The Zestimate is Zillow’s proprietary algorithm for computing home valuation estimates for the millions of homes presented by Zillow. The Zillow Zestimate is so easy to access for almost any home presented by Zillow including homes listed for sale on the MLS, for sale by owner listings and even homes not listed for sale on the market. Users assume that the Zillow Zestimate is accurate just because it is easily accessible, but how valid is this assumption?
At the end of May 2017, Zillow announced a competition for any person or team who can most improve the company’s Zestimate algorithm. The competition consists of a public qualifying round followed by a private final round ending on January 17, 2018. If the winner can beat Zillow’s benchmark accuracy, they will be awarded a $1 Million dollar prize. Zillow’s Stan Humphries claims that Zillow’s error rate is down to 5 percent nationwide.
One needs to wonder why Zillow is willing to spend $1 Million if its flagship algorithm is as accurate as the company claims. First, consider that Zillow’s claim of a 5 percent error rate is defined by Zillow as half of all Zestimates within 5 percent of the actual sale price. Per Zillow’s definition, the other half of all Zestimates could be completely wrong; hundreds, thousands even tens of thousands of dollars over or under the actual sale price and Zillow could still claim their 5 percent error rate nationwide! Also consider that since Zillow presents their Zestimate for homes not listed for sale, those homes and their Zestimate are not considered in the error rate computation since there is no sale price to evaluate against.
The Zillow Zestimate varies from one region to the next, based on the data that is available to Zillow in any particular area. Available data includes public records, Multiple Listing Service, etc. Both of these are available in the CNY region, but for Onondaga County, Zillow’s Zestimate rating is only “fair” (2-stars). The data presented for Onondaga County’s Zestimate accuracy is reported as follows:
- 148,600 homes with Zestimates
- 2% of homes within 5% of sale price
- 8% of homes within 10% of sale price
- 5% of homes within 20% of sale price
- Median error 7.3%
To put these numbers in perspective, keep in mind that when Zillow says 58.8% of homes were valued within 10% of the actual sale price, the 58.8% includes the previous 39.2% within 5% of the actual sale price. Another way to structure this data is presented below:
- 2% of homes within 5% of sale price
- 6% of homes between 5-10% of sale price
- 7% of homes between 10-20% of sale price
- 5% of homes greater than 20% of sale price
Zillow is careful to claim that their Zestimates are not appraisals, with good reason. However, Zillow users are ignoring this warning and use Zestimates as if they were appraisals or at least accurate valuations. Just from the brief exercise above, you should be able to see that almost one out of every four Zestimates in Onondaga County are more than 20% over or under the actual sale price. As a buyer, are you willing to pay a 20% premium or more for a home just because that’s what the Zestimate says is an acceptable price? I’m sure the seller of the home you are buying won’t argue with you! How about sellers who list at the stated Zestimate and find out that no buyers are interested? It should cross that seller’s mind to consider that the Zestimate is overstated.
There is no substitute for an appraisal. Appraisers follow very strict guidelines to arrive at a single dollar value for a property. Unfortunately, appraisals cost hundreds of dollars! Realtors use the same techniques as appraiser for determining a value range for a property. This value range is used to set a price based on market conditions (seller’s, buyer’s or balanced market). Realtors call their process a comparative market analysis (CMA). The best part of a CMA is that there is no cost for clients. When it comes time to purchase a home or list a home for sale, seek help from professionals who know the market and prepare CMAs on a daily basis. Zillow is fine for window shopping, but when you become serious, get serious guidance – contact a Realtor!