When you get into a discussion of price— related to someone’s home, they almost always come to the discussion armed with their “Zestimate.” This isn’t always a bad thing. The Zestimate can be a great starting point, but it is neither precise, nor accurate. That’s not to say your home’s value is always grossly off via Zillow, it could be spot on in any given case. But, before taking that number (or range) as a given, it is important to understand how the Zestimate is calculated. The algorithm is intelligent, but flawed. In contrast, a good agent with working knowledge of an area has the ability to be both accurate and precise, and that can make all the difference in valuing your home.
There are two primary issues with the Zestimate. The first issue is the quality of the data. The Zillow algorithm has no human intervention to recognize bad data. The almighty Zillow will consult its database, and then, using their secret formula, crunch the numbers and spit out its magical and mysterious answer. But, frequently the data itself has issues leading to inaccurate results. That portion of the Zestimate is actually an area a homeowner can impact. “Claim” your home and update these inaccuracies. This can have an immediate impact on your Zestimate as it refreshes daily.
After the data issue though, the biggest issue with the Zestimate is the inability of an algorithm to recognize differences people value. The variability in two 2400 square foot homes can be huge! One might be a fully custom, decked out lake front property, while another could be abandoned and run down like the home pictured above. Clearly those properties have different values and the market at large will recognize the difference.
Zillow will choose comparable homes near the property, so if an area is pretty consistent in terms of price, then the values are more accurate. However, if there is large variability in an area, a Zestimate might include properties that are clearly not a match. It uses recent solds for its comparables. So, it is possible for a Zestimate to drop rapidly if a home in the same area sells for considerably less. This is disheartening to people when their Zestimate drops because the home Zillow picked up might be a complete fluke – and there might be a story behind the low sales price that Zillow certainly doesn’t consider.
Even two homes which started out as similar properties might be considered the same per Zillow when their paths actually diverged. One perhaps had a brand new high end kitchen makeover that didn’t require permits, complete with custom cabinets, marble countertops, high end appliances and designer lighting. The other had no changes. Zillow would not know the difference. Had the work been permitted, like an addition, then Zillow would gather that info from the tax collector, and eventually an adjustment would be made.
Because technology changes all the time, Zillow has improved the Zestimate. A more recent iteration allows the tech to recognize the listing photos of a superior kitchen like the one I mentioned above.
But, of course that means a house must be for sale to Zillow to pick up the upgrades via the listing photos. Therefore Zillow’s accuracy is closer for “For Sale” homes than for homes which haven’t been listed.
In fact, For Sale homes in the Charlotte area, according to Zillow, have a median error rate of 1.8%. Unlisted homes have a median error rate of 7.4%. Only 37.5% of off-market Zestimates fall within 5% of the actual sale price, 59.9% within 10% and 79.9% within 20% (Zillow). This seems reasonable until you focus on a specific market. Consider the market for $500,000 homes: 20.1% of these homes will have a Zestimate off by more than $100,000. This possibly discrepancy makes it difficult to trust the Zestimate; there is no telling in a particular case if Zillow hit the bullseye, or missed the dartboard entirely.
At the end of the day, Zillow is doing it’s best to mimic human judgement. A good agent, will use the data, like Zillow, but then they will look at the raw numbers and make decisions about what makes sense to include or exclude based on their market knowledge – a judgement call.
That house down the street that has been tied up in an estate for years whose family finally decided to sell for an obscenely low price just doesn’t belong in the calculations, it is an outlier. Jane’s house around the corner still boasts avocado appliances from 1975, which any good agent knows will depress the price (unless they make a comeback). And while Sharon and Rob bought the standard Rochelle model in the neighborhood, they spent a fortune upgrading it, which not only increases its curb appeal as compared to its peers, but its market value as well. This interpretation of the “data” is beyond number crunching – it requires market smarts and a deep knowledge of the subject area.
Even the CEO of Zillow, Spencer Rascoff, recently listed his home for sale. Did he use the Zestimate value for list price?
No, he did not.
He actually listed for lower than the Zestimate. His Zestimate showed $1.75 million — he sold his home for $1.05 million. This is a difference of over 40%! That is a GINORMOUS disparity. I don’t know about you, but I think a $700,000 difference on a home is sorta a BIG deal! I’ll keep my $700,000, thank you very much.
Listing for less than the Zestimate is helpful psychologically. Buyers see the list price and then look at Zillow and see a higher Zestimate, and suddenly they feel like they are getting a bargain!
Contrast that with a home listed for more than the Zestimate. Buyers can’t get over the fact that Zillow thinks the home is worth less, so it must be overpriced.
The reality is the Zestimate is just a starting point for adjustments. If you see a home listed for $900,000 and the Zestimate is $850,000, there is a good chance the home has some upgrades Zillow doesn’t recognize, or maybe a home in the vicinity just sold at a lower price, or maybe a combo of the two. If the Zestimate is higher than the list price on the other hand, it doesn’t necessarily make the home a bargain. Maybe the surrounding homes recently sold at a higher price driving up the Zestimate for the subject home but they were “parade ready” whereas the subject home needs to be freshened up. All this to say, there are a lot of human factors that should make up the calculations, but Zillow isn’t at that level of detail.
So when you really want to know how your home value stacks up, take a quick look at Zillow, but then ask a trusted real estate advisor. I’d love to share that information with you – it might take me a smidge longer than the nanosecond Zillow takes when considering your home, but I think it’s worth it.
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