Whether you’re a buyer or a seller, the chances are good that you’ve checked out Zillow’s Zestimate on homes in your area. Buyers often love Zestimates for their seemingly instant opinion of home value. Sellers love the Zestimate if it gives their home a high value and dislike it if it gives a low one. Real estate agents mostly don’t love it because many people accept Zestimate at face value without considering that it’s not designed to serve as an official appraisal or as a replacement for a professional CMA (Comparative Market Analysis). In other words, it’s often inaccurate and doesn’t account for critical factors that affect home value. But if you really can’t resist the Zestimate, use it only as a starting point, which is exactly how Zillow describes it. Let’s look at Zestimates in more detail and compare them to a professional CMA, which allows for a more thorough look at home value.
By Zillow’s definition, a Zestimate is “Zillow’s estimated market value, computed using a proprietary formula. It is not an appraisal. It is a starting point in determining a home’s value. The Zestimate is calculated from public and user-submitted data, taking into account special features, location, and market conditions.” To break it down, Zillow uses an Automated Valuation Model (AVM) (a computerized algorithm) to present a home valuation based on things like square footage, number of bedrooms and bathrooms, total number of rooms, and location. But AVMs aren’t able to account for things like the condition of a home and whether significant updates have been made, which obviously can increase or decrease what a buyer is willing to pay. And AVMs can’t account for nuances within neighborhoods—such as when one street commands much higher prices for its homes than the street a quarter mile away in the same zip code. The Zestimate in particular relies on a homeowner’s input of additional information that may or may not help tweak the value. The result is that sometimes a Zestimate is close to what is happening in the market for a specific neighborhood at a specific point in time and sometimes it’s very far off. How are you able to determine which is which? You obtain a CMA from a real estate agent.
A CMA compares prices at which similar properties in the same area recently sold. Real estate agents perform this analysis for their clients to help determine a listing price for home sellers or an offer price for home buyers. A professional real estate agent will review available photos of homes previously sold to determine which are most relevant for comparison, as well as compare sold prices, features, size, and location variances that affect pricing. This data gives you a picture of what the market will bear—in other words, what buyers are willing to pay and what sellers are willing to accept. An agent who is experienced in a particular area will also have the benefit of knowing in general what buyers are offering and what sellers are accepting at any point in time because they are out working with both in that neighborhood on a regular basis. Even Zillow recommends that buyers and sellers obtain a CMA from a local real estate agent when determining offers and list prices.
For buyers, your safest use of the Zestimate is probably price range rather than price point. For example, if you know you need to buy a home in the range of $200,000 to $300,000, Zestimates may help you find where those ranges exist. As a seller, however, Zestimates may cause more confusion than anything. Zillow says its sampling error is about +7.5 percent. That means there’s a 95 percent probability that a home with a $300,000 Zestimate will sell between $277,500 and $322,500. That’s a difference of $45,000. A competent real estate agent is likely to come within $5,000 to $10,000 of what you’ll get for your home, based on his CMA.
Finally, don’t use a Zestimate to negotiate an offer, whether you’re a buyer or a seller. You don’t know the accuracy of a Zestimate until you’ve obtained a CMA. CMAs are more reliable because they include the ingredients that complete the picture of home pricing: Condition of home, presence or lack of updates, neighborhood nuance, relevant sold prices of comparable homes in a specific area, and the experience of a local agent.