Combating the Zestimate

November 9, 2021

Recently Zillow announced they are ending their iBuyer program – a program in which Zillow will buy your home, fix it up, and sell it. It seems as though Zillow failed to accurately predict prices, costing over $400 million last quarter, and a chance that about 25% of employees could lose their jobs.

 

Zillow’s COO said, “It’s just challenging to predict future home prices in such a rapid and volatile market for home price appreciation.”

 

Now, let’s put a few things into perspective for individuals who focus on the Zestimate when selling or buying.

 

  • In 2016, the Zillow CEO, Spencer Rascoff, sold his Seattle home for $1.05 million (40% less than the Zestimate) of $1.75 million.

 

  • In 2017, Zillow calculated their Zestimate error rate at about 4.5%, and offered a $1 million cash prize to anyone who could rework the algorithm to reduce that chance for error. It was reported that the winners (announced in 2019) of the competition reduced to error rate to about 4%.

 

  • In 2020, Spencer Rascoff listed his Brentwood home in Los Angeles at $24 million (almost $8 million more than the Zestimate at the time). He then went on to purchase another home for $5.7 million (almost $1.5 million above the Zestimate).

 

So all this makes you wonder how much water the Zestimate really holds. Let’s take a look at the Data Coverage and Zestimate Accuracy table. Let’s focus on the Tallahassee market by looking at Leon County.

 

Zillow Data Coverage and Zestimate Accuracy Table: as of 11/9/2021 for Leon County, Florida - rates accuracy at 3 out of 5 stars with 102.8K homes on Zillow with 88.6K homes on Zillow. 57.2% accuracy within 5% of sales price, 73.2% accuracy within 10%, 82% accuracy within 20%, and a median error rate of 3.7%. https://www.zillow.com/howto/DataCoverageZestimateAccuracyFL.htm

 

Zillow rates it’s Zestimate 3 out of 5 stars. Would you trust the sale or purchase of your largest asset to something that rates itself a 3 out of 5 stars?

 

At about 80% of homes being valued within 20% of the sale price, that means that a $250,000 home could have a Zestimate of $200,000 or $300,000. As a seller, are you okay with the chance of losing $50,000 due to an inaccurate estimate? Or, as a buyer, are you okay with the chance of overpaying $50,000 due to an inaccurate estimate?

 

Or let’s say a seller lists their home for $50,000 over the market value. This could give off the perception you are not motivated to sell. You might think, “We can just drop the price later.” Well… yes, but sometimes the impact of this is not seen as well as pricing to the market straight out of the gate. Price reductions can be overlooked – flyers and emails announcing the adjustment can fall into a pile of other marketing mail. Then when you reduce, buyers will wonder if it was because of a defect.

 

Currently, Zillow suggests the following on their FAQ page about the Zestimate, “We encourage buyers, sellers and homeowners to supplement the Zestimate with other research, such as visiting the home, getting a professional appraisal of the home, or requesting a comparative market analysis (CMA) from a real estate agent.”

 

We suggest not supplementing the Zestimate with a professional appraisal or comparative market analysis from a real estate agent, but replacing the Zestimate with these more accurate methods of determining market values.

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