AVMs, ZILLOW, and REALITY

AVM: Automated Valuation Model. A system by which public data is interpretted to come up with an estimation of a property's value. Many lenders rely heavily upon AVMs. IN the past, some lenders used ONLY AVMs in their lending decisions, a practice that has left many of them facing major defaults and losses. Today, AVMs are more typically used by lenders to validate the value of an appriasal. If the appraised value and an AVM value are dramatically different, the lender will require a review of the apraisal, or a second appraisal. To ensure the validity of the AVM, lenders actually pay for the AVM program and have some sort of insurance built in. This keeps the AVM companies working hard to enure as accurate a product as possible.

ZILLOW: Real Estate Website Portal. Zillow is a website that bills itself as providing an "edge in real estate." They offer free tools to the general public, most noteably the Zestimate. The Zestimate is Zillow's branded verison of an AVM. Taking information provided to the general public, Zillow's claims to be able to estimate the value of a property. According to Zillow's disclaimer on the values, they are only accurate to within 5% of a home value roughly 26-28% of the time. The values are only accurate to within 10% of the home's value 49-53% of the time. The estimates are within 20% of the actual value 68-70% of the time. Although they claim a "median average" of error as only roughly 10% (interesting math), the numbers they claim above would indicate that they are pretty far off at least half the time. The service is free and offers no insurance or guarantees. They make money on selling ads.

Reality: The difference between hype and what you really get. When considering Zillow as something to base any idea of value on, one should remember that the information they offer is free, comes with no guarantees or insurance, and is off by at least 10% half the time. AVMs offered by real companies trusted by Lenders will be much more accurate and offer assuances on their values. Lender's stake MILLIONS of dollars on the accuracy of AVMs provided by these companies.

My Conclusion: Zillow is simply an advertising medium, offering a free (and flawed) estimation of real estate property values.

Feel free to draw you own conclusions. However, I will leave you with the 3 questions that I can not shake, as follows:

  1. What would happen if Realtors lived by Zillow's standards and were considerably off the mark 50% of the time? Would they lose their license? Be open to lawsuits? Go out of business as a whole?
  2. How many Lenders are willing to risk Millions of dollars on Zillow's 50% accuracy rate? What would happen if they did? Even if it saved them a few bucks on the cost of an AVM, how much would it cost them in losses?
  3. If Lenders and Realtors would be on the losing end by employing Zillow's standards, why in the world would home buyers and home sellers even consider placing any validity on this website when it comes to the single largest purchase of their lifetime?

The floor for discussion is open....

Ed Nailor, Charlotte Mortgage Lender

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Rainmaker
189,766
Clint Miller
Real Estate Pipeline, Inc. - Missoula, MT

Excellent post!  Awesome!  Im a huge fan of accuracy and I think you propose a fantastic arguement that can not be refuted.  Nice work.

Jun 13, 2008 02:02 AM #1
Rainer
208,569
Julianna Hind
eXp Realty - Tacoma, WA
REALTOR, 206-679-4768, Tacoma Federal Way, Auburn, Kent, WA

Great percpective. Your stance, "Zillow is simply an advertising medium" is right on the mark.

Jun 13, 2008 02:11 AM #2
Rainer
8,372
Scott Ingalls
Nothnagle Realtors - Rochester, NY

Good post!  It seems that Zillow is very often at least 10% below our actual market here.  I know that when I speak to a buyer or seller, they are aware of what Zillow has to say about a particular piece of property, so I have to take that into account when I talk with them. I wonder how long it'll be before the public realizes that they've been "Zestimated"? 

Jun 13, 2008 02:32 AM #3
Rainmaker
284,107
Dave Woodson
Dave Woodson - Chesterton, IN
Not the Average Agent

great post, I have always laughed at zillow as it never can find my house. it places me in Illinois and I am in Indiana

Dave

Jun 13, 2008 03:04 PM #4
Rainer
11,334
David Gibbons
Zillow.com - Seattle, WA

Hi Ed, it's David G from Zillow,

A few corrections:

1) According to independent data and our analysis, commercial AVM's are not in fact more accurate than Zestimate values. What information are you basing that statement on?

2) Reliance on AVM's is certainly not a commonly cited reason for risky lending practices.  The opposite is in fact the truth; appraisals by human appraisers who were under pressure from RE and mortgage brokers are generally accepted as a common cause of the problems we're facing in the mortgage crisis. 

3) "Median Average" makes no sense. Where did you see that claim?

Jun 16, 2008 03:39 AM #5
Rainmaker
30,140
Jon Tipton
RE/Max Dynamic - Brandon, FL
Realtor/Cert. Res.Appraiser with The Duncan Duo & Associates

Thanks for posting.  Great content.  Here's a blog I recently posted about Zillow as it relates to Tampa home appraisals.  Have a great one!

http://tampabayappraisers.com/2011/01/every-reason-not-to-use-zillow-for-home-values/

Jon Tipton

Jan 25, 2011 01:21 AM #6
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