Home buyers often want to get pricing information for a property without having to rely on a real estate agent. This is where real estate sites like Zillow.com come in handy. However, can you really rely on a Zillow home estimate?
The first thing to understand is how Zillow arrives at a Zestimate, its name for a home value estimate. According to the site, Zestimates are based on a proprietary algorithm that incorporates public records and user-submitted data. However, a Zillow home value is not an appraisal and may not take into account all the data necessary to make it as accurate as possible.
How Zillow's Estimates Work
Zillow acquires data from tax assessor and county records, real estate brokerages, and multiple listing services (MLSs). It also incorporates user-submitted data. For example, a homeowner may contact Zillow to update information about their property's features. The owner may improve the Zestimate accuracy for their home by submitting up-to-date information on finished square footage, number of bedrooms and bathrooms, and lot size.
How an Agent Estimates Home Value
When an agent assesses a property, typically they begin by studying it from an overhead, satellite view on Google. They note whether it backs up to a busy street, the proximity to commercial property or freeways, the size of other homes nearby, the vegetation and landscaping, and its orientation to the sun. If available, they will view any photos of the exterior plus a street scene.
An agent might then run an automated valuation. There are two ways to do this: one uses specialized real estate software, and the other uses sales pulled directly from the MLS. The resulting values from these two methods are often very different from each other, but if used together they can provide a range of value.
Armed with that information, an agent then inspects the home and looks at it through the eyes of a buyer and an appraiser, as well as considering how the house will be positioned against the competition on the market.
It's not unusual for an agent to enter a home with a prepared listing agreement in hand and end up manually changing the listing price after viewing the house.
How Appraisers Assess Value
Before the lender will sign off on your home loan, they will insist on a home appraisal. Typically, this costs several hundred dollars and is paid for by the buyer.
Home appraisers must be licensed and certified by the state. Their job is to conduct an unbiased assessment of the home's value. To do this, they'll conduct a walk-through, comparing the house's features against a checklist. They'll look for visible defects, but they won't look for potential issues in the same way as a home inspector would.
Appraisers usually issue a written appraisal report, including photos of the property, a street map, information about comparable properties, and market data.
Zillow never claims to be 100% accurate. If all the homes within a six-block radius are very similar to each other, a Zillow estimate will be much more accurate, perhaps within 10%, because there are not enough specific variances to throw it off. In other cases, such as for older neighborhoods with many homes that have been improved in different ways, it won't be that close at all.
At least for now, Zillow can't predict how a buyer will feel when they enter a home. It can't tell you whether the interior has been updated, whether the workmanship is superior, whether the materials used are inferior, or whether a school around the corner has decreased the value of homes that back up to the football field. Real estate agents and appraisers use any number of factors when they know the neighborhood and have inspected the home in person.
Many csoftware programs can forecast the value of a home. Even real estate agents use software, but they don't rely on those programs alone like Zillow relies on the artificial intelligence used to assemble its Zestimates.
Zillow Home Values vs. Actual Sale Prices
The following four typical homes were actual home sales, and the price outcome is compared with their Zillow Zestimates at the point of sale, to highlight some of the variations in the two values.
One property is two houses on a lot in Midtown Sacramento, located on a busy street near the railroad tracks and close to freeway noise, across from a commercial property. Zillow estimated the value of that home at $380,733, but it sold at $349,000, after almost six months on the market with plenty of exposure. In this case, the Zillow estimate was about 9% too high.
The second home was a custom waterfront property in the Pocket area of Sacramento. Zillow valued that home at $983,097, yet it sold at $1,085,000, which was 10% more than the Zillow estimate. If the sellers had relied on the Zillow estimate, they would have lost more than $100,000.
The third home was a reconstructed home in an exclusive area of Davis, California, near the University of California, Davis. Zillow valued that home at $1,230,563, but it sold for $1,495,000, and for cash, with no financing involved. That Zestimate was more than 20% too low.
Finally, the fourth home was a lakefront home in Elk Grove, California. Again, the Zillow estimate was too low at $488,711. The home sold for 16% more at $565,500.
Zillow’s Home Estimates as a Starting Point
The Zestimate is formulated to give website visitors a range of value. It's not meant to replace an appraisal nor a real estate professional's opinion. Many agents might take a gander at Zillow values before visiting a seller, because they know the seller is looking at those values. However, real estate agents do not use Zillow to price a home.
In some cases, agents will tell their clients to look at a home's price on Zillow to justify how good of a good deal they are getting when buying a home (provided that the Zestimate is much higher than the actual sales price, of course). It's a selective usage with agents. When the price is to their advantage, they might use it as evidence for their client. Even banks don't know any better, so in a short-sale situation for example, when the offer is more than a Zestimate, a short-sale agent might point to the Zestimate when in negotiations with the short-sale bank.
Zillow offers so much more for the consumer than the Zestimate aspect. Viewers can get so hung up on the Zestimate that they overlook the wealth of other information on the website, including comparable sales and neighborhood demographics. All of these can be invaluable to any first-time home buyer or home seller in a real estate transaction.