Man vs Machine: the Zestimate, is it Good for Consumers?

In November 2021, Zillow upset the real estate world and Wall Street when they revealed their plans to terminate their iBuyer program, Zillow Offers, due to over $881 million in recorded losses.  In addition, Zillow sadly eliminated 25% of its workforce (approx. 2,000 Seattle employees) because of the company’s exodus from the practice of purchasing and re-selling homes due to their mismanagement of property price evaluations.  Zillow CEO Rich Barton went on record to say: “Fundamentally, we have been unable to predict the future pricing of homes to a level of accuracy that makes this a safe business to be in,”.

 

The Zestimate and Zillow Offers

This was a shocking statement to hear from a CEO who’s partially built their business model around a computer algorithm that spits out a home value called the “Zestimate”.  A Zestimate is an AVM (Automated Valuation Model). The numbers produced by automated valuation technology come from analyzing public record data and utilizing computer decision logic to provide an estimate of the probable selling price for a residential property.  An AVM is generally a combination of two types of evaluation, a hedonic model and a repeat sales index.  The results of these are analyzed, weighed, and then reported as a final estimation of value based on a hypothetical date.

Zillow’s iBuyer program targeted eager home sellers who wanted a quick, no-hassle sale.  Zillow Offers would present the sellers with a cash offer based on the Zestimate and close on a mutually agreed-upon date.  Soon after closing, Zillow would flip these recently acquired properties with some mostly aesthetic improvements and list them back on the market.  The problem was that Zillow ended up overpaying for a majority of their purchases, which proved that their Zestimate (AVM) lacked accuracy in the market. Accounts vary, but on average, Zillow Offers lost between $25,000-$80,800 on each property they flipped!

 

Why Is It Inaccurate?

One of the biggest reasons we find why Zillow’s Zestimate misses the mark by so much is the lack of human touch. Thorough market research that includes touring the subject property and neighborhood, recent local industry sales experiences, surveying other brokers about their surrounding listings, and assembling information from other agents about the terms of their recent sales and overall experiences helps to determine more accurate market conditions than the macrocosm of impersonal data used to establish an AVM like the Zestimate.  Computers unfortunately can’t do this type of in-person research, nor do they have the instinct to pick up on and predict shifts in the market, but humans (real estate brokers) can!

Oftentimes when we are talking with prospective seller clients, their Zestimate (or other AVMs, like Redfin Estimate) come up in the preliminary conversation. We absolutely understand why, too. This is information that is relatively easy to access, constantly advertised, and gives the seller a beginning idea as to the value of their home. Where an AVM can become detrimental, is when a seller thinks it’s the be-all, end-all of home evaluations – becoming attached to the number initially provided. Even worse is when a consumer bases this major financial decision solely on this limited information. This is harmful to sellers because according to Zillow themselves, ~39% of all Zestimates in the Seattle metro area are not within 5% of the actual value.

For Quarter 1 2022, the median home price in the Seattle Metro area was $915,000. With 39% of all Zestimates not within 5% of the actual value, that is a beginning margin of error of $45,750 for 2 out of every five 5 households! Further, they claim that only 82% of their Zestimates are within 10% of the actual value, which is a marked difference for a fifth of sellers – up to $91,500! Where AVMs are flawed is that the foundation of their formula is tax records, which in our experience are often outdated and inaccurate. In addition, and perhaps most importantly, an AVM does not take into consideration the condition or recent improvements of the home, the neighborhood, and other environmental impacts such as school district, road noise, and unsightly neighboring homes, to name a few.

 

Then What’s the Point of AVMs like the Zestimate?

So, why exactly does the Zestimate exist? Zillow is a publicly-traded company (ZG) and its website is the medium through which they create profit. The Zestimate attracts consumers to the website who are often just beginning to dip their toes in the pool to see what their home might be worth or begin to search for available homes for sale in their budget. When a consumer is browsing Zillow’s website they get bombarded by real estate and mortgage broker ads on every page. These brokers are paying large amounts of money for that advertising space, which is how Zillow creates its revenue and why there is a Zestimate. The Zestimate is not a public service, it is a marketing gimmick, a widget to bring prospective clients to their advertising space which allows for them to sell more ads to brokers looking to obtain new clients.

The take-away is this: use Zillow/Redfin/any AVM as one of many tools in your real estate search and evaluation arsenal. Zillow provides a great jumping-off point and contains a plethora of information to begin familiarizing yourself with before embarking on your real estate endeavors. However, we live in a time of information overload and we are overstimulated at best. Nothing beats the evaluation and judgment of a knowledgeable and experienced real estate broker to help you determine your home pricing accuracy, which will lead you to the empowerment of clarity.  At Windermere, we refer to this as The Human Algorithm.

If you are curious about the value of your home in today’s market, please contact us. We can provide an annual real estate review of all of your real estate holdings, and can even dive deep into a complete comparative market analysis if that would be helpful for you. It is our goal to help keep our clients informed and empower strong decisions.

 

Zillow® and Zestimate® are trademarks of Zillow, Inc.