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Why “Zestimates” are truly just (bad) “Estimates”

By Chris Dallas

By now, you’ve all heard of Zillow.com, and most have probably visited and used the popular website as a tool to research real estate.  Before you jump to conclusions and think that based on my articles title that I’m about to climb up on my soap box to bash Zillow, think again.  My goal here is to simply make people aware of something that they may not be aware of.

For the record, I love the Zillow website, especially their iPhone app with their cool mapping feature.  I love that with this map feature that you can save time by focusing on the areas that you are exclusively looking in.  It’s a great time saver.  I’m sure all of us can agree that without a map feature we’ve all come across a home that knocks our socks off, only to find that it’s in a location that we are simply not interested in – and that immediate rush of disappointment stings. 

Lately, Zillow has received a ton of negative publicity for its’ pending IPO and the stocks impact since the company has not turned a profit.  This article is NOT about Zillow’s profitability or to give you my opinion about how the pubic offering will fare.  Nope, not interested.  I’m neither Jim Cramer nor a financial pundit.  This article is simply about what I believe is the most talked about and scrutinized part of Zillow… their “Zestimates.”

Why am I writing this article?  Lately and quite frequently, I’ve come across numerous people (okay buyers) that will say something to me along the lines of “Where did they come up with that price? The Zestimate says its worth X amount,” “those sellers are crazy, the Zestimate is way less than their asking,” or something along those lines. 

It amazes me how Zestimates have quickly become almost biblical to most folks.  Let me clarify… Zestimates are not the word of God, as Zillow barely gets it right or even close for that matter!  Oh yes, this is where my love for Zillow dies… with its’ Zestimates and its’ so called “proprietary logarithms.”  Zillow does not disclose to anyone how they come up with their Zestimates and this seems to irk many.  Quite frankly, I don’t care about their logarithmic formula.  My concern is that their formula is not getting it right here in Providence, and from what I’ve researched online, its pretty much happening all over the country. 

These days, real estate has been difficult enough to assess, and Zillow is doing nothing more than skewing the truth about values, which is making things more difficult.  What Zillow doesn’t understand is that real estate is about micro markets, and for a national company like Zillow to think that their geeks can come up with a formula to calculate accurate values in every city and town is absurd. 

Zillow touts themselves as an information portal for consumers (i.e. non-real estate industry people), and for that I love them.  If you think about it, you can see how their Zestimates have become biblical to buyers.  For buyers, there is really no other place for them to go to get help in understanding a particular market.  Yes, of course there are buyer’s agents but most buyers’ feel that the buyer’s agent is more interested in a quick sale then actually helping them find the right place.   

In Zillow’s defense, they do state on their website that “Zestimates” are not 100% accurate and only “a starting point.” However, you really have to look and click to find that statement.  Most don’t see that disclaimer and believe what they see in front of their noses.  Why doesn’t Zillow put this disclaimer at the bottom of every page where a “Zestimate” exists stating that it’s “a starting point?”  Well because they are a business and if more people didn’t believe that their Zestimate was useful, then they might shy away from their site.  You gotta love capitalism!

“Zillow is about empowering consumers with information and tools which they have not had access to before.  Our Zestimates are designed as a starting point.  We say in many places on the site (and next to the Zestimate on every home details page) that Zillow is not an appraisal, but a free research tool for consumers.”

– Lloyd Frink, Co-Founder Zillow

Thanks Lloyd!  Bravo!  That’s a great quote… way to be transparent!  There’s just one thing.  Most don’t notice or click on that really small “?” mark next to those bold, orange numbers that claim value.  Oh, I get it… it’s on the consumer to dig and search for truth.  Speaking of value, what I find even more astonishing is the “Value Range.” Now there is a useful tool for buyers & sellers! 

On a typical $450K home on the East Side of Providence, the “value range” ranges between $383-498K.  Is this considered useful information?  Does that help buyers assess value?  Oh yeah, that was the “range” for 377 Cole Avenue in Providence on May 25, 2011 which sold for $439K back in December 2010. 

One other quick note on “Value Range”, Zillow just updated that information as of June 21, 2011 and the range for this particular property is now $352-518K.  Thanks again Lloyd.  As a consumer, that really helps me assess the value of this property… give or take $80,000.

Speaking of specifics, I did some research of my own.  I reviewed property values of single family homes on the East Side of Providence that have recently sold.  In order to keep this article semi-short I will summarize, however if you want me to email you the details with the exact figures please feel free to email me: chris@geopropertiesinc.com

Of the 20 single family homes that have recently sold, the “Zestimates” were above the actual sold price on only 2 of the 20.  Of those two homes that were valued above the sale price, both were in need of significant renovation – in other words, a developer’s project. 

Zillow’s “Zestimate” came close to one property at 310 Blackstone Blvd.  The “Zestimate” was $413K and the property sold for $415K, but again this was a property in need of significant renovation. 

All others, 17 out of the 20 homes were sold for more than the “Zestimate” value stated.  In most of these cases, by at least 10%.

There is one more item of business to cover.  Have any of you seen this?  Again, I don’t want to completely bash Zillow.  To their credit, the company does post the graph below on their website for all markets, but again you really have to dig to find this information.  Unfortunately, most do not.

WHAT DOES THIS MEAN?

Zillow states (in a hard to find place) that their ‘Zestimates” are within 5% of the selling price in only 19 out of 100 homes and that only 36 of 100 come in within 10% of the selling price.  Even more frightening, just over half are within 20% of actual value.

In other words, for a home listed for sale at $500,000 the “Zestimate” could be off by $50,000 in 64 out of 100 homes and in 41 out of 100, it’s off by at least $100,000.  That’s a huge discrepancy… and a lot of money! 

Imagine if you are the Seller?   These skewed values from “Zestimates” could be telling consumers that your home, that is listed for sale for $500,000 is only worth $420,000.  That is a significant difference, especially when the true and accurate value is much different.

This is my beef with “Zestimates” and why I believe they are nothing more than estimates.  People believe what they read, and the truth is a far different story.  How does this information help buyers and sellers come to an agreement?  It doesn’t. 

“Zillow is such a neat concept on paper, but in the end, all data goes into a black box and spits out a number.”

Source: Jonathan J. Miller, Miller Samuel Appraisers

The real estate industry is changing for everyone, including the real estate companies that control it – like it or not.  Information is making its way to the public and in turn giving consumers more power, which I personally think is a good thing.  However, there is no website that can use a logarithm formula to compute real estate values without seeing the home, knowing the area, street by street, block by block.  For that reason alone there will always be a need for real estate agents.  Real estate has and always will be based on a range of value and that value is best defined when a buyer and seller agree on a sale price.  A real estate agent, someone who has their pulse on the market, is there to advise and assist on this.  Not some logarithm located at Zillow headquarters in Seattle, Washington.  Real estate is about micro-markets and specializing in those particular markets.

Chris Dallas is an Associate Broker at Geo Properties, Inc. For inquires or comments, he may be reached at Chris@geopropertiesinc.com or 401. 273.7777.

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