Zillow and Zestimate Background
One of the most frequent questions I address is about Zillow and the accuracy of their Zestimate. In order to explain it to someone without sounding like a conspiracy theorist it takes some time and background on the Zestimate. Keep in mind throughout the article that it is an “estimate”, hence the name “Zillow Estimate” or “Zestimate” for short.
Zillow is a widely used and user-friendly home search tool that has become a household name. They started out as just a basic search tool, but later added multiple features including the Zestimate for homeowners to check the value of their homes. The Zestimate algorithm has changed significantly over time and in general has become much more accurate recently. The accuracy of it though cannot replace what appraisers and Realtors do and Zillow learned this the hard way by reporting over a $1 Billion loss on their home flipping program.
I have heard from some homeowners who obsess over the number and check it as frequently as daily to see how the value of their home has changed. Home values do not really change daily and remember it is just an estimate, so don’t base important or large financial decisions on this number. Keep the Zestimate talk for entertainment purposes, and you should be just fine.
What is a Zestimate?
Zestimate is the term Zillow uses for their sight unseen home value estimates. They are computer generated algorithms that approximate the value of a home. Assessors use similar methodologies to determine the value of your home for property tax purposes. While they keep the exact algorithm and calculations a secret, it generally considers square footage, age of the home, bedrooms, bathrooms, garage spaces, etc. The Zestimate is only as accurate as the inputs, so if there are errors in the public record or listing then it will lead to an inaccurate Zestimate. Garbage in produces garbage out as they say.
In Zillow’s own words a Zestimate is the following:
Notice the last paragraph where they caution using it for any sort of appraisal purposes? I would agree you should not make any important decisions based on this number. Further to this an appraiser will not consider the Zestimate value in any form or fashion in determining the value of your home.
How Does Zillow Make Money?
Up until recently, Zillow made most of their money on real estate agents and lenders who pay for advertising on their site. When you click on a link to talk to an agent that agent has paid for that opportunity or “lead” as we call them.
The challenge of any website is to drive traffic and user engagement and continue to drive that traffic over time. This traffic generates more leads which generates more revenue. Zillow created the Zestimate as a means for homeowners to check the value of their home and thus increase traffic to their site. The more time users spend on a website the more revenue they make on advertising/lead generation. This doesn’t invalidate the accuracy of the estimate, but helps explain why the estimates change so frequently.
How does Zillow Calculate a Zestimate?
There was a time where Zillow was simply using the Assessed value from the local Assessor’s office and multiplying it by a percentage to get the Zestimate. I proved this to myself some time ago by taking 10 homes in a zip code and comparing them to the assessed values and found that every home was exactly 7.15% more than the assessed value. The only problem with this is the assessed value doesn’t change frequently enough so it wasn’t very useful at driving web traffic. They have since developed their own algorithm and the value of the homes change frequently. The reality is the value of your home is fairly stable and doesn’t change dramatically on a daily basis, but that won’t stop the public from checking it frequently.
Zillow had taken their Zestimate to a level where they felt confident it was accurate enough to build a home flipping empire. Their proprietary algorithm was the key to unlocking the complicated process of buying or selling a home…or so they thought. They have since ceased buying homes after a massive loss and laid off their workers in this division. It turns out that while a computer algorithm might be good enough for an assessor to tax your home, it falls short when truly determining a fair value of your home at market. Ultimately Zillow will not reveal their proprietary algorithm, but it doesn’t really matter as their actions and financial losses provide what we need. Keep in mind these massive losses are on the back of the greatest year of real estate appreciation in history. If you can’t make money in this market, you never will.
What Drives Zestimate Inaccuracy?
Just like anything in life complexity drives inaccuracy. In neighborhoods that are relatively newer with similar homes the Zestimate tends to be close. These are also areas that are pretty easy for almost anyone to determine a reasonable value for a home.
The big value drivers of a home are location, above ground square footage, age of the home, condition, and level of finishes. It is easy to figure out the first three, but condition and level of finishes are more difficult to determine sight unseen. There are some other minor items that will add up, but are not overall that material.
Accuracy of any algorithm including the Zestimate depends on the conformity of the neighborhood. The more alike all the homes are the more accurate it will be.
I have found the following items are some of the sources of error in the Zestimate from my experience:
- Large Amount of Time Since Sale (2014 or older)– Computer algorithms are now much better at capturing detailed data during home sales. All this extra detail wasn’t being stored until around 2014. If you have owned your home since at least 2014 the databases are less complete and the Zestimate could be off.
- Old Neighborhoods With High Variability– In Denver the older established neighborhoods can be challenging for any algorithm. You have a mix of old historic homes, brand new builds, homes on double lots, and everything in between. What works for valuing homes in Commerce City certainly doesn’t work the same as Washington Park.
- Recent Remodels – The algorithms do a poor job of capturing improvements you made to your home as nobody told them about it. If the project was permitted the Assessor will have this data and they might take this into account, but they generally have no idea of the scope.
- Atypical Home Style – If your home is very unique it has a hard time capturing this. Unique homes are hard to value by hand, let alone a computer doing a valuation.
- Condition – This is probably the most difficult and subjective thing for most people to assess, but it is a serious value driver. The Zestimate attempts to capture this, but I am challenged to see how it could do so accurately. If a person struggles to assess value based on condition it is nearly impossible to program a computer to mimic your thoughts.
- Level of Finishes – Similar to condition the algorithms have a hard time figuring out the level of finishes of your home. This can easily be a 10% swing in value.
- Location – Not just the neighborhood is important when it comes to location. Homes that back green or open space have a higher value than homes that don’t. Also a home on a busy street is less valuable. Algorithms are trying to capture this, but I find they often don’t.
What Does Zillow Say About Their Zestimate?
You can perform a fairly simple google search and find their own published data on accuracy. Below is what they show for Denver.
You can see they claim that 89.8% of homes in Denver are within 5% of the Sales Price. That may seem accurate, but when you are talking about your home, you want to know if you are going to be one of the outliers. I found that only 30% of my home sales were within 5% of the Sales Price…granted I am a much smaller sample size. I am also comparing the Zestimate they have BEFORE it is listed for sale, not the Zestimate they determine after it is listed for sale. I talk about that later in the article. It is easy to make statistics show whatever you want it to show. Don’t trust the numbers when they won’t show you exactly how they determined them.
My Zestimate Just Changed After I Listed! Now What?
First of all don’t panic that a computer changed it’s sight unseen estimate for your home. The Zestimate often changes after a home has been put on the market. Zillow will usually increase the Zestimate (within reason) when a property is listed if their estimate is too low. Zillow has been sued multiple times for homeowners blaming their home not selling on the basis of the Zestimate being too low. They may be increasing their Zestimate because they want to avoid lawsuits in the future? Do they believe asking price is a better approximation of value than their Zestimate? Do they do this to bolster their own statistics on accuracy? Whatever the reason doesn’t give me a whole lot of confidence in the precision of the number. Here is what Zillow says straight from their website:
It is a good convenient excuse, but I have also sold homes as little as 2 years since the last purchase where the Zestimate was off by 15%. That is a lot of error for a home that has had nothing done to it with a nearly identical MLS input.
You will find the Zestimate is quite accurate on a home that has just sold which leads people to believe they are accurate. Let’s think about this for a moment…if your home just sold and they changed the Zestimate after it sold then I would sure hope it is accurate as we just determined the fair market value of the home!
Recent Zestimate Versus Sale Price Examples
Before every listing I pull and present to the homeowner various values that different websites publish prior to putting it on the market. I have recorded what the Zestimate is before the sale and what we actually achieved at sale. Below is a graph of the last 10 properties I sold in the Denver Metro area.
At first glance it visually appears close, but several of these are off by $100,000 or more. That is a lot of money to leave on the table if you are overly influenced by the Zestimate.
All of these homes were sold in 2021 with rapidly appreciating home values. This could be an excuse for the Zestimate being lower than the final sale price, but I find that hard to believe with how frequently they change the Zestimate. Maybe I just kick butt as a Realtor…that must be it! While I didn’t post my 2020 sales here, the story is much the same and has just as much margin of error. I don’t know if Zillow’s desire to flip homes is impacting the values or if being a little conservative is their desire, but they generally have been light on average over the last 2 years. Overall, I only found that 30% of the homes sold are within 5% of the pre-listing Zestimate. This is in stark contrast to their claims.
The largest margin of error were Properties 4, 7, and 9 and all three of these were unique properties. Property 8 was off by over 10% and should have been spot on as it was a condo in a building with a lot of sales, but it was off due to the algorithm not picking up condition of the property as well as the rare garage space that it had. On Property 6 the algorithm was almost spot on, but this was luck more than anything. We did not think we would achieve anywhere near that high of a sales price and the bidding wars were out of control…perhaps the Buyer’s were influenced by the Zestimate?
Is there anything better?
I have a software package called RPR that produces a valuation estimate they call the Realtor’s Valuation Model (RVM). This software is used by both agents and appraisers, and we consider the algorithm values as a starting point. I find the RVM estimate from my RPR software to be more accurate on average, but it is often close to the Zestimate. The nice part about the RVM estimate is it gives me a confidence range and it shows me which properties it considered so I can QC it quickly. If the RVM shows high confidence it is quite accurate in my experience. If you want to know the RVM of your home just contact me, it is easy for me to run it.
The Zestimate is just another tool to consider when understanding an approximate value for your home. Zillow has improved the accuracy of it over time and it is much better than it was years ago. Do not obsess over it or consider it anything more than just a computer estimate. Remember that it does not know the level of finishes or condition and the more variable the neighborhood is the more inaccurate it will be. The main intent of the Zestimate is to drive web traffic. I have sold many homes where the Zestimate was way below the final sales price as evidenced above. Good agents will educate their clients to not consider the Zestimate when offering on a home or determining a fair listing price for your home. The Zestimate of your home will change all the time including when your home hits the market and after it sells.
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Not responsible for accuracy or for updating this content, readers should perform their own due diligence and seek proper legal and tax counsel prior to making any decisions. This is intended as an informational opinion piece only. Original content is created by Greg Taft.
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