Prospective home buyers often want to get pricing information for various properties without having to always rely on a real estate agent. This is where real estate sites like Zillow.com come in very handy. However, can you really rely on the site’s value estimates? Many have wondered whether Zillow provides accurate data with its Zestimate home price estimates.
Zillow is a business website, established to get eyeballs on a bunch of homes for sale and, in turn, to sell advertising to real estate professionals. It isn’t a real estate company with a group of agents.
Zillow bases many of its value conclusions on opinions formed by using algorithms that process data collected from various sources. No matter how great the algorithm is, opinions are not facts. If Zillow and similar sites truly had their finger on the pulse of the real estate market, any of these sites could’ve predicted the collapse of the housing market, which they did not.
Understanding Zillow’s Zestimate
Zillow acquires data by amalgamating all the information on housing it can gain access to. It mixes and merges data from various sources into one source. Many computerized programs exist that can forecast the value of a home. Even real estate agents use computerized programs, but the difference is real estate agents don’t rely on those programs alone like Zillow relies on the artificial intelligence used to assemble its Zillow Zestimates.
At least for now, Zillow can’t predict how a buyer will feel when she enters a home. Zillow can’t tell you whether the interior has been updated, if the workmanship is superior, whether the materials used are inferior, or whether a school around the corner has decreased the value of homes backing up to the football field or any other number of factors real estate agents and appraisers use when they know the neighborhood and have inspected the home in person.
How Agents Arrive at an Estimate of Value
When agents begin to assess a property, the first thing they typically do is study the home from an overhead, satellite view on Google. They note whether it backs up to a busy street, the proximity to commercial property or freeways, the size of other homes nearby, the vegetation and landscaping, its orientation to the sun and, if available, will view any photos of the exterior plus a street scene.
An agent might then run an automated valuation using specialized real estate software. One is Realist, a company owned by CoreLogic, that is data-centric for all sales, including non-MLS, and will take into consideration surrounding home sales varying 25 percent or less in configuration and type, including other parameters an agent can manually establish.
Another type of automated valuation is based on sales pulled directly from the MLS, and computed based on square footage, including high, low, median and average values of all sold, pending, and active listings. Those two types of automated valuations and the resulting values alone are often very different from each other but, used together, can provide a range of value, generally not more than a 5-percent difference. That process provides a lot of information but still is not nearly enough to establish a strong value conclusion.
Armed with that information, an agent would then inspect the home and look at it through the eyes of a buyer, how an appraiser will view it, and where it would be positioned against the competition to drive traffic to the home. It’s not unusual to enter a home with a prepared listing agreement in hand and end up manually changing the listing price after viewing the home. Automation, such as that used by Zillow, can never take the place of personal assessment.
The Zillow Zestimate of Value Accuracy
Zillow never claims to be 100 percent accurate all the time or even 80 percent accurate most of the time in all areas. If all the homes within a six-block radius are very similar to each other, in a suburban subdivision, filled with homes built around the same year, and about the same size and with identical amenities, a Zillow estimate will be much more accurate, perhaps within 10 percent, because there are not enough specific variances to throw it off. In other cases, such as for older neighborhoods with many homes that have been improved in different ways, it won’t be that close at all.
Real World: Zillow vs. Actual Sale Prices
The following four typical homes were actual home sales, and the price outcome is compared with their Zillow Zestimates at the point of sale, to highlight some of the variations in the two values.
One property is two houses on a lot in Midtown Sacramento, located on a busy street near the railroad tracks and close to freeway noise, across from a commercial property. Zillow estimated the value of that home at $380,733, but it sold at $349,000, after almost 6 months on the market, with plenty of exposure. In this case, the Zillow estimate was about 9 percent too high.
The second home was a custom waterfront property in the Pocket area of Sacramento. Zillow valued that home at $983,097, yet it sold at $1,085,000, which was 10 percent more than the Zillow estimate. If the sellers had relied on the Zillow estimate, they would have lost more than $100,000, which is no small change.
The third home was a reconstructed home in an exclusive area of Davis, California, near the University of California, Davis. Zillow valued that home at $1,230,563, but it sold for $1,495,000, and for cash, with no financing involved. That Zestimate was more than 20 percent too low.
Finally, the fourth home was a lakefront home in Elk Grove, California. Again, the Zillow estimate was too low, at $488,711, and it sold for 16 percent more, which included the buyer’s lender’s appraisal, at $565,500.
The Zestimate is formulated to give website visitors a range of value. It’s not meant to replace an appraisal nor a real estate professional’s opinion of value. Many agents might take a gander at Zillow values before visiting a seller because they know the seller is looking at those values, but not because there is value to the agent as a professional in the estimate. Real estate agents do not use Zillow to price a home.
Zillow as a Backup Value
In some cases, agents will tell their clients to look at a home’s price on Zillow to justify how good of a good deal they are getting when buying a home, providing the Zestimate is much higher than the actual sales price, of course. It’s a selective usage with agents. When the price is to their advantage, they might use it as evidence for their client. Even banks don’t know any better, so in a short sale situation for example, when the offer is more than a Zestimate, a short sale agent might point to the Zestimate when in negotiations with the short-sale bank.