By: Jason Starr, Realtor and owner of The Starr Group at RE/MAX Real Estate Concepts
There has been a lot of confusion from both buyers and sellers surrounding Zillow’s “Zestimate”. Questions often arise on how the Zestimate is calculated and how close the Zesitmate is to a properties actual market value. Quite simply, a property in only worth what a buyer is willing to pay for it and what a seller is willing to sell it for. There are many ways to calculate a properties estimated current market value. The best methods use credible data, local information, both objective and subjective characteristics, and in most cases a little judgement. One can say that estimating a properties market value is a little bit of an art and a science. The “Zestimate” uses some, but not all, of these components to calculate their version of market value. A summary of these elements are included below. The information in quotations was pulled directly from Zillow’s website.
1) Zillow uses a statistical based algorithm that is limited in scope. They capture simple figures like square footage, number of bedrooms, number of bathrooms, etc. They do not take into account many of the qualities that drive a properties desirability for buyers. (and subsequently the property’s value) Some of these characteristics that the Zestimate does not take into account are: updates, quality of finish, lot characteristics (flat, steep, waterfront, timbered, views, cul-de-sac, etc), problems or issues with the property (foundation, water in basement, radon, expansive clay soil, etc), maintenance and upkeep (poor or exceptional), design and floor plan/layout, basement finish, outbuildings, fencing, exterior landscaping, road is paved vs. gravel, and the list goes on. It is also important to note that Zillow will accept homeowner submitted data that may or may not be accurate and is not verified.
“Updates and remodeling explained: Most upgrade information is not in the public records, and is not easily quantifiable. We do not know about home updates and remodels unless they have been reported to the local tax assessor, so those items are not used in Zestimate calculations. While we do utilize user-submitted data that is measurable, (e.g., additional bedroom count, bath count, and square footage) there is no way for us to systematically gather and verify the type of remodel or build information where the value is based upon how the final product appeals to the buyer. Because of this, the algorithm can’t use that information. We use proprietary automated valuation models that apply advanced algorithms to analyze our data to identify relationships within a specific geographic area, between this home-related data and actual sales prices. Home characteristics, such as square footage, location or the number of bathrooms, are given different weights according to their influence on home sale prices in each specific geography over a specific period of time, resulting in a set of valuation rules, or models that are applied to generate each home’s Zestimate. Specifically, some of the data we use in this algorithm include: Physical attributes: Location, lot size, square footage, number of bedrooms and bathrooms and many other details.”
2) For the data that IS used, the Zestimate will have little to no statistical credibility in areas where few properties have sold.
“The number of transactions in a geographic area affects how much we know about prevailing market values of homes in that area. More transactions provide more data and improve the accuracy of the Zestimate. Also, we use public and user-provided data for house attributes, and some areas report more data than others. The more attributes we know about homes in an area (including yours), the better the Zestimate. Remember that homeowners can also update their home facts if they feel they are incorrect or there are missing values, and the updates may affect the Zestimate value.”
3) The Zesitmate is not reflective of comparable properties in your immediate neighborhood. This contradicts the first rule of a property’s value being about location, location, location
“The number of transactions in a geographic area affects how much we know about prevailing market values of homes in that area. More transactions provide more data and improve the accuracy of the Zestimate. Also, we use public and user-provided data for house attributes, and some areas report more data than others. The more attributes we know about homes in an area (including yours), the better the Zestimate. Remember that homeowners can also update their home facts if they feel they are incorrect or there are missing values, and the updates may affect the Zestimate value. Our estimating method differs from that of a comparative market analysis (CMA) done by real estate agents. Geographically, the data we use is much larger than your neighborhood. Often times, we use all the data in a county for calculation. So though there may be no recent sales in the “neighborhood”, even a few sales in the area allow us to extrapolate changes in the local housing market. However, the data we gather does allow the models to incorporate the geospatial (neighborhood) patterns of recent sales.”
4) The value of a property to a buyer reflects many objective and subjective characteristics. The Zestimate only contemplates a small number of objective items which will never fully capture the true value of a property.
“The Zestimate is created by an automated software process, designed by statisticians, and there is no ability for humans to manually alter the Zestimate for a specific property.”
5) Zillow indicates that the Zestimate is a simple starting point and that it is important to get a CMA from a Realtor or an appraisal from an appraiser.
“The Zestimate® home valuation 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. We encourage buyers, sellers, and homeowners to supplement Zillow’s information by doing other research such as:
- Getting a comparative market analysis (CMA) from a real estate agent
- Getting an appraisal from a professional appraiser
- Visiting the house (whenever possible)”
6) Zillow indicates right on their website that the relative accuracy of the Zestimate is poor and it is even worse for certain types of properties and in certain areas. In Iowa, only 38% of the Zestimates are within 5% of the actual market value of a home. Pricing is one of the most important aspects of selling a home. National statistics suggest that a seller should list their home at or within 5% of the current market value to actually get it sold close to list price and in a reasonable time period. (Interestingly, Zillow gives themselves a 4 out of 5 stars for their 38% accuracy. You will also find that in many areas of Iowa, Zestimates accuracy is even lower due to a lack of credible statistical data)
“Our accuracy depends on the home data we receive; see our Data Coverage and Zestimate Accuracy table to see how accurate we are in your area. When it comes to unique homes (e.g., luxury mansions, unusual designs) we are less accurate in our Zestimates.”