understanding the market, and determining which components of a house you’ll give the most weight to when doing your evaluation.”

A full appraisal is also going to be required by mortgage lenders because it tends to be the most accurate way to verify that they aren’t loaning out more money than the house is actually worth.

“Most lenders want standard appraisals using the sales comparison approach, which uses recent similar sales and adjusts for differences within those recent sales,” Rowe says. “We look at all these different units of comparison, then have to decide which ones have the most weight.”

The sales comparison approach involves reviewing other recent home sales in the area, often referred to as “comps.” Jamison makes sure to discuss the appraisal process with her clients.

“I tell them: The appraiser is going to look at the best three sales within a mile radius and three listings that are the closest match. Then they are going to look at different variables to establish value,” she says. She adds that she also shows clients comps in their area so they can better understand how the process works.

Depending on where you live, an appraisal will usually cost between $350 and $500, which might seem like a lot when you can do an online estimate for free, but according to Rowe, there’s something to be said for the old adage about getting what you pay for.

“There’s an allure to AVMs because you can just plug in the info, but they are kind of a black box,” he says. “You don’t know how they come up with their value, and even a 5% discrepancy can mean a potential difference of thousands of dollars. That’s a big gap, and it could affect the sale of the home.”

Rowe adds that appraisers are, by law, unbiased third parties. They are required to tell it like it is, and, coupled with advice from an experienced agent, the appraisal process is still the best way to determine a home’s current fair-market value.

“This is the biggest investment of many people’s lives,” he says. “It’s not worth trying to save $500 by using algorithms that you might not be able to trust.”

Other types of appraisals

When an agent lists a house for a client, they will help determine a competitive sales price by doing a comparative market analysis, or CMA.

The agent reviews available data of similar homes in the area that recently sold, and then based on factors such as upgrades, age of property, and how well it’s been maintained, the agent helps their client decide on a listing price. This differs from an online valuation in that the agent actually sees the house they are evaluating, and can therefore factor in everything that adds or detracts value from the house.

Similarly, a BPO, or broker price opinion, also provides an estimated valuation of a house, based on recently sold homes that are comparable in size, age, and upgrades. A BPO is considered a more concise version of a CMA, and in addition to being a tool for homeowners to use, it is sometimes used by banks or lenders in lieu of a full appraisal when estimating the value of a bank-owned property.

Jamison says these kinds of home valuations are an educational process for both buyers and sellers.

“We have to explain why we came up with the value that we did, and why one house might have a higher value than another,” she explains. “One house might have a pool, which is going to mean a higher value, or have a lot of upgrades that another, similar house doesn’t have.”

Hybrid appraisal

Some appraisers may use a combination of online data and third-party inspections, alongside a physical inspection of the home. This is called a hybrid appraisal, and while it’s similar to a standard appraisal, usually at least some of the information used to calculate the home’s value is taken from online technology.

While there is some debate within the real estate industry about their accuracy, hybrid appraisals are not uncommon in today’s market. Rowe says their company does them, but notes that hybrid appraisals do not use AVMs to determine value.

“Our hybrid appraisals involve one person doing the inspection and another doing the analysis,” he says. “We do get a lot of our data online, but not from AVMS. We review MLS listings, online county assessor records, and mapping tools, but typical AVMs are not very useful to us.”

How you can utilize an online appraisal

While an online home valuation might not be as accurate as a full appraisal or even a CMA, it can still be worth your while to take a look at them, as it can help give you an idea of what the home you’re looking at is potentially worth, as well as the current overall housing market.

Make sure you review more than one online estimate, and examine the property details and data for each tool; different data inputs will help explain discrepancies. You’ll also want to be aware of how different the results can be with various online calculators, and avoid trying to create some kind of average valuation of the house in question.

Most importantly, talking to an experienced agent about which of these online tools might show the closest correct value is key when it comes to utilizing a free online appraisal. Your agent will help you find a property you love, with an accurate sales price to go with it!