What You Should Know About Zillow ‘Zestimates’

 

One of the biggest changes to the real estate industry in recent years has been the public’s access to vast amounts of real estate data and information via the internet. While this is by and large a good thing and provides both buyers and sellers more empowerment, we all know the internet is basically a giant dumping ground for information and one should be careful when gauging the accuracy of what they read there. Information on the internet can cause confusion and misunderstanding; and in the real estate industry, this is very apparent with Zillow’s ‘Zestimates’.

While it is tempting to think that a computer can use a formula to come up with a value for a one-of-a-kind home in a one-of-a-kind neighborhood, the fact is that it simply can’t. Maybe, if we all lived in cookie cutter homes that were in exactly the same condition and extended for huge distances around us, then a computer algorithm might have a chance; but most of us don’t… and Zillow knows this. The following is stated directly on Zillow’s website: “The Zestimate is not an appraisal… it is a computer-generated estimate of the worth of a house today, given the available data. Zillow does not offer the Zestimate as the basis of any specific real-estate-related financial transaction. Our data sources may be incomplete or incorrect; also, we have not physically inspected a specific home. Remember, the Zestimate is a starting point and does not consider all the market intricacies that can determine the actual price a house will sell for.” If a Zestimate was indeed taken as ‘a starting point’- and with a bit of a grain of salt – then it wouldn’t be as disruptive as it is proving to be. Unfortunately, the public appears to be accepting Zestimates as factual market values, which can have real life effects and be grossly misleading for both buyers and sellers who don’t know any better and point to Zillow as ‘the expert’. We find many sellers, in particular, fixated on a certain market value for their home because ‘that’s what Zillow says’.

To see just how misleading Zestimates can be, let’s look at their track record. A Zestimates success rate varies widely throughout the United States. For King County, the accuracy level of Zestimates is ranked as ‘fair’ and comes in as a 2 on a scale of 0-4, which definitely doesn’t say much for its level of  preciseness. According to Zillow’s website, Zestimates in King County currently come within ±5% of the actual sales price approximately 35% of the time, ±10% approximately 65% of the time, ±20% approximately 89% of the time, and that the median error rate for King County is 7.4%.  That might not seem too far off… until you start doing the math. Let’s assume a home in King County sells for $500,000. This means that:

  • 35% of the time the Zestimate is within the 5% accuracy range and the home is valued between 475K and 525K (that’s already a pretty big estimate range, and remember, that’s Zillow at its best)
  • 30% of the time it’s within the 10% accuracy range and is either between 450-475K on the low end or 525-550K on the high end (you probably could have made a wild, uneducated guess and come up with that one all on your own)
  • 24% of the time it’s within the 20% accuracy range and is either between 400-450K on the low end or 550-600k on the high end (this is obviously just a worthless estimate)
  • 11% of the time it is outside of one of the accuracy ranges and the Zestimate is either below 400K  or above 600K

So why are these Zestimates so often off target? Since Zillow’s Zestimates are derived from a “super-secret algorithm” made up of public and user submitted data that may be incomplete or incorrect, it makes it very difficult to know. We do know that recent sale prices in the area are used, but because these comparisons are not physically analyzed, these ‘comps’ may or may not be valid comparisons. It is also said that the areas used to pull comparisons can be quite large, which would make them unacceptable to a real estate professional. And finally, tax assessments are apparently one of the major value factors used in the formula, and most everyone is aware that the assessed home value is almost always a very different number from its market value.

However, regardless of the factors used, the point is that a computer is just not the best choice for coming up with a home valuation. It may seem fast and easy, but if you really want to know the current value of your home, engage the services of good Realtor who is trained in analyzing the multitude of unique factors of a home including the neighborhood, condition, remodeling, special features, layout, views, landscaping, privacy, street noise and street location and the general emotional appeal and then comparing them to actual ‘comps’ in a radius as close as possible to your home. Zillow even acknowledges this their website by saying “we encourage buyers, sellers and homeowners to supplement Zillow’s information by doing other research such as getting a comparative market analysis (CMA) from a real estate agent or getting an appraisal from a professional appraiser.” While it’s tempting to think that a computer is capable of doing all this, the fact is that these kinds of fine tuned judgment calls still lie in the realm of a trained human professional.

Posted on December 5, 2014 at 1:14 am
Tamara Stangeby | Category: Urban Natural Homes | Tagged , , ,

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