If you have had even an inkling of interest in real estate in the last few years, you have probably heard of Zillow, the online real estate website. It’s one of many online financial services shaking up the game like the Acorns savings app, or the Digit app.
Zillow built its audience on the concept of a Zestimate, and online, computer-based algorithm that provides an estimate of the value of your home. People love seeing what their house is “worth” today, this month, and over time. The Zestimate is updated as often as the algorithm gets new data.
Are Zestimates Real Estimates?
Zillow has had to fight off people from the real estate industry who don’t like the company giving people ideas that makes it harder to earn that real estate commission. Sometimes, it makes people think their house is worth too much, and sometimes it makes people think the house they want to buy is overpriced. Either way, that is a headache for realtors and real estate agents.
According to a recent lawsuit, it also caused problems for home builders who accused Zillow of hurting their ability to get the proper sale price for their homes by publishing Zestimates that undervalued their homes.
Today, the judge in the case threw out the lawsuit stating that the word Zestimate itself is obviously a combination of Zillow and estimate, and therefore understandable as an estimate by anyone.
That means Zillow can keep Zestimating.
Are Zestimates Accurate?
Lawsuits aside, how accurate are Zestimates?
The answer is tricky for the same reason that pricing a home is tricky — it depends on a lot of variables.
At its core, Zillow does what the average real estate agent does. It looks at recent sales, gets an average price per square foot of similar homes in the same area, and then multiplies that by the home’s actual square footage. Voila! Zestimate.
Of course, there is more to it than that. Like the Google algorithm that mainly counts links but has hundreds or thousands of adjustments to the count, Zillow adjusts figures based on things it’s computer algorithm can see as well.
The catch is that Zillow can only see the data it can pull in from online information and databases. So, while it may know a house on a busy street corner may be worth less than one a few houses down the block, it won’t be able to value amenities like stainless steel appliances, and so on. Sometimes, Zillow is working with the wrong square footage altogether because someone finished a basement, and Zillow uses the public records that list the old square footage. And so on.
Even more than that, a lot of intangibles come into play that are tough for a computer to be programmed for. Floor layout changes the desirability of many homes, as does that creepy back yard of the house next door that you can only see from the window of the master bedroom. In our recent home shopping experience, it wasn’t until we were standing in the basement of a house we really liked online that we realized the ceiling in there was very low and I’d have to actually duck to go through doorways. (Too bad, because we loved everything else about that house…)
The really tricky part is figuring out where the invisible borders are that change property values. These are the areas where a knowledgeable real estate agent, or even some really familiar with the neighborhood knows things a computer doesn’t.
At our old house, we were technically part of a certain neighborhood. But, because our home was separated from the rest of that neighborhood by a fairly large park, when people came looking for houses, they considered our area part of the nicer neighborhood to the south, so our house was undervalued. Zillow seemed to figure that out a few years back, and switched the “comparables” that our Zestimate was based on, but it missed another factor.
Our particular area was part of a historic district which restricts the ability of the homeowner to do things such as scrape and build, like they do just two blocks away out of the historic district. As a result, then our house was overvalued.
There are ways to deal with this. For example, you can claim and edit your home to add that square footage. There is even a Zillow I Disagree link that encourages you to contact a realtor to get a full estimate.
What Are Zestimates Good For?
Like many of the free credit score services out there, such as Credit Karma, or Credit Sesame, the value of a Zestimate lies not so much in the actual number, but rather in the direction and trends of the number. While a $600,000 Zestimate might be off by $50,000 or even $150,000, a rising Zestimate pretty accurately says that home values are rising in your neighborhood.
It can also be very helpful to come up with your own value. When we were looking to sell our house, we started following what in our neighborhood went up for sale, and what the price was, as well as when it sold (and much later for how much). By watching the values and looking at pictures we could do our own, in-person estimates. So, when the place three blocks away (worse school boundary) sold for a bit more than the one down the block (one of the bedrooms was in the basement) we knew to add and subtract accordingly.
The reality is that your house is worth what a buyer will pay your for it. Some buyers may be willing to pay more, some less. As a result, even the “real” estimated value appraisal you get from a realtor may be off by tens of thousands of dollars, which you can see all the time in the market as prices are cut, or final sale prices come in far above asking.
Even harder to account for is that the house must match what a buyer wants to buy. A perfectly priced house with a kitchen layout that doesn’t work for a particular buyer won’t sell. But, another buyer might fall in love with the same layout. The trick is timing. If the latter buyer won’t be in the market for another month, or already bought a house last month, they may never even see the house, let alone make a bid.
The Zillow tool is a good one for home sellers and home buyers to start getting a feel for the market. In the end, every house is unique and no computer, and no realtor is ever going to change that.