How Useful is a Zestimate?

By MICHAEL EDLEN | Special to the Palisadian Post

Many people have heard of Zestimates, which are readily available from Zillow, and often rely on them to decide how much their home is probably worth or how much to offer on a home for sale. Others have no awareness of what a Zestimate actually is. Fundamentally, a home is worth what a buyer is willing to pay.

What is the Zestimate and how is it created?

The Zestimate is simply a home evaluation by computer technology that takes into consideration many factors that are available in public records. It is one of many similar systems that use sophisticated algorithms in calculating a probable range of value on a particular property. Today Zillow covers more than 100 million homes in the U.S.

The factors used include recent comparable sales in the area, the square footage of the home and property, tax assessments, number of bedrooms and baths, and history of previous sales. The estimates are updated several times per week automatically and are modified by any market trends that are present.

How accurate are the Zestimates?

The accuracy of Zestimates has been questioned by many people ever since Zillow began using the tool in 2006. For example, when their model was used to estimate the home value of their company’s president more than 10 years ago, the eventual sale of the property was about $1 million lower than the Zestimate had predicted. This was due to the fact that it backed up to a major roadway, which the evaluation model could not have taken into consideration.

Over the years, though, Zillow has made significant progress in improving its accuracy.  In some areas it is highly accurate, especially when due to a large number of sales of relatively similar properties. However, if a homeowner has made significant improvements to their property, which might increase the value substantially, Zillow would not likely include that information. Also, Zestimates vary in accuracy based on the area. For example, it has been found to be off by 5% half of the time in some areas.

Within communities such as west of the 405 freeway, the estimates can quite often vary widely. Since Zillow’s system does not know the difference between the Huntington Palisades and the adjacent Alphabet Streets area, for instance, several recent sales in either one of those neighborhoods may skew the numbers in the other one. The reverse is found in areas such as the Palisades Highlands townhomes, where the units are much more homogenous, making it easier to calculate more accurately.

A home in the hills may have a great view, while one below it by a few hundred feet might have none. Their Zestimates might be almost identical, even though one would sell for $1 million more than the other.

What difference do these inaccuracies make though?

The record shown by Zillow indicates that approximately 20% of the Zestimates are off by 20% or more. This variance could be either above or below the actual present value of a property.  Therefore an owner who thinks the value is just what the Zestimate says, may be leaving a lot of money on the table if he accepts an offer anywhere near that level. Or, he may be sorely disappointed if the market does not bear what he is so sure its value is. Likewise, a buyer may think a listing is overpriced, whereas it may be priced right at its market value.

According to Zillow’s data, the median average error rate is greater than 7% for homes that are not for sale. Even for homes that are on the market, the error rate is more than 2%. In an area where the average home may sell for $4 million or more, even a variance of 5% is $200,000.

Can the consumer use online evaluation systems like Zillow effectively?

There are at least six other similar algorithm-based systems that are readily available to people wanting a potentially greater degree of confidence in the estimates done in this manner. Redfin, Realtor.com, Core Logic, Quantarium and Collateral are some examples. Since each method has its own algorithm, someone can look up the estimates of a property on each one, note the ranges of value on each, and then calculate an average of all of them. This way, one might minimize the variation from value that any particular system has.

Are there more accurate ways to estimate the potential value of a property?

An evaluation done in person by a licensed professional appraiser will usually result in a number that is very close to what the home is actually worth at that time. However, few owners or potential buyers would want to invest in the cost of obtaining such an appraisal.

A Comparative Market Analysis by a local real estate expert will be customized to the particular property and based on much more specific information than any online evaluation method can possibly know. It will also take into consideration any factors that could impact the value such as potential view obstruction, limiting easements or deed restrictions, etc. A review of properties currently under contract as well as those on the market would be taken into consideration too, as those might affect the pricing strategy to maximize ultimate sales value.

As an example, our team’s evaluations are accurate 98% of the time within 5%. Of course the ultimate sale price of a home will be affected by the preparations an owner is willing to do before putting their home on the market. These can easily make a difference of 3 to 5% in sale value.

Are Zestimates and similar valuations of no value?

These estimates definitely do give a rough idea of potential value of a property, and thus, are a good starting point for planning and discussions with a professional Realtor.  However, owners and potential buyers would do well to not place heavy reliance on the numbers derived this way.

Michael Edlen has been a leading consultant in real estate for 30-plus years, and is available for a complimentary and confidential conversation upon request at 310-600-7422
or michael@edlenteam.com.