Zillow Estimates

By Elizabeth Hotz, First Time Home Buyer Specialist

In a time when technology rules the day, consumers have a number of resources at their fingertips. You can get your groceries online, take an eye exam, find out why your dog is sick, and, now, you can even assess the value of your neighbor’s home. Zillow.com emerged in 2006 as a new obsession for real estate Buyers and Sellers. Advertiser supported, this website offers free computer-generated estimates for home values to consumers. Oftentimes these “zestimates” not zactly accurate.Zillow Home Value Estimate

This Washington Park home has a Zillow Zestimate of value at $272,000. In real life, it just went under contract for more than it’s $299,000 offering price. So, if the contract closes, the real value of this home is at least 10% more than its Zillow estimate. Just how do they do they get their information to be able to estimate home values?

Basically, Zillow uses a computer program that taps into county records to find data on recently sold homes within a certain proximity that are physically comparable in size and construction to the subject property. It also gathers information on past listing history and most recent tax assessments.

All sounds good - right? Well, that would be true if county records were always accurate. What Zillow doesn’t take into account are factors that dramatically impact the value of a property. Zillow typically draws their comparable properties from a specific radius regardless of neighborhood boundaries. For example, it could be comparing one property in a desirable, safe neighborhood to another home in a different, adjacent neighborhood that has a higher crime rating or simply feeds into a less desirable elementary school.

Busy streets, highway noise, proximity to public transportation or community park are other neighborhood factors that vary block by block - these are also taken out of Zillow’s equation when pricing a home. Let’s certainly not forget about condition either. Public records simply don’t report on condition - especially if there’s been updating/remodeling done without a permit. Another thing to remember is that most often times public records don’t record tractions accurately when they are Seller concessions - ie. closing costs, Buyer incentives or credits. They also don’t reflect situation when title is transferred between family members, friends, or business partners for a token price. That goes for foreclosures or short sales as well, which can be sold below “market” just to get a fast closing.

To be fair, Zillow does mention a number of times on their website that they are simply a “starting off point” and not as accurate as a CMA (Comparable Market Analysis) done by a professional Realtor or an appraiser. Zillow, themselves, even reports on their website a 10% median margin of error for the Denver market (some sites claim Zillow has been off in their market by as much as 40%!).

I do know a number of people who like to use Zillow for their aerial views of the neighborhoods and their advertisements. And let’s face it, this site sure satisfies our real estate curiosity factor. If anything, it appears that Zillow actually works best for mid range homes in homogeneous neighborhoods. It most certainly does not have the ability to account for luxury, custom homes where Italian marble flooring or a one-hole golf course in the backyard can make all the difference.

I have tried to resist the chorus of Realtor complains about Zillow. I didn’t want to join the Zillow-hating bandwagon. As a consumer, I too want to gather as much information as I can before making an important investment. However, the inaccuracy that Zillow promotes could jeopardize my clients and actually prevent them from getting the house they want or selling their home for the right price. Furthermore, it’s giving the general public an unfair view of the market. In fact, the state of Arizona has issued two letters to Zillow asking them to “cease and desist” in their state. In another instance, the National Community Reinvestment Coalition issued a letter the US Federal Trade Commission stating that Zillow does not adequately explain their limitations when it comes to home valuation - see, us Realtors aren’t the only ones who are fed up! Unfortunately, life just isn’t about just about plugging number into an equation. Don’t you think one of the biggest transactions of your life deserves more than that?

After all my research, experience and horror stories regarding this hugely popular site, I now see Zillow for what she is: the neighborhood gossip - fun for a few drinks, but eventually going to spread lies about you to the neighbors.

August 16, 2008 | Filed Under Denver Real Estate News 

Comments

3 Responses to “Zillow Estimates”

  1. Mortgage Samson on August 17th, 2008 2:47 pm

    Those Zany Zillow Zestimates!

    The seller feels the house is worth $30k more than it is and as a result, the home doesn’t sell. Then, when the homeowner decides to drop the price, it’s too late.

    I’ve seen it work both ways though. Sometimes Zillow underestimates the Zalue.

  2. D Martin on August 19th, 2008 11:42 am

    Good job, you did a great job explaining Zillow. The public need to understand it’s only a large dart board, sometimes you hit and sometimes you miss the target

  3. James Schel on August 21st, 2008 7:34 am

    I’m a licensed appraiser and I read the article about automated valuation systems by Ms. Holtz (Wash Park house) and would like to add my $.02.

    You have my permission to publish this, if you desire, edited for space only (otherwise let me know if you need changes).

    James M. (Mike) Schel
    303-425-7575
    valueappraisal@comcast.netl

    Letting Computers Perform Real Estate Appraisals. A Good Idea?

    Most Americans have never heard of them. Home mortgage lenders love them. One of the nation’s largest lenders recently announced it would use nothing else in order to “limit market exposure.” The nations largest savings depended heavily upon them and is now in deep financial trouble. Your lender won’t talk about them and won’t tell you when they are using one. It’s one detail of the current real estate mess you won’t read or hear about in local or national news. Yet they’ve been a major factor in driving the rising foreclosure rate and damaging home values in many places.

    They are Automated Valuation Models, or “AVMs,” computers that tell a lender what your house is worth. AVMs analyze data either purchased from title companies or farmed from public sources and do away with “old-fashioned” home appraisals. Nobody will visit, talk to you about your home, note any new and upgrade features, measure it and then compare it to nearby similar homes that have sold recently to develop a final estimate of value–an appraisal. And the cost of an AVM “appraisal” is always a fraction of the typical $300 to $500 real appraiser will charge. This low price allows the lender to magnanimously offer to pay the “appraisal fee” for you. And an AVM calculates its valuation in minutes, rather than the several days or a week or more a real appraiser will spend determining the value of your home.

    AVMs sound like manna from heaven, don’t they? Cheaper, faster, less intrusive . . . it’s hard to see a downside. Well, there may be one: AVMs are almost never accurate.

    The use of AVMs by lenders grew dramatically during the last few years of the 1990s. As the economy slowed and mortgage lenders’ profit margins slimmed down and they began marketing to more risky borrowers, anyplace they could trim costs became more attractive. To many mortgage lenders, a borrower who can’t find the $350 to pay the apprasier isn’t someone who shouldn’t be buying a home. Nope, they are an “untapped market.” AVMs are just another tool unethical lenders have used to put people into mortgages they can’t afford, leading to escalating foreclosures.

    Lenders will argue that a human appraiser is too slow, too subjective and just too darned expensive! An AVM can tell you what your house is “worth” in minutes. Besides, who wouldn’t rather pay thirty dollars than $300 or more? And yes, AVMs are certainly far less picky than an appraiser! For instance, while an appraiser will look at that repossessed, vermin-infested former meth-lab that sold last month a couple of blocks over as unacceptable for comparison to your lovingly maintained family home, not an AVM! The AVM will compare size, age, room and bath count and if that meth-lab is remotely similar to yours, it’s as good as the same house to the AVM. The AVM won’t worry for a moment over why that house sold for $75,000 less than anything else in the neighborhood; it just factors the raw numbers. And sellers may believe that since the appraisal isn’t their obligation, this has nothing to do with them. So if the AVM says the house is worth thousands less than the negotiated sales price, most sellers have no problem just knocking that off the price!

    AVMs don’t always undervalue homes, though. If an unscrupulous agent sells a nearby house to his cousin, for $50,000 more than anything else in the neighborhood, the AVM won’t scratch its head in puzzlement over the deal. AVMs don’t have heads to scratch. They just have numbers they crunch. A licensed appraiser, however, is obligated by the regulations and ethical standards of the profession to do a little more digging. Sales like this can cause AVMs to over-value a home by tens of thousands of dollars.

    Before you start jumping up and down like someone who just hit the lottery, remember that if you are refinancing, that extra money will be part of your mortgage. If you are selling, unless your prospective buyers are stupid, they’ll rescind on the deal and find a more reasonably priced house. If you bought or refinanced based on this over-valuation, and you decide to sell or need to refinance a few months down the road and if values in your neighborhood are stagnant or as in so many other areas right now, depreciating, how will a mortgage overvalued by tens of thousands? What many Americans have learnt too late in this situation is that they can’t get out from under an overvalued home by selling or refinancing because their current mortgage is so far “upside down”–you owe far more than anyone is willing to pay for or lend on the house. Then, often, the only way out is foreclosure.

    American appraisers are licensed by their state, carry liability insurance and must adhere to strict federal and state guidelines. If an appraiser seriously misidentifies the current market value of your home, in either direction, he or she can be held accountable. Can AVMs be held accountable? Not so much. They are not licensed or even regulated in any way. The people who run them are rarely themselves appraisers. Often, so that the lender can further distance themselves and “limit market exposure,” these computers are not even in this country! But surely if a value problem turns up, you can go to the lender, right? Sure. And they’ll tell you it’s not their fault. They didn’t provide the value, the AVM did. In the end, about all you can do if an AVM got you into serious trouble is to write a strongly worded letter. To a computer. In India.

    A real appraisal will and should cost a few hundred bucks. Appraisers are licensed professionals who provide a very valuable service. If you can’t scrape a few hundred bucks together, maybe it’s time to seriously reevaluate your financial ability to own a home in the first place. If you are just a cheapskate, you’re not a very smart one. You might ace an appraiser out of his or her fee, just to ace yourself right out of your home down the road.

    So whether you are selling, buying or refinancing, if someone with a tape measure and clipboard doesn’t come by to peak into your attic and cellar and talk to you about the new windows and refinished floors, you might want to call the lender and exercise your right to demand a real appraisal by a licensed, human appraiser.

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