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Zillow Informs and Confuses : Part 1 – the Zestimate

Like many homeowners, I got to know about Zillow through the infamous Zestimate.  For years during the boom, I would check on the latest weekly update on the price of my home and sometimes take a furtive peek at those of my friends.  It was an addictive combination of self-congratulatory wealth monitoring and anonymous electronic voyeurism.  To a certain extent, I suppose it could be argued that the constant updates from the Zestimate helped to perpetuate and stoke the frothy housing bubble.  At the time, whether the Zestimate were accurate or not, nobody really bothered.

As the housing bubble deflated, I went into Zestimate detox as few things were as depressing during the grinding recession as the constant reminder of how much home equity was being wiped out on a weekly basis.  So, I detached from Zillow altogether, only returning years later to post my agent profile once I became a real estate broker.  Upon my return, I began to see Zillow in a new light.

While Zillow makes the rather admirable effort of promulgating transparency in real estate, the secretive formula for the Zestimate remained troubling.  Usually, the estimates given by Zestimate were as useless as appraisals and sometimes worst, when compared to actual transaction prices.  Zillow’s own internal analysis of Zestimate shows that the median error is between 8-10% of the price.  While this may not seem like a big margin of error, when translated into actual dollars, the difference is often in the 5 to 6-figure range, especially in California.  When that much money is at stake, no one can or should depend on Zillow’s free estimate.

To be fair, if an appraiser were asked to provide an estimate without knowing the pending offer price (which is usually provided, causing a dangerous bias), the accuracy is usually no better than Zestimate.  So, at least Zestimate is providing a “ball-park” estimate for free, as compared to $450-750 for a “professional” appraisal.

Still, based on this error, the Zestimate provided during the house bubble tended to over-estimate the market price, providing somewhat unrealistic expectations.  Meanwhile, the Zestimate today tends to under-estimate the prices of non-distressed properties, depressing already lowered expectations.  For distressed properties, Zestimate tends to over-estimate as the distress discount is hard to calculate.

So, what should a curious homeowner do to get a real estimate?  Ultimately, only actual market transactions will provide an accurate estimate of value.  There’s really no better system than having a real estate professional apply market intelligence to compare a home to sold comparable properties.  Fortunately, the interested homeowner can ask any competent Realtor for a free market analysis.  If you’re in the Bay Area, feel free to contact us.

Michael Cheng

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