Many of us love to explore Zillow’s site for jumpstarting the process of searching for a home or seeing what our current home is worth. One of the tools Zillow provides is the famous “Zestimate,” an algorithmic estimate of a home’s value. But experienced Realtors tell their clients to be careful using Zestimates because they can be inaccurate. Some agents will go so far as to say the Zestimate is just a toy to get consumers interested in their local real estate.
The Downfall of Zillow Offers
The recent failure of Zillow’s iBuying program, Zillow Offers, gives strong reason to question the accuracy of the Zestimate, which the business relied heavily on for home pricing. Zillow Offers was a program where Zillow presented home sellers a below-market cash offer for their home (with specific stipulations and fees), making the selling process easier for those who wanted a quick and guaranteed sale. Zillow then used affiliated agents to sell the property for a profit, or so was the plan. The business model crumbled for a variety of reasons, resulting in expected losses of over $500 million in 2021 (reported by The Wall Street Journal). Zillow Offers was discontinued in November 2021.
Can You Trust the Zestimate?
Zillow still makes impressive claims about the Zestimate’s sale pricing prediction, citing that it has a median error rate of 1.9% for homes that are on the market and 6.9% for homes that are off the market. And Realtors will concede that sometimes the Zestimate is actually on the money. But sometimes it’s off – and way off. On their Zestimate webpage, Zillow points out that that the more data available on a home, such as square footage and number of bedrooms and bathrooms, the more accurate the Zestimate will be. Yet one failure Zillow reported of their iBuying program was that they “couldn’t accurately predict future home prices.”
With such a big financial loss in Zillow Offers, a program that based home pricing on its own Zestimates, consumers have good reason to be cautious when using the tool. While clicking a few links on a screen is simple and convenient, it’s not necessarily going to present an accurate picture of your home’s worth or the value of the one you want to bid on. Often there are community factors at play and sometimes just one segment of a street commands a different price range than the rest. That kind of nuance is hard to capture in an automated system.
The Human Factor in Home Pricing
A real estate agent can create a Comparative Market Analysis, a report that compares many specific factors among homes to arrive at a price that the market will bear. To do so, agents combine their knowledge of a local market with the data and photos they pull. They can also fill in missing information with research, a critical piece that is missing from the Zestimate. An agent has also walked the sidewalks of local neighborhoods and can often predict which homes will sell for more than others right around the corner. That’s something an algorithm has yet to achieve.
While algorithms aren’t going away, it seems for now, human intervention helps create a more accurate prediction of what people are willing to pay for a home at a particular point in time.
For more information on iBuying vs traditional home selling through a Realtor, go here.
Real Estate Term of the Week
iBuyer: A company that uses technology to make an offer on your home instantly. Models vary, but the basic idea is that the company estimates the value of your home and typically makes a discounted, non-negotiable offer. If you accept, they own, market, and resell the home themselves. Depending on the service you choose, the benefit is the certainty of an all-cash offer and more control over when you move.