Have you found yourself lying on the couch on a Sunday morning, scrolling Zillow and checking out the Zestimate for your own home or homes nearby? Has your heart rate ever spiked or dropped receiving emails notifying you that your home value has increased or decreased within the past month? If so, you’re definitely not alone. Many Americans use Zestimates as their primary way to determine the value of homes that interest them; however, it isn’t as accurate as one might think.
While the Zestimate can be a good tool for home searchers or homeowners to spot check potential values, relying on the Zestimate as ground truth can be extremely problematic and ill-advised. Much of this is not Zillow’s fault– the accuracy of their models relies on real time data on the property and sales in the market area, both of which are not often available. The algorithmic ibuyers have gotten torched over the last few years, losing billions of dollars by buying assets at the wrong prices, only to get stuck with inventory they had to sell at a loss.
Below you’ll find the top five reasons why the Zestimate cannot be trusted as a standalone real estate valuation tool:
Zillow is only informed about a property once it gets updated and is ready to list; however, properties change. They are renovated, new features are added, or new design is done. Zillow does not know that and therefore cannot provide an accurate, real time valuation.
Consider a beautiful colonial house in Boston. The buyer bought it for $600,000 and it was a real fixer-upper. Over two years, the buyer spent $250,000 to restore the property and add 1,000 square feet in the back. Zillow does not have access to the updated property information. So the house now might be worth $900,000 but zillow thinks it’s worth $650,000 because it’s relying on the information it has on the unrenovated product.
The Zestimate relies on data that has been inputted by an agent or the county. Oftentimes, the county does not have reliable or current property information and the brokers are incentivized to misrepresent a property in a sale process in order to make it look as good as possible; therefore, the data that informs the algorithm can oftentimes be of low quality.
A broker lists the square footage of a property at 3,150 and the county says 2,900. The algorithm uses dollar per square foot as a main variable in its valuation. Which square footage is used? Why is it used? How do we know which one is accurate? If your house is judged on a dollar per square foot basis, and the square footage is wrong, this can drive a poor financial decision.
The headline price is not always the reality of a situation. Zillow relies on public record information in order to provide comps to feed its valuations; however, not all closing prices are created equal.
Consider the buyer incentives, mortgage buydowns or unconventional deals that might inflate the headline price of a property, but not actually be the net effective price that the buyer and seller transacted at. This can cause values to look inflated in a neighborhood, and encourage a buyer to overpay for their home. It can also make a seller believe their house is worth more than it is.
Automated valuations work well in market areas with similar housing stock of similar housing quality in suburban neighborhoods. But when properties with unique features are identified, automated valuations have a harder time determining value contribution.
This uniqueness is particularly relevant in expensive markets. Consider a property in Los Angeles that was developed by a famous architect. It is almost like a work of art. A sophisticated buyer pool might put a premium on that architect’s work because in their social circle, telling friends that Frank Gehry designed your house is worth a lot of money. Or maybe it used to be Beyonce’s house. There are bragging rights with that! A zestimate will not be able to appropriately factor in factors that are hard to put a dollar amount to. Maybe there is some billionaire who will pay an exorbitant price to live in Beyonce’s old house!
Zillow relies on comparable sales data to feed its algorithm. This data is often 30 to 90 days behind the real time market.
During COVID, Austin, Texas was accelerating at 4% price appreciation per month! If you relied on sales data (which isn't even publicly available in Texas) that was three months old, you would be 12% off your price. On a $500,000 house, you are talking about $60K!
While Zillow's Zestimate can be a useful reference point, it is not a reliable stand-alone tool for real estate valuation due to its reliance on incomplete, outdated, and potentially misleading data, as well as its inability to assess unique property features and adapt to rapid market fluctuations. For the most reliable and accurate outcomes when seeking real estate valuation, seek the guidance of experienced real estate professionals with access to information beyond what a Zestimate can provide.
Lenders are NOT the only one who can order an appraisal and here at True Footage, we don't believe in a "one size fits all" model when it comes to helping you gain accurate insight on the value of your home. If you are interested in learning more about what solutions True Footage can provide for you or would like to see our current employment opportunities, contact us today!
John Liss is the founder and CEO of True Footage. John was born and raised in New York and started as a real estate agent in high school and college. He went to Harvard for his undergraduate degree and worked in real estate finance after college in New York and Miami. He then went to Harvard Business School where he graduated in 2021. There, he came up with the idea for True Footage and launched it straight out of school. John currently lives in Austin. In his spare time, John likes to play tennis, work out, hang out with friends, and go to concerts.