Whether you’re buying or selling, chances are good that you’ve checked out Zillow’s Zestimate on homes in your area. Zestimates give an instant “estimate” on home value. But the value in dollars on each property is generated by an automated algorithm that relies on user input and it could be significantly off the mark. Still, it is one tool that consumers can use as a starting point, as long as they keep in mind that even Zillow recommends getting advice from a local real estate agent for accurate pricing. A Zestimate is not designed to serve as an official appraisal or as a replacement for a professional CMA (Comparative Market Analysis). 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.
How Does the Zestimate Establish 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. As a result, the Zestimate might only reflect true market conditions some of the time and be far off at other times. How are you able to determine if the Zestimate is within range of true market value? You obtain a CMA from a real estate agent.
CMAs Represent a Realtor’s Personal Analysis of Local Data
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 what buyers are offering and what sellers are accepting at any point in time because they work in that neighborhood on a regular basis.
Zestimate’s Margin of Error
For buyers, the 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 $250,000 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 median error rate for off market homes is about +7.5%. That means a home with a $300,000 Zestimate has a probability of selling 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.
Zestimates Are Not a Negotiation Tool
Finally, don’t use a Zestimate to negotiate an offer, whether you’re a buyer or a seller. Sold comps from a CMA provide the most informed evidence of price. CMAs 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 expertise of a local agent.