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Zillow's Huge Problem When Evaluating Home Pricing

Saturday, January 27th, 2018 at 11:52am

Zillow has a huge position on the internet. It also has a huge problem when it comes to how it evaluates home pricing which is extremely disruptive to the buying and selling process.

I thought it might be helpful to explain how Zillow works so buyers and sellers are aware of how inaccurate their data can be and why.

Zillow’s information is driven by metrics and data derived from public records. They are only concerned with numbers of bedrooms, baths and square footage. A true picture of value is simply not possible with their model.

Zestimates are allegedy arrived at by Zillow placing a pin on a subject property, pulling the sales and public records data from all homes in a 1 mile radius then dividing that by the number of homes.

 If you live in a “cookie cutter” neighborhood where all the houses are exactly the same and no one’s interior finishing touches are better or worse then the model might work.

If ,however, you live in a house that has any upgrades , is on a larger lot or has any custom finishes this model will never work.

Let’s consider that you own a fourth row beach home in Charleston and several houses near you on front beach have sold within a year.  Your houses value will be grossly inflated because it is grouped with houses that are not in fact “like kind”. They are on front beach and you are four rows back. There is tremendous difference in land value which of course Zillow’s model can not determine because it’s never touched by human hands. The computer does not determine lot variations.

Conversely let’s say you own a house on true deep water with acreage out on Johns Island. The houses that have sold around you are all on small dry lots with absolutely no access to water. Your value will be grossly under what it really is because Zillow has no way of knowing that the lot values are so far apart.

For buyers it is very confusing and I can see why.

They get on the internet, find a house they like and the price looks amazing. This is the price that they are relying on when they call a realtor who then informs them the house is really worth twice as much. How can that be?

Well the house may be newly renovated and Zillow has absolutely no way of knowing that. The other houses around it may be old and in need of renovation or even be tear downs but again Zillow is only using neighborhood sales data. It does not take into account the renovation or the finishing touches in the house. It can’t! Zillow’s computers are not ever going to know what kind of floors or kitchen countertops or moldings are in a house.

The issue is they are using comps that are in no way comps. The formula for determining a homes value makes no sense.

Zillow stating incorrect estimates with incorrect comps makes it difficult for sellers and virtually impossible for buyers to make real informed decisions.

The other thing Zillow can  not do is account for short sales or foreclosures in their estimates. If a property sold for 50% of value it will still be lumped into the estimates for surrounding properties. That is how sellers can see their values fluctuate dramatically in a very short time. A distressed property sells in the neighborhood and the next day their value drops by tremendous amounts.

If all of this is true then how can they have such a huge presence on the internet. Surely this is not cheap!

Well Zillow as an internet company makes money by selling leads to realtors. They prospect and call agents on a daily basis to sell then “buyer leads” who are coming into the site to look for property. This is huge business. The Zestimates are a way to get consumers onto the web site and to convince realtor boards like ours locally to provide them with listings. Everyone wants to know what their property is worth. Once on the site the consumer will land on a property they like and possibly contact a realtor. Those consumer leads are where the dollars are generated.

It all makes good sense until you realize the estimates are so far off and why.

If you are in the process of selling it is much better to get an appraisal or a market analysis from an experienced realtor you trust.

If you are buying contact a realtor that specializes in the area or type of property you want.

That way you get accurate information based on real facts and not just guestimates.

It will save you and your potential buyers a lot of headaches.

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