First of all, this article is in no way meant to put Zillow and their Zestimate 'down'. Zillow has done a great job producing a place to shop for properties from both Real Estate professionals and owners. But after reading local forum posts, internet articles, and conversations with others that have begun to view Zillow's Zestimate as 'gospel' in terms of price it is obvious that people are not understanding the concept. For example, I recently read an article from a Real Estate investor who was questioning the need for appraisers since Zillow offers the Zestimate. Commenters agreed that this was a viable option. Likewise, in a recent conversation with another Real Estate professional it was discovered that a review board overturned a licensed appraiser's appraisal for the lower Zestimate to the tune of $14,000. It is easy to see that the perception is becoming that this is a viable option for pricing. Because of the inaccuracy issues related to Zillow's Zestimate, it is a serious situation that demands that every Real Estate professional, owner, and buyer understand the Zestimate and the consequences.
What is Zillow's Zestimate?
First, it is exactly that . . . Zillow's estimate of the value of a property. The price is derived from Zillow's proprietary calculation that is constantly being developed. Now Zillow does a great job disclosing the accuracy statistics of their calculation of the Zestimate. The problem is that I have found that most people never look at this. So I urge everyone to CLICK HERE TO READ ZILLOW'S ZESTIMATE EXPLANATION AND DISCLOSURE BY STATE AND COUNTY
Now I'd like to take a look at my own area, Flagler County FL. By Zillow's disclosure, the Zestimate is:
- They are within 5% of the selling price 14% of the time
- They are within 10% of the selling price 27% of the time
- They are within 20% of the selling price 52% of the time
- The median error rate is 19.3%
By any statistical analysis, this Zestimate calculation is far from accurate. Truth be told, most Real Estate professionals understand that listing price and actual sale price of a property should be as close to 100% as possible. The larger the inaccuracy, the greater the dollar cost to owners and buyers to the tune of tens of thousands of dollars! At best, the Zestimate is merely a novelty system that is 'fun' to look at but can not be taken as a serious valuation system by any means.
What do I do if a professional quotes the Zestimate for valuation?
This is the biggest issue for consumers, and you should immediately question this practice and demand the actual data that went into their own analysis (i.e. property comps, appraisal report, etc.). If they can not show you the comps, you should not proceed. I personally recommend challenging them to explain the Zestimate disclosure percentages for your area as well.
With all of our technology, why doesn't automated property valuation exist? Is this just another way for Realtors and Appraisers to justify their profession?
First, any Appraiser and Realtor would tell you that they would love a plug in an address and get a recommended list price type of system any day. Pricing is tedious and work. The problem is that no 2 properties are exactly the same. You are always comparing apples to oranges and avocados. Then you have to determine the value of differences to buyer expectations. For example, a 3 bedroom house with the same floorplan and one has granite countertops and a pool. What do those granite counter tops and pool really mean in terms of dollars to buyers? There is no definite answer here either. For some those things might be important and/or a must, but to others they might be 'luxuries' that they can do without and therefore have no real value to them. In fact, what is important to buyer tastes today might actually not be so important years later. There are many other things also taken into account.
As you can probably guess, it can easily become a tedious and daunting task of deriving not only a list price but also for an appraiser to determine fair market value for lending purposes. Unfortunately, you can not automate that at this time. You have to have to get into the property and make the best determination possible based upon the facts you see.
Again, this article is not to put Zillow down in any way. They have done a great job creating a communal place for properties to be advertised and shopped for. But in terms of valuation, it is not a place to get formal valuation of properties for listing or lending purposes and buyer and sellers need to be aware of that. You are literally risking tens of thousands of dollars of your money by doing so.