By Terri Seignious, Guest Contributor
Zillow has a huge presence on the internet. While it has become a popular website with buyers looking to find their next home, Zillow 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 the home valuation data can be and why.
Zillow’s information is driven by metrics and data derived from public records. The analytics reflected are only concerned with numbers of bedrooms, baths and square footage. A true picture of value is simply not possible with this type of valuation model. "Zestimates" are allegedly 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 to ascertain a close to accurate estimate. 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 house's 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. In this scenario, there is tremendous difference in land value which of course, Zillow’s model cannot determine because it’s never touched by human hands. The computer does not determine lot variations and this can cause an incredible amount of frustration for sellers.
Conversely, let’s say you own a house on true deep-water with acreage 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 can be 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?
While the house may be newly renovated, 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 renovations or finishing touches in the house. Zillow’s computer algorithm is not going to know what kind of flooring, kitchen countertops, or moldings are in a house. The site is using incorrect comps and in turn, providing incorrect "Zestimates" which make it difficult for sellers, and virtually impossible for buyers, to make real, informed decisions.
The other thing Zillow's formula cannot 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 a tremendous amount.
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 them “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 website 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 for Zillow.
It all makes good sense until you realize the home value estimates are so far off and why.
If you are planning to buy a home, 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." 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.
It will save you and your potential buyers a lot of headaches.
NOTE: If you live in the Charleston, SC area and you are thinking of selling your home, find out what your home is really worth from a qualified, local real estate source.