I was on Zillow the other day looking at real estate when it occurred to me that I never really touched upon the so-called “Zestimates” offered up by the famous real estate portal.
Most consumers have heard of the Zillow Zestimate, but they’ve been largely written off by industry folk (real estate agents) as “unreliable” and various other expletives, assuming the value estimation is lower than it should be.
First things first, let’s define a Zestimate. By Zillow’s own account, a Zestimate is the “estimated market value” of a property.
By estimated, they mean a home value assigned using proprietary computer algorithms developed by statisticians.
They also refer to Zestimates as a “starting point in determining a home’s value,” which is important to note when browsing around Zillow.
A Zestimate is computed based on data, not human touch, vision, interaction, etc. And we all know how computers can fall short…this explains why there are error rates.
Speaking of, the median error rate for the entire nation is currently 4.6%, which means half of Zestimates nationwide were within 4.6% of their sales price, and the other half were off by more than 4.6%.
Where to Find a Zestimate?
If you look up any property on Zillow, whether it’s for sale or not, you should see a Zestimate at the very top of the page, directly under the last sales price (or current listing price).
And if you scroll down a bit more, you’ll see an entire section dedicated to the property’s Zestimate, including a 1-year, 5-year, and 10-year graph.
On the graph, you’ll be able to track the history of the Zestimate alongside home prices for both the city and zip code to get a better feel for the property in question.
It also displays the movement of the Zestimate over the past 30 days to give you more information about recent price movements, as seen below.
Recently, the company launched a Zestimate forecast, which as the name implies is an estimate of the home’s value over time, in this case the next 12 months (both dollar amount and percentage wise).
Finally, you’ll see a so-called “Rent Zestimate,” which is simply the estimated monthly rental price of the property.
Is Zillow Accurate?
A Zestimates accuracy is clearly of utmost important, especially if it’s being relied upon by millions of prospective home buyers. But Zillow says themselves that Zestimates track the market, as opposed to drive it. So it’s not a forward-looking valuation tool.
So are these Zillow estimates accurate? This is a tough question to answer because like any other statistical model they could get the value right on the nose or be $100,000 or more off. It’s a bit of a crapshoot really. But it certainly depends on the property. And the day because they’re apparently updated daily.
For example, a 3-bedroom, 2-bathroom single-family residence built in 1982 in Your Town, USA may be assigned a Zestimate of $250,000, based on public data culled by Zillow.
You’ll also see a value range, which displays the high and low estimated value of the property.
A large range indicates less data/higher volatility, whereas a small range means Zillow has plenty of information to make an informed decision, and hopefully a lower median error rate.
In other words, if there are lots of sales in a given area where homes are pretty uniform (same style/size/layout/number of beds and baths), the Zestimate will probably be pretty accurate.
Conversely, if the property is unique and in a sparsely populated area where homes only sell a few times a year, the Zestimate may be a far cry from its true value. And this can be too low OR too high.
So if a multi-million dollar home sells next to yours, and it’s the only recorded sale over the past six months, your Zestimate will probably be inflated if it’s not truly a multi-million dollar home.
Zestimates may also appear to be too low if there’s a ton of demand in a certain area because home buyers are technically overpaying based on the value Zillow comes up with. The opposite is also true. That being said, the seller won’t care that they’re selling well above their Zestimate so long as someone is willing to pay.
And if you make the “Zestimate is too high” argument, you’ll probably get laughed at by the seller and the real estate agent.
Of course, if I were buying a home and had the choice, I’d want to be making an offer on a home that was listed below the Zestimate, whether accurate or not. It’s not a must, but if I had the choice…
If you want to get really deep, you have to question what accurate really means. Is what a property is worth what you should pay for it? Does it matter what it’s “worth” if someone is willing to pay an entirely different amount?
I’m sure over time we’ll see improved Zestimate accuracy, which is a good thing, but it will always leave many unanswered questions like those just posed. Then again, so will full-blown appraisals.
In fact, there have been three different versions of the algorithm released thus far (2006, 2008 and 2011) with probably more to come.
Note: Only about 100 million homes have an associated Zestimate, so you could get extremely unlucky, but chances are the property you’re researching will have one.
A Zestimate Is Not an Appraisal!
This is where things get ugly. A lot of homeowners, and I suppose some in the industry, seem to get tripped up into thinking a Zestimate is a home appraisal.
Zillow explains right on its informational page that a Zestimate is not an appraisal, and cannot be used in place of an appraisal.
Why? Because Zillow hasn’t physically inspected your home, like a real appraiser would.
And the data they receive may be dated, incomplete or inaccurate, especially if recent changes have been made to the home in question, such as major home improvement, or if a home has sold nearby. Of course, they do allow homeowners to edit their home facts if thing change.
But it’s still really nothing more than a home value estimator, just like the Redfin Estimate.
Regardless, you can’t get a mortgage with a Zestimate. You’d be laughed right out of the bank. An appraisal from a certified appraiser will be required by the mortgage lender to obtain financing in most cases.
So what does that tell us? Well, it means Zestimates are exactly what Zillow says they are, a starting point. An idea, a ballpark, an estimation of a home’s value using a computer.
In other words, take them with a huge grain of salt. But still brag to your friends if and when your Zestimate rises!
Read more: How much house can I afford?