Does Zillow Overestimate?

I think Zillow is great, but not for the reasons you might think. Zillow is a valuable online tool that allows visitors to peruse home values nationwide. Does Zillow overestimate? Yes. Can you use it anyway? You bet. Read more…

Zillow is fast becoming a popular online resource with an estimated 4 million visitors each month. What’s the fuss all about? Zillow offers free computer generated estimates of property values with comparable sales, sales history and tax info.

Zillow is extremely user friendly and filled with straightforward advice for buyers and sellers. It is a database of properties, not just properties for sale but what you’d find in the town clerk’s office.

The Wall Street Journal called Zillow’s “Zestimates” very good and in a recent survey found the service’s estimates to average 7.8% from selling price. The “Zestimates” have some factual figures behind them but the service should be used with guarded enthusiasm.

Just for fun, I ran a “Zestimate” on one of my own properties. I choose my condominium because there are 100 other identical units from which to draw comparable sales. Condos are easy to analyze because they are fairly uniform.

Zillow overestimated the property value by about $35,000 or 20%. The estimates for six recent comparable sales of identical units were on average about 13% over actual selling prices. The error is likely because Zillow used non-comparable properties to generate an estimate.

Now Zillow did hit the mark on about two of the sales. One “Zestimate” was just 5% over actual selling price. A very good analysis and well within the desirable 10% range for setting competitive asking prices. The problem is unless you understand when Zillow makes an error you could find yourself making some costly mistakes.

Zillow uses regional data rather than property specific data. The database doesn’t have all the property specifics - sometimes even basics - just location, size and selling price. This makes it difficult to generate reliable estimates because there is a lot more to property value than size and location.

Condition, renovations, nearby amenities and local problems (like polluted ground water) all affect a property’s current value. If my condominium has original finishes and my neighbor’s is completely renovated, Zillow doesn’t see the difference. Two mansions may be the same size and within the same neighborhood, but Zillow won’t know if one hasn’t been maintained and the other has state-of-the-art upgrades.

Still, Zillow is a useful tool for both buyers and sellers. The online service provides a general idea of property values. Zillow does generate “exact” estimates but also offers visitors a price range. What is useful is that Zillow shows users actual selling prices.

Estimates and asking prices are theoretical and shouldn’t be used to determine property value. Just because an owner thinks their house is worth $200,000 doesn’t mean the market supports it.

Closing prices however are facts that can be used to create more reliable estimates and Zillow’s got them. If you know the properties that you should compare (condos to condos, 3 bedrooms to 3 bedrooms) you can use Zillow’s sold prices (not “Zestimates”) and get a ball park number for the average sale price of comparable properties.

Zillow also has excellent advice for sellers and buyers alike. The site's "Real Estate Guide" answers all the basic questions and more from understanding mortgages to preparing your home for sale to where to find local environmental data.

Sellers and real estate agents can post comprehensive listings for free or choose to entice the right buyer with the “Make Me Move” offer – a non-binding, casual ‘we love it here but we’d consider moving if you’d love it for $460,000.’ Both agents and owners take advantage of the free exposure and “Zestimates” are listed next to asking prices.

The margin between what owner’s are asking and “Zestimates” varies. Some listings are priced below Zillow’s numbers and others above. In one instance, a 7,800 square foot contemporary was listed for $2,000,000 while Zillow’s estimate pegged the property value at $835,000. Depending on the sale price, this is likely an example of Zillow's limit for estimating unique properties.

Even with its limits, Zillow has the information that sellers and buyers need. The site encourages self-motivated searchers to use the tools available and not take “Zestimates” at face value.

Owners can use “My Estimator” to do custom comparisons that take into account some of the factors that the computer misses, like renovations. Buyers and sellers can sift through comps by screening out mismatched comparisons.

The website boasts to have targeted more than 67,000,000 property values and keeps an eye on the market with quarterly home value reports on 75 metropolitan areas. All in all, Zillow churns out quite a bit of useful information.

Whether helping buyers to narrow in on a purchase, sellers to watch the rise and fall of their home’s value or curious onlookers peek inside the neighborhood mansion for sale, Zillow seems to have tapped into the part of human nature that finds real estate fascinating.

Visitors just need to keep in mind that it’s general information and not necessarily specific to their market or property. With the right perspective, homeowners and buyers can count Zillow as a weapon in their real estate arsenal. The information is all there, it just needs to be used wisely.

*Note: The information in this article is general advice and not meant as a substitute for personal guidance from a financial advisor, real estate professional, general contractor or legal counsel. Although the author is a licensed realtor, the advice given in this article does not constitute any client contract or agreement between the author and the user. The author is not responsible for any losses, damages or claims that may result from your decisions.