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Debunking Zillow’s Zestimate

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By PETER STRAND  |  Moonshine Ink

When looking to buy or sell a home, many turn to the Seattle-based website zillow.com as a place to start their home search or to look for comparison pricing. While Zillow has empowered buyers and sellers to gather basic information about their home and other homes for sale in their market, real estate professionals warn that the estimates on properties generated by Zillow, called Zestimates, are unofficial and should not be considered a reliable fair market value.

When trying to uncover the Zillow mystery, global real estate advisor Brian Hopper of Seattle’s Realogics-Sotheby’s International Realty explains the importance of using this tool appropriately. “Zillow is used as a conversation starter before my clients call for a more accurate evaluation of their property,” he said.

Sites like Zillow only give consumers information about a property that may be obtained from publicly available sources. The system uses an automated valuation model which leaves out numerous important factors that should be considered when a home is being appraised. For example, the system only accounts for basic property details and characteristics without considering additional information about the home or possible recent home improvements.
Zillow captures square footage and number of bedrooms and bathrooms, for instance, and uses a proprietary formula to predict a value based on other available market data such as assessed value or most recent sale price.

Hopper disapproves of this pricing method. “There are so many variables that make properties unique that it is essential for an actual person to walk through the house and spend time seeing exactly what the property offers,” he said. “Zillow’s system doesn’t factor in the details of a home that can’t be seen by a computer, including the actual condition of the property and improvements made to the home.”

Often there are location advantages to a property, such as proximity to a great neighborhood or school. On the flip side, there might be a detrimental quality to the location or condition of the home. If these are not detected by the Zillow algorithm, the actual value of the home could be significantly higher or lower than that of the Zestimate. Zillow also doesn’t distinguish between types of home sales, such as short sales or foreclosures.  

“I encourage my clients to use Zillow for their initial research,” Hopper conceded. “Frankly, people love to do their research when buying a home and they are welcome to spend that time getting information before they contact me and my team for an actual comparison of properties,” he said, adding that it is essential for any buyer or seller to work with a real estate agent who can pull an actual comparative market analysis using their local MLS system.  

Zillow is aware of inconsistencies in their data. Per an article published in the Seattle Times on May 26, 2017, Zestimate home values in the city were off by as much as $40,000, according to Zillow’s own data. Zillow has reacted to this feedback by launching a contest offering a top prize of $1 million to the team capable of developing a new, more accurate home algorithm. Finalists for this contest will be chosen in January 2018, and prizes will be awarded by January 2019.

While the error rate varies by location, the Seattle market is not the only region wrestling with Zestimate flaws. Realtors in the Lake Tahoe/Reno region have seen inconsistencies as well.

“Even Zillow acknowledges that realtors are better equipped at predicting sales prices, and this is especially true in resort markets like Lake Tahoe and Truckee,” said Brit Crezee, director of marketing at Sierra Sotheby’s International Realty.

“Important features like views, homeowner amenities, and proximity to the lake, ski resorts, golf courses, and open space are things that the Zestimate can’t factor into a home’s value,” adds Tahoe City-based real estate advisor Neil Morse. “The system might work well in areas with lots of common tract housing, but Lake Tahoe is largely comprised of custom-built homes and incredibly diverse neighborhoods.”

As buyers and sellers routinely rely on Zestimates for true market value, the process of buying and selling in our market can become distorted.

If a house for sale has a Zestimate of $375,000, a buyer might challenge the seller’s listing price of $450,000. Or conversely, the seller might question a potential listing broker’s proposed $795,000 sale price when Zillow shows a value of $950,000.

“To overcome disparities like these we’ll often refer clients to the Zestimates section located in small type at the bottom of the Zillow homepage. This is where people can find valuation error rates by state and county,” Crezee said.

As of August 2017, Zillow’s reported median error rate for California’s Placer and Nevada counties are 3.3 and 3.9 percent, respectively. “With second quarter median sales price for single family homes in Tahoe Donner reported at $693,000, for example, that translates to a significant $54,747 value discrepancy,” Crezee pointed out.

Hopper summarizes the Zillow conundrum, stating, “Zillow is one point of data of many needed to review before getting a true valuation of a home. But in addition to the computer, the human factor is critical to determine realistic pricing.”

As president of Sierra Sotheby’s International, Peter Strand’s experience has been defined predominantly by real estate franchising mixed with team leadership opportunities for more than 25 years.

 
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December 14, 2017