The power of the Internet over the last 10 years has grown enormously (just consider where you are reading this article!), and with that growth has come an enormous change in the process of buying and selling a home.
With more information at their fingertip tips, both buyers and sellers are taking a more active role in how a home is valued. I think that’s great — an interested, informed and knowledgeable client is the best client to work for.
Unfortunately, along with all the good the Internet offers (the ability to see pictures and videos of potential properties, the marketing of a home or property to a wider audience, nationally and internationally and, quicker response times) comes the problematic companies that have sprung up. “Zestimates” purport, through “sophisticated algorithms,” to be able to give you an accurate evaluation of your home. These “Zestimates” are inaccurate!
As real estate agents, we know that one of our most difficult tasks is pricing a home. That holds true whether we are representing a seller or a buyer. Market pressures change from week to week and from neighborhood to neighborhood, especially in Santa Barbara.
The motivation of the parties is always a factor, as is the condition of a home and those around it. No algorithm, however sophisticated, can quantify the value of a kitchen that was remodeled just before a home was put on the market or a yard that is landscaped with drought tolerant water-saving features or solar systems that save you on energy costs. It simply isn’t possible for any automated system to predict the value of a home with a level of accuracy sufficient to make a housing decision. And so we come to Zillow.
Zillow, over just a few short years, has come to be the brand with the greatest name recognition in the automated valuation of homes — through a combination of brilliant marketing, and feeding on the myth that anyone can do the job of a good real agent — all you need is a laptop and a formula. And so with the rise of the “Zestimate” as an indicator of home value comes a whole host of complications in the transaction of real estate, as sellers often won’t budge off estimates of their home published on line, or buyers won’t come up to the market price because “the computer said” the house they have their eye on is marketed too high.
Zillow knows that’s true — and it says as much on its website (although you have to dig a bit to find it). You can find this disclaimer from Zillow: “The Zestimate is not an appraisal and you won’t be able to use it in place of an appraisal, though you can certainly share it with real estate professionals. It is a computer-generated estimate of the worth of a house today, given the available data. Zillow does not offer the Zestimate as the basis of any specific real-estate related financial transaction. Our data sources may be incomplete or incorrect; also, we have not physically inspected a specific home. Remember, the Zestimate is a starting point and does not consider all the market intricacies that can determine the actual price a house will sell for.”
Yet not a week goes by that we don’t encounter a seller or a buyer who is fixated on a particular value for a home because that’s what Zillow says it is. Kudos to Zillow for making this kind of impression on the public — brilliant marketing. But research shows that, on average, those “Zestimates” are within 5 percent of the actual value of a home just half of the time.
This mark tallies with the research of Zillow itself: Are “Zestimates” accurate? And if they’re off the mark, how far off? Zillow CEO Spencer Raskoff has stated publicly that they’re “a good starting point” but that nationwide Zestimates have a “median error rate” of about 8 percent.
Just stop for a moment and think about that number — 8 percent. Median. On a $500,000 house, that would be a $40,000 difference — that’s a lot of money on the table, and could create problems. But here’s something Rascoff was not asked about: localized median error rates, meaning that the percentage difference in Zillow estimates and the actual market value as determined by sales prices, professional assessment, and comps sometimes far exceed the national median, which raises the odds that sellers and buyers will have conflicts over pricing. Just take a look at Zillow’s website, and you will see, not prominently featured, the error rates by counties and cities.
For example, in New York County — Manhattan — the median valuation error rate is 19.9 percent. In Brooklyn, it’s 12.9 percent. In Somerset County, Md., the rate is an astounding 42 percent. In some rural counties in California, error rates range as high as 26 percent. In San Francisco, it’s 11.6 percent. With a median home value of $1,000,800 in San Francisco, according to Zillow estimates as of December, a median error rate at this level translates into a price disparity of $116,093. How does that translate into the real world? That means a buyer or seller armed with a Zillow “Zestimate” comes to the table often wildly misinformed as to the actual market value of their home given local conditions, the condition of their home, recent upgrades or sales in the neighborhood, and makes the process of negotiation more difficult and longer than it needs to be.
So what do you do now that you’ve got the scoop on “Zestimate” accuracy? Most important, take Rascoff’s advice: Look at them as no more than “a starting point” in price discussions with the real authorities on local real estate values — contact an experienced Realtor. A seasoned real estate agent will be able to help you determine the right asking price for your home (one that will generate the greatest number of market value offers), or help you to determine what the value is for that home you are making an offer on.
Remember: An estimate is just a guess, and a “Zestimate” is a guess made at a distance by an algorithm!
If you would like an accurate evaluation on your home or if you are looking to make a wise investment in the Santa Barbara area, please don’t hesitate to contact me.
— Mary Layman is a Realtor with Berkshire Hathaway HomeServices California Properties. She can be reached at mary@marylayman.com or 805.448.3890. The opinions expressed are her own.