From the DCrealestateguru.com 2017

When Zillow first launched in 2005, it shook the real estate industry for its ability to provide instant appraisals. Zillow’s search engines allows users type in an address and see an estimated value of any home. Over the past few years, more people began to trust Zillow and it grew to become an indispensable tool for homebuyers and sellers.

As a real estate agent, my clients often ask me about the accuracy of the Zillow home value estimates, which Zillow calls “Zestimates” – and this is where the problem lies. Most homebuyers begin their search for properties online. So, while Zillow and similar tools can be useful in providing important property information, these sites can also pose a serious problem as it pertains to determining the true value of a home.

Why You Can’t Trust Zillow Home Value Estimates in 2017
To put it simply – Zillow’s estimates come from an automated system, which means that it doesn’t have the ability to think for itself. This is the reason why oftentimes its home value estimates can be wildly off, sometimes to the tune of thousands of dollars. 

Because Zillow is a system, it can’t take into consideration variations in the property that would differentiate an average home to a renovated home full of upgrades. Both buyers and sellers face a serious risk here when using the system. A seller can end up overpricing their home as a result of over relying on Zillow’s estimates thereby scaring off potential buyers.

In my experience analyzing Zillow home estimates in the Northern Virginia and Washington DC areas, it’s not uncommon to see Zillow home estimates sometimes as much as $50,000 over the actual market value.

While online services like Zillow are designed to provide quick and fast answers, it isn’t always ideal for the real estate market. When it comes to determining the actual value of a home, this presents a multi-layered problem that is often full of complex details.

Margin Of Error And Formula Used
On its website, Zillow claims that it has a median error rate of 5%. They also claim that the “Zestimate” are merely starting points that can be used to determine the actual market value of a property.

The Zillow system uses algorithms that consider property tax assessments, recent sales, and calculations all of which are updated based on user-submitted data. The site knows how much a home was sold for on its most recent purchase, and it also knows the same kind of information for homes surrounding the property. Together,  combined with data inputted by homeowners, Zillow will then come up with its own estimate.

How Zillow Determines The Market Value Of A Home
However, one of the biggest problems about the formula used by Zillow is that it takes into consideration a home’s assessed value. But the truth of the matter is that a home’s assessed value rarely has any correlation to market value. I’ve seen many cases of homes selling for more than $150,000 over its assessed value, as well as below its assessed value. Real estate professionals know that one should never look at the assessed market value when determining the market value of a home. It’s never that simple, although it would make the job of a real estate agent easier.

What’s even worse is that the accuracy and margin of error varies by region. Some real estate markets in the US have zero stars in terms of its Zillow accuracy rates as well as no identified error rate, which means that it’s impossible to get any actual valuations. In some states such as Texas, the public can’t get access to the completed sale price of homes, so analyzing accuracy of valuations is virtually impossible.

Why Zillow Estimates Can’t Be Relied On
In some cases, few and far in between, Zillow estimates may actually work. But in my career working as a real estate agent in the Washington DC area, I’ve noticed discrepancies as much as 50% higher than actual market value.

While the last selling price of a home is useful to know, it’s also the only concrete data that Zillow has on a property. The last selling price has no weight on what a home is worth now, and we all know that the real estate industry changes quite frequently. With an industry as dynamic as ours, there is no point in relying on a system for estimates of a home’s current value, especially if it’s taking into consideration a sale price that is months, years, or even decades old.

Knowing how much nearby homes sold for is also important in both buying and selling. These numbers, known as comparable sales, are a major deciding factor when real estate professionals price a home. But considering comparable sales needs a human aspect to it; these can’t be analyzed just for the numbers that they provide. There are only specific situations when comparable sales can be considered; for example, if you are living in an area where all the homes are similar, same price range, and none have been renovated, then this is a scenario where you can apply comparable sales without analyzing other factors. On the other hand if you live in an area where there are several different housing styles and sizes, and the houses are of different ages, comparable sales can’t be used to determine the actual market value of a home.

Never Rely Solely On Zillow As A Buyer Or Seller
Buyers and sellers should never rely on the Zillow tool alone. Even the website itself tells you that the estimates are only a starting point. This should be kept in mind if you were intending to use the site to sell your home and you had no plans of meeting with an appraiser or a real estate agent because you thought it was good enough to rely on the Zillow estimate alone. A house is worth what people are willing to pay for it, and this is information that a real estate agent would know. Buyers can’t force the issue of a property being worth $1,000,000 if that’s what Zillow says it’s worth, because if it’s still in the market for 6 months, it is clearly worth less than that.

Any seasoned realtor will tell you that the number 1 reason that homes don’t sell is because of an unrealistic asking price. There are consequences if you price a home too low; in the same way that there are consequences for pricing a home too high. Make sure you get a 2nd opinion from a trusted agent before you decide to buy and sell any home.

Why Realtors Are Still Indispensable
Despite the popularity and prevalence of online real estate tools such as Zillow, it’s important to know that these systems can’t replace the work of realtors.

Real estate professionals use different methods to appraise the value of a home, and can even provide critical insight on how one comparable sale plays a role in appraising the next property. Realtors have the experience and skills needed to compare entirely different homes in one neighborhood to give a seller an accurate price on their property.  Zillow doesn’t have this feature; as mentioned earlier in my post. It doesn’t have the ability to think because it’s merely a system that is prone to errors. 

Additionally, realtors also complete a comparative market analysis (CMA) when appraising a home. The data used by Zillow is far too broad, and sometimes the system has to rely on all the county data available to make a calculation.

Every time I check home value estimates especially in my areas of Northern Virginia and Washington DC, the Zillow figures are usually just too far off! Any good realtor in my areas will tell you that the values vary greatly from one area to another.

Truth be told, while technology can replace many industries today, I doubt it will ever happen in real estate. Zillow only makes it difficult for real estate agents to do their work. For example, when a seller sits down with an agent to interview them, most likely they’ve already looked at the “Zestimate” of their home. The real estate agent then presents the seller with a comprehensive CMA and walks the seller through data to show how they’ve arrived at a suggested list price. 

These figures will come as a shock to the seller, especially when they are presented with figures that are as much as $50,000 lower than what Zillow says their home is worth. See what I mean?

You Still Need An Agent For Accuracy
Every home seller and buyer needs to understand that Zillow is a system tasked with estimating hundreds of millions of homes across America. It’s simply impossible for them to accurately know the exact value of each of those homes. If the owner of one of those homes suddenly spends $50,000 renovating their swimming pool, there is no way for Zillow to know this and suddenly update the system automatically, unless the homeowners does it themselves. Zillow doesn’t employ people whose sole task is to check on the accuracy of their estimates. There is no such system in place, which is why people still need real estate agents to do their job. 

There are so many things that Zillow doesn’t know. In fact, the town card data that feeds into the system could have several errors, but the system wouldn’t know this. Any home could have an area that needs major repairs, which will of course affect the sale price, but Zillow wouldn’t know this. Zillow doesn’t know that you just spent $100,000 on interior upgrades. We know that these are all things that will affect the sale price of a home, and these are also important details that only real estate agents will know and understand. Real estate agents will take these things into consideration when providing you with the suggested list price and the probable sale price.

How You Can Make The Most Out Of Zillow
The Zillow website is very well built, and all the features can come in handy to buyers, sellers, and real estate agents EXCEPT the Zillow estimates.

For example, Zillow has excellent integration with Bing maps. This makes it easy to understand what is in the surrounding area. The system also compares to none when considering the depth of information about a property, such as bath and bedroom count, lot size, age, and square footage. Sellers can take advantage of the site because when their properties look good on Zillow, there’s a higher probability that interested buyers will talk to real estate agents about it.

Zillow is also useful in determining what the seller paid, and when. These figures will also have an impact on the selling price.

I also have to admit that the Zillow app is useful for buyers. Imagine driving around looking for a house, but you don’t have a real estate agent with you and find one that you’re interested in. All you need to do is pull up the app and you’ll immediately have all the information about the house at your fingertips.

The Final Word On Zillow
When it comes to real estate, different areas will have trending prices, which will fluctuate with market, and these prices will also change based on several other factors. Zillow can be useful for the buyer in determining where and when to buy, because the website can be accurate in showing trending prices.

While Zillow might not be able to provide true market value of a home, the estimates can serve as a good starting point.  But for sellers who want to accurately price their home, or for those who want to know what a home is truly worth, Zillow will never be able to replace the job of a professional realtor in providing good insight and more accurate values.  

From the Washington Post

David Howell is executive vice president and chief information officer at McEnearney Associates. Stan Humphries, chief economist at Zillow and architect of the Zestimate, responds to Howell’s criticisms in his own commentary.

One of the great evolutions in real estate over the last decade is the power of the Internet, and more than 90 percent of homebuyers begin their search there. We think that’s great, and buyers are more empowered than ever with loads of information.

Some of that information can come from sites like Zillow that offer what’s called an “automated valuation model” — AVM for short — that purportedly present a great estimate of the current market value of millions of homes. It’s cool technology, amassing an enormous amount of information from publicly available sources in one place that is then scrubbed through very sophisticated algorithms to predict value. And all of that is presented in an easy-to-use user interface.

And to its enormous credit, Zillow has done a tremendous job in reaching “top of mind” status with consumers. There’s just one problem: Those predicted values are wildly inaccurate and inconsistent.

As real estate agents, we know that one of our most difficult tasks is pricing a home. That holds true whether we are representing a seller or a buyer. Market pressures change from week to week and from neighborhood to neighborhood. The motivation of the parties is always a factor, as is the condition of a home and those around it. No algorithm, however sophisticated, can quantify the value of a kitchen that was remodeled just before a home was put on the market or a yard that is poorly maintained. It simply isn’t possible for any AVM to predict the value of a home with a level of accuracy sufficient to make a housing decision.

Zillow knows that’s true — and they say as much on their Web site (although you have to dig a bit to find it). They have this to say about their “Zestimates” of value: “The Zestimate is not an appraisal and you won’t be able to use it in place of an appraisal, though you can certainly share it with real estate professionals. It is a computer-generated estimate of the worth of a house today, given the available data. Zillow does not offer the Zestimate as the basis of any specific real-estate related financial transaction. Our data sources may be incomplete or incorrect; also, we have not physically inspected a specific home. Remember, the Zestimate is a starting point and does not consider all the market intricacies that can determine the actual price a house will sell for.”

Yet not a week goes by that we don’t encounter a consumer who is fixated on a particular value for a home because that’s what Zillow says it is. Kudos to Zillow for making this kind of impression on the public — brilliant marketing. But our research shows that, on average, those “Zestimates” are within 5 percent of the actual value of a home just half of the time. (Funny, that’s what its research shows as well.)

As real estate agents, if we got within 5 percent of the value of a home that infrequently we’d be out of business. So if consumers want to base their valuation of a home purchase or sale on what they find on the Internet, we suggest they take out a coin and flip it. Heads — that value is within 5 percent  (high or low) or what the home is actually worth. Tails — that value could be 10 percent, 20 percent or more off target.

Beginning in 2010, McEnearney Associates has examined the accuracy of the estimates for property values that Zillow provides — its “Zestimates” of value. This marks our fourth and most comprehensive analysis. We took 500 properties in MRIS, our regional multiple listing system, that were scheduled to settle between March 24 and March 31. During that week, we looked for the Zestimates of those 500 properties. Once the properties settled, we compared the actual sold price to the predicted values on Zillow. And to be as fair as possible, we excluded new home sales from our research because it is highly unlikely that Zillow would have details of the home to be built.

To provide some context, we compared the results of the March 2014 research to that of our September 2012 research. In 2012, we researched 280 properties, and we were able to find a Zestimate for all 280. In the research we just concluded, we were able to find values for all but two of the 500 properties.

Generally, Zillow’s predicted market value is not any better now than it was 18 months ago. The Zestimate is within 5 percent of the actual sales price roughly half the time. In September 2012, the Zestimate was just as likely to be too low as too high; now, it is roughly twice as likely to be too low.

As one might expect with a computer-generated value, there are always outliers. In September 2012, of the 280 Zestimates, the highest was roughly 140 percent of the actual sales prices. The lowest was 82 percent. In the research we just concluded, the highest predicted value was 256 percent of the actual sales price and the lowest was 62.8 percent.

There are significant geographic differences in Zillow’s performance in our current research. They get within 5 percent of the actual sales price just over a third of the time for properties in Washington, and within 10 percent of the sales price less than 60 percent of the time. They are within 5 percent of sales price 43 percent of the time in Maryland and almost 60 percent in Virginia.

Zillow is a bit less accurate for condo and coops than for attached or detached homes. Mirroring the overall results, in all three property types Zillow is at least twice as likely to predict a value that is at least 5 percent lower than the actual value as predicting 5 percent high.

Not surprisingly, those properties that sold for $1 million and more were a little tougher for Zillow to estimate accurately.

It got within 5 percent of the actual price just over one third of the time. It fared much better for homes selling between $500,000 and $999,999, getting within 5 percent almost 60 percent of the time, but for homes selling for less than $500,000 they were within 5 percent less than half the time.