Why Zillow is Usually Wrong

This blog was inspired by a cartoon which shows a couple sitting with a real estate agent. The agent says: “Based on comps, I suggest listing at $350K.” Wife: “But we paid $650,000 for it!” Husband: “And Zillow says it’s worth $675,000!” I found the cartoon on Facebook and reposted.  The sad truth is that most consumers do not understand Zillow—or House Values, or even their county assessment office—all of which use Automated Valuation Models (AVMs) to price property.   The boring stuff first: AVMs use mathematical formulae, including multiple linear regression, to assign values to certain features of houses to come up with a value.  As with any program, GIGO applies (Garbage In, Garbage Out).  The AVMs out there for use today by consumers, of which Zillow is probably the best known, rely on reported and recorded sales data. This is why, if you live in one of the fourteen states in the US which does not record sales prices, the information you find may be sketchy, and derived from Multiple Listing Services (MLS).  You may be thinking: “Well, what’s better than that? A recorded sales price tells me what that house down the street sold for.”

                Well, yes and no. A recorded price will tell you the amount they put in the deed as the transfer amount. It will not tell you:

• If there were any “side deals” or cash under the table
• If the seller paid closing costs or other fees on behalf of the buyer, known as “seller concessions”
• If it was an “arms-length sale”, or one under duress, or between related parties, or any other sale which an appraiser would not usually consider

This is where the AVMs fall apart.  As I always say when teaching pricing and valuation: “All comparables are sales; all sales are not comparables.” Here’s what I mean: in order for any real estate professional to use a comparable (“comp”) to compare to your home to establish a price or value, it needs to have sold.  Houses that are listed and don’t sell indicate what the market won’t pay. Houses that are listed and sold indicate what the market will pay.  However, not all sales are comparables. Here are some examples of houses I would not use for comps, as an appraiser:

• The sale between two parties with the same last name, and it is verified that they are related by blood or marriage
• The sale between two parties with different last names, but verification of the data revealed that the party selling the property was acting as executor of her mother’s estate, selling the 2/3 interest she and her sister had to their brother, who already owned a 1/3 interest
• The property that did not sell at auction, and the next week the owner sold it for 20% below my appraised value to a neighbor, who was a friend
• The property that sold for at least 20% higher than market, and upon verification, the buyer was not represented by an agent, was from out of town, and was unfamiliar with the market

You will notice the same word in all four scenarios: “verification”. As an appraiser, I verify data. I’m required to. But any real estate professional who is good at his or her profession will verify data, and will only use data which is germane and pertains to the property. Zillow, and other AVMs, don’t verify data. They throw it all into the mix. Some is high, some is low, and some is just irrational.   So, before you decide to sell your house based on a “zestimate”, do yourself a favor and get an opinion from a qualified real estate professional.